UK Goverment Pension and Private Pension - Tax free in US or not?

[ER275]

I too am confused. Article 18 provides that the pensions or annuities will be taxed in the recipients Contracting nation state. Therefore in my case I have a company pension from the U.K. and my wife and I each receive a state pension, all of which is taxable in the U.S as we are resident in the U.S and citizens. The purpose of the treaty is to avoid double taxation, not any taxation! That would be nice! The pensions are not exempt from U.K. tax so they become subject to U.S. tax for a U.S. resident as I read it. 

[MovedtoNZ]

Agreed ER,

I think that the "best answer" in this thread is incorrect, although the DTA that I have knowledge of is the US/NZ DTA rather than the US/UK DTA.  The DTA states that the country that you have residency in, has sole taxation rights to private pensions.  I "think" that if I am reading the US/UK DTA correctly, it similar to the US/NZ DTA where the public pension is taxed in the country of origin (for example US social security payments gets taxed only by US despite one having residency in NZ).  For the US/UK DTA, both articles 17 and 18 have applicability for you.

[DaveF1006 · Accepted solution]

if you paid a foreign tax on your British pension, you can claim a foreign tax credit on your US tax return to avoid double taxation. To claim your foreign tax credit, please follow the guidelines written by one of our agents LinaJ2020 as she has listed detailed instructions.  Follow these closely.

After this is entered, you will need to claim a foreign tax credit by doing the following:

1. Click Federal >Deductions and Credits at the top of the screen
2. Scroll down to Estimates and Other Taxes Paid and click on Show More
3. Click on Start or Revisit next to Foreign Taxes and then select Yes
4. Select Yes to the question "Have you already reported all of your foreign income?" and then click on Continue
5. Select any applicable boxes to the question "Tell Us About Your Foreign Taxes" and then select Continue
6. Then select "Take a Credit" to the question "Do You Want the Deduction or the Credit?" Select No to the question "Do all of the following apply to your foreign income?"
7. Continue until you get to the section "Choose the Income Type" and then select the appropriate income category. Click Continue.
8. Add the country and continue through the sections, answering any applicable questions. Keep going until you get to the section "Foreign Taxes Paid" and then enter your foreign taxes and the date. (See screen shot below)

[britgeezer]

To understand the full situation and how bad it is for us retiring here, over and above article 17 &18 you also need to consider the IRS document "The agreement between the US and United Kingdom document" (Windfall Agreement) and its sister document "Windfall Elimination".

Having consulted with several experts here is what I understand. Assumption - you are a US resident or Citizen.

1. Income from UK Social Security from DWP and private pensions if not taxed in the UK, is taxable in the US as ordinary income.
2. Most experts say don't bother to create 1092-R's to report, just include it as other income. The net result is the same, just the paper work is less onerous. Now more bad news....
3. UK DWP and Private Pension is used to calculate a reduction in any eligible US SS payments. I'm not sure of the calculation and SS determine the exchange rate and will not tell you or vary it.
4. This additional income will increase MAGI and so probably also increase IRMAA for Part B and Part D premiums.
5. If the income is not declared and they find out they will claw back  "over-payment" they made through SS.

So folks your UK DWP and Private Pensions are not only subject to US tax, but will reduce your SS payments and potentially increase Medicare Part B and D costs.

Anybody fancy going to a Tea party?

If any Tax Professional with experience in successful rebuttable of UK Pension taxation in the US would like to comment please do.

I would love to receive confirmation and save a bunch of money now I'm on fixed income.

[MovedtoNZ]

There are some interesting details here...

One is the "is not taxed" proviso.  One should not expect a free lunch.  TANSTAAFL.

Another is the public pension and SS.  I've not read through the details on the US/UK DTA sufficiently to confirm it is the same as the US/NZ DTA, although they use quite similar language and wording.  For the US/NZ DTA, the result is that you get the highest of the two as a payout, and not a cent more.  If the UK public pension payout ends up being higher than the US SS payout, then, you would not get the US SS payout.  If the UK public pension payout is lower than the US SS payout, then you can claim the difference between the two from SS.

Any private pension payout will not be used to reduce the US SS payout, regardless of whether the private pension is sourced in US, UK, or other countries.

[DaveF1006]

I do think there are many tax implications here that required precise calculations that are out of scope for this community forum. You will either need to consult a local tax professional or if you are preparing your return using Turbo Tax online, subscribe to Turbo Tax Live to engage with a live Tax expert that can assist you over the phone.

[MovedtoNZ]

Agreed, there are some difficult to interpret results from the double tax agreement.  

A few items that are important to note.  The DTA states that public pensions are only taxable in the country of origin (unless not taxed in the country of origin). The DTA also states that private pensions are only taxable in the country of residence.  The other bit is how public pensions are handled between two countries that have a DTA.  The US inserts statements such that one doesn't get to have both countries public pensions in their entirety, but instead, you get effectively the higher of the two.   Pay attention to which pension gets taxed by which country.  

For many, they should definitely be consulting a tax professional that is conversant with the details of the DTA.  There are also many that can discern what the tax laws allow (and not allow).

[britgeezer]

It seems the NZ deal is different.

UK /US its not one or the other the agreements I mention. Here is the relevant text. They use a magic formula to reduce SS seems to be a round 10-15%.

A U.K. pension may affect your
U.S. benefit
If you qualify for Social Security benefits from
both the United States and the United Kingdom
and did not need the agreement to qualify for
either benefit, the amount of your U.S. benefit
may be reduced. This is a result of a provision
in U.S. law that can affect the way your benefit
is figured if you also receive a pension based
on work that was not covered by U.S. Social
Security. For more information, call our toll-free
number, [phone number removed], or visit our website,
www.socialsecurity.gov, and get a copy of
our publication, Windfall Elimination Provision
(Publication No. 05-10045). If you are outside
the United States, you may write to us at the
address on the inside cover.

Now the kicker on Medicare.

Although the agreement between the United
States and the United Kingdom allows the
Social Security Administration to count your
U.K. credits to help you qualify for U.S.
retirement, disability or survivors benefits, the
agreement does not cover Medicare benefits.
As a result, we cannot count your credits in the
United Kingdom to establish entitlement to free
Medicare hospital insurance.

So unfortunately a resident / citizen retiring in the US gets hit a few times.

You came up with a truffle, that I've heard about but could not prove.  "Private Pensions" cannot be used to reduce SS. Can you provide more info. SS didn't say that to me when they reviewed my SS benefits on my retirement they just asked questions and gave a number and declined to explain the calculation and how ongoing exchange rate s were handled.

Interesting.

So there is no difference on declared income DWP and Private being taxable?

But only DWP impacts SS?

[britgeezer]

Understand your comment.

However note the advice in this forum changed from last year to this.

I did consult with an expert or 2, but there remains a divergence of opinion among experts. Would the TT live expert really have proven experience on the taxation issues in question. Its such a small number of people interested in this issue that practical, proven experience is hard to find.

Most experts are reading the rules for the 1st time so its opinion based their interpretation rather than applied and confirmed with IRS.

[MovedtoNZ]

I've read through the US/UK DTA, and some info on the SSA website (EN-05-10199.pdf, and EN-05-10045.pdf).

It appears that I was wrong, the US/UK DTA is considerably different than the US/NZ DTA in terms of how a public pension is determined.  The taxation provisions are still quite similar, but the US SS calculation is dependent on the years of substantial service in US, the years of credit in UK, etc.  I've not seen anything showing that there will be a deduction on the US SS as based on other pension payment.  Frustratingly, the calculation basis is not defined.  At least, I've not been able to find the appropriate definition.

I will declare myself ignorant in regards to the details of the SS determination for US/UK, please disregard my previous comments about the public pension capping as it is clear that the process is considerably different than what I have become familiar with for US/NZ.

Regards

[ReneeM7122]

You are correct, some TurboTax experts do have an extensive background in a wide array of tax topics, including foreign pensions.  The proper reporting of a foreign pension can become quite complex, often requiring FATCA, FBAR, and other IRS forms for foreign income.  Sometimes things can require the need to consult with a private CPA or EA that specializes in foreign tax topics because the issue is out of scope. Legal or investment advice is not covered under the TurboTax service agreement. Here is a link to the service agreement.

@britgeezer

[Adrian S]

Hi britgeezer,

My situation is very similar to yours; 

• Full time US residents / citizens receiving SS for both partners. I am dual US/UK citizen, my wife is US citizen.
• UK government paid to both partners based on working contributions (mine) prior to moving to the US.
• Previous UK employer pension paid to 1 person
• US tax Basis, married filing jointly.
• UK basis no tax deducted from any pension (income less than 12,500 pounds).
• UK pension amounts declared to SS.

For me the following seems to give no way out of paying taxes on UK pension;

IRS Publication 901, page 33, states that "Pensions paid by, or funds created by, the United Kingdom...........are exempt from US income tax unless the recipient is both a resident and a citizen of the United States".

Article 17 of the UK - USA Tax Treaty, section 3, seems to be relevant, 

"3. Notwithstanding the provisions of paragraph 1 of this article, payments made by a Contracting State (in this case, say UK) under the provisions of the social security or similar legislation of that State (UK) to a resident of the other Contracting State (USA) shall be taxable only in that other State (USA).

As a resident and dual UK/US citizen I cannot find a way to escape taxation on my UK pensions.

When we filed for SS, 2 years ago, I discussed the issue of reducing SS payments by the UK pension (disclosing to them how much my UK pension was) and was told that was not an issue for me.  I cannot remember the precise details but it may have been that I did not need to count UK credits to qualify for U.S retirement benefits.

[ReneeM7122]

You are correct, as a resident and dual UK/US citizen it is complex to find a way to avoid taxation in the US on your UK pensions.  Several threads above have pointed out several legal issues related to this question.  As a likely legal topic (in addition to being a tax topic), it appears that this question is out of scope.  We would advise you to seek the advice of a tax attorney or a private professional qualified to advise you.

@Adrian S

[Stresstime9]

There seems to be a lot of confusion over the matter of whether a UK Government  Pension is tax free in  the US.

I am not clear why it should be because I don't think it is tax free in the UK. The confusion may arise because in  many cases  the UK Government pension is below the individual tax free allowance. A person who is resident in the UK would be taxed on their world wide income including UK government pension less the individual tax free allowance. The fact that the UK government pension is usually paid without tax deducted does not necessarily mean it is all tax free. In believe that a person who's only income was a UK state pension that exceeded the personal tax free allowance would be taxed on the balance by which the tax free allowance was exceeded. Negating the UK state pension in the miscellaneous income section of turbotax seems to be a very risky process unless the DTA can be interpreted as meaning that the tax free allowance (Tax deductible USA) can be added to the US tax deductible.

[DaveF1006]

No, your UK pension is not tax free in the US. The full amount is taxable.