US Taxes on Foreign Pension Income

[Arneoker]

My wife is dual citizen of the US and Colombia. She just received a pension bonus of about $25,000 covering the work she did in Colombia for various employers. She has been living the US for over 20 years. Is my understanding correct that we are potentially liable to pay US Taxes on this pension bonus, but that it would be offset by the taxes she pays in Colombia? When do we need to pay the US taxes on this pension bonus, the year she actually received it or the year she pays taxes to Colombia so we can see what US taxes we need to pay?

[pk]

@Arneoker ,

(a) you recognize the income in the year that you received the income

(b) for US tax purposes, only US status is recognized i.e.  US Person ( citizen/GreenCard/Resident for Tax Purposes ) -- taxed on world income   OR   Non-Resident Alien -- taxed only on US sourced income.

(c)  Because there is no "in-effect" tax treaty between US and Colombia, there is no "double taxation" protection -- implying taxes paid to Colombia on Colombia sourced income is not eligible for "foreign tax credit".

(d)  You could report this  "pension" lump sum payment as a 1099-R equivalent, especially if she had contributed to the fund i.e. reduce the taxable income by the amount she had paid in during her period of participation.

Is there more I can do for you ?

[Arneoker]

Thank you very much for your information. I have a few more follow up questions:

1, I suppose I need to obtain the statement showing the payment of this bonus and then file an estimated tax payment. How would that work specifically, especially as this wouldn't be reporting more or less regular income but a one-off bonus?

2. Since of course the exchange rate varies all the time which one would I use? Would it be the exchange rate in effect on the date of the payment?

3. From my research I thought that I would be able to get some sort of break on the taxes paid in Colombia on this bonus. Would I at least get a deduction if not a credit? Thank about the information about the contributions, at least I can deduct those.

Thanks again for your help on this.

[pk]

@Arneoker , my answers in Italics:

1, I suppose I need to obtain the statement showing the payment of this bonus and then file an estimated tax payment. How would that work specifically, especially as this wouldn't be reporting more or less regular income but a one-off bonus?

Because this is "pension", you report it as if a 1099-R was received -- use  code 7 for normal distribution, -see instructions for 1099-R here  -- 2025 Instructions for Forms 1099-R and 5498.

2. Since of course the exchange rate varies all the time which one would I use? Would it be the exchange rate in effect on the date of the payment?

Ideally you should use the exchange rate in effect at the time of  each transaction.  However, an annual average published by US treasury or any other published source can also suffice.  But be consistent  i.e. use the same source for all the transaction(s)

3. From my research I thought that I would be able to get some sort of break on the taxes paid in Colombia on this bonus. Would I at least get a deduction if not a credit? 

Please see IRC section 901, 904 for whom and what type of foreign taxes are eligible for  foreign tax credit.  Two items to note here ---(a)  the statute uses "citizen" through out as to whom is eligible. However, and in general US citizen for tax purposes  is undisguisable from "US person" used in other statutes  --US person  implying  US citizen, GreenCard holders and Resident for Tax Purposes.  Thus  the position  that for foreign credit to be available for taxes paid to a country, that country must provide a substantially similar tax relief to a US person if he/she were a resident of that country;  (b)  the statute does not clearly stipulate  that  there must be a  double taxation treaty in effect with the other country but the language  used  between the different sections of 901, it cannot lead to any other interpretation.

Note also that there is no such limitation ( tax treaty in effect requirement ) for deduction of foreign taxes paid  as "State And Local Taxes " subject to SALT  limitation , if and only if itemized deduction is used.

Is there more I can do for you ?

[Arneoker]

My followup question is this:

Since we are talking about a likely tax liability for this of over $4,000 I'm thinking that I should make the payment this year and not wait until next year to file my 2025 tax return. What process should I follow to do that, other than of course completing the 1099R as you described. Can I use Turbotax for this even though I've already used it to file my 2024 tax return? 

Thank you so much. I may have more later.

[pk]

@Arneoker 

Preparation / recognition of the "pension" income  ( I am assuming that you received  the amount in 2025 calendar year) can be done using TurboTax.  I am quite biased towards using  the Windows downloaded version -- every thing stays on my machine  and I can use the forms mode to see how the forms are being filled out / make changes to the worksheets if needed --plus I am quite unfamiliar with the on-line product.

If , however the amount was constructively received during 2024, then you will have to  amend your 2024 return to recognize the income.

Assuming 2025 receipt, an estimated payment can be made -- you can use  2024 TurboTax to create the estimated payments for the 2025.     Don't forget this income may also be taxable income to your state of residence.

If the monies rested in a foreign bank account that you own or have signature authority over, you may come under  FBAR ( form 114 at FinCen.gov and ONLY on line )  and FATCA ( form 8938 along with your return ).  Thresholds for filing these are here --  Comparison of Form 8938 and FBAR requirements | Internal Revenue Service

Is there more I can do for you ?

[Arneoker]

Thank you very much for all of your help. I would just like to describe the document I received in case this information might change anything we have discussed. The document is from Colfondos and is in regards to a "Devolucion de Saldos" or "Return of Balance." I have enough Spanish to understand that my wife didn't meet the requirements to receive an actual pension so they are paying her this lump sum of about 115 million (rec Colombian pesos (received this year, between $20,000 and $30, 000 in US dollars). Clearly she is receiving benefit much more than any contributions she made for her jobs in Colombia over 25 years ago. 

Assuming that really doesn't change anything I will follow your advice and use Turbotax to file this for a payment of taxes this year. Again thank you.

[pk]

@Arneoker  what I get from a reasonable amount search for Calfondos, it appears to a be part of mandatory pension scheme -- private plus public .  It is essentially a defined contribution system  ( unknown  domestic tax implication )  where the monies are invested and allowed to grow.  Thus my impression is that what you have  is a total distribution  of funds composed of contribution plus growth thereon. There appears to be a way to get the history of contributions  (  probably only she with her "clave" would be able to do that  or your document may already show that ).  So my earlier articulations  still stands.   Please do document, and keep safe , how you arrived at the figures  -- just in case of a challenge  ( usually unlikely ).

Is there more I can do for you ?

[guywong]

Since this is similar to the defined contribution plan, the amount your wife contributed to the plan is not taxable.  Only the employer contributions and growth are taxable.  

The amount of taxes paid to Columbia qualifies for Foreign Tax Credit, you use IRS Form 1116 to report the taxes paid to Colombia.  They are not SALT (State and Local Tax), so no $10,000 limitation.  You don't have to itemize your deductions when taking a foreign tax credit.

You report the income in the year the fund disburses the money under your wife's control, regardless when the funds are received in the U.S.  If the funds so disbursed are deposited in the Columbia bank account, then, as suggested, you will be subject to the FinCEN FBAR (Foreign Bank Account Report) requirement.  The FBAR must be filed electronically (FBAR_ONLINEEFILING.pdf).  You won't be subject to the IRS Form 8938 reporting requirement since the amount received is only $25K, assuming you have no other foreign financial assets.

As to exchange rate, you may want to use the IRS average exchange rates schedule:

https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

[Arneoker]

Thank you. My wife says that she wouldn't pay taxes on this pension bonus until next year, so I would think that I couldn't apply for any credit until I do my 2026 tax return, which of course would be in 2027.

Just to be clear about some things:

1. We actually have no plans or intent of moving this money to the US, instead the money is going to be entirely used in Colombia. Does that make a difference in determining whether or not this bonus is subject to US income taxes.

2. This pension bonus is based entirely on income my wife received working jobs in Colombia before we got married in 1998. Does that make a difference in determining whether or not this bonus is subject to US income taxes.

[guywong]

The answer to both of your questions are "no".  It makes no difference whatsoever whether the money stays in Colombia or transferred to the U.S. 

Once the pension plan releases the money to your wife, it's taxable income to your wife.

U.S. citizens and lawful permanent residents are taxed on their worldwide income, regardless of where they live or work, including foreign pension income, even if it was earned before becoming a U.S. resident.

[pk]

@Arneoker  since user @guywong  has responded to your two articulated questions, I will comment only on the first paragraph of your post -- to wit:

"My wife says that she wouldn't pay taxes on this pension bonus until next year, so I would think that I couldn't apply for any credit until I do my 2026 tax return, which of course would be in 2027."

1. For US purposes you have to recognize the income in the tax year it was constructively received by you --- so if it was credited ( US Bank , Foreign account , posted etc. ) to you in calendar year 2025, then you have to recognize  this on your return for the tax year 2025 --- 2026 filing year.  This has nothing to do with when and how you settle  your foreign ( source country ) taxes / filings.

2. As I have mentioned earlier, there is no tax treaty in effect between US and Colombia in 2025 -- at the time of distribution.  Thus foreign tax credit is NOT available on this income.  You may be eligible for  SALT, as mentioned earlier.

3. A pension treatment does allow you to deduct her total contribution -- only the rest  ( growth plus any employer contribution ) is  taxable income.

Is there more I can help you with ?

[guywong]

@pk Could you cite the authoritative literature that says foreign tax credit can only be claimed for income taxes paid to countries with a U.S. tax treaty?  Also, why the foreign income tax paid to Colombia may be claimed as SALT?  Thanks.

I totally agree with you that if the pension was paid to his wife in 2025, then the taxable portion must be reported on their 2025 1040.