Foreign tax credit on US sourced income?
Dec 10th 2018, 9:20 pm
#1
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Foreign tax credit on US sourced income?
Just a query to all those expats/us persons living in the UK who file US tax returns - how do you avoid double taxation on your US sourced income, specifically any annuity/pension you have ? I could be wrong and may have missed something but from what I can see the foreign earned income is only relevant to anyone who is working - and as I read the foreign tax credit it seems that only applies to tax deducted on foreign sourced pensions ( UK pensions etc) - did i get it wrong?
Essentially i guess i am asking how do you avoid double taxation on your US sourced pensions when you are residing in the UK? I am concerned that as my only source of income for the next few years are US based I will end up having to pay both countries. Any input appreciated.
Essentially i guess i am asking how do you avoid double taxation on your US sourced pensions when you are residing in the UK? I am concerned that as my only source of income for the next few years are US based I will end up having to pay both countries. Any input appreciated.
Dec 11th 2018, 2:22 am
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Re: Foreign tax credit on US sourced income?
This is a good question that also applies in my case and am interested in a definitive answer. The tax laws on this (on both sides) seem quite complex. The IRS Foreign Tax Credit I don't believe would be applicable, as it's intended only for foreign sourced income, not US sourced income or pensions.
I know US social security benefits paid to US citizens (or other foreign nationals) resident in the UK are only taxed in the UK per US/UK tax treaty. Per wording of the tax treaty designed to prevent double taxation, this would seem to apply to US private pensions as well.
"Any annuity derived and beneficially owned by an individual (“the annuitant”) who is a resident of a Contracting State (UK here) shall be taxable only in that State. The term 'annuity' as used in this paragraph means a stated sum paid periodically at stated times during the life of the annuitant, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than in return for services rendered)."
If this is correct, both US social security benefits and US sourced private pensions would be reported only for UK taxation, and not US (IRS). But I'm not completely sure on the latter.
Much also depends if one is a dual US/UK citizen or just UK. If just UK citizen and resident, I'd think this wouldn't be an issue as UK filing should be sufficient.
I know US social security benefits paid to US citizens (or other foreign nationals) resident in the UK are only taxed in the UK per US/UK tax treaty. Per wording of the tax treaty designed to prevent double taxation, this would seem to apply to US private pensions as well.
"Any annuity derived and beneficially owned by an individual (“the annuitant”) who is a resident of a Contracting State (UK here) shall be taxable only in that State. The term 'annuity' as used in this paragraph means a stated sum paid periodically at stated times during the life of the annuitant, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than in return for services rendered)."
If this is correct, both US social security benefits and US sourced private pensions would be reported only for UK taxation, and not US (IRS). But I'm not completely sure on the latter.
Much also depends if one is a dual US/UK citizen or just UK. If just UK citizen and resident, I'd think this wouldn't be an issue as UK filing should be sufficient.
Last edited by Richard8655; Dec 11th 2018 at 3:51 am.
Dec 11th 2018, 9:05 am
#3
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Re: Foreign tax credit on US sourced income?
I have dual citizenship and I have US private pensions and I live in the UK. When filing my US taxes I complete form 1116 and put my US pensions as “Resourced by Treaty” (a box to be ticked) which then counts them as foreign income and then I claim the UK tax I have paid on them as foreign tax credits. Bit of a pain but it works.
Last edited by durham_lad; Dec 11th 2018 at 10:52 am. Reason: Clarification
Dec 11th 2018, 12:34 pm
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Re: Foreign tax credit on US sourced income?
I have dual citizenship and I have US private pensions and I live in the UK. When filing my US taxes I complete form 1116 and put my US pensions as “Resourced by Treaty” (a box to be ticked) which then counts them as foreign income and then I claim the UK tax I have paid on them as foreign tax credits. Bit of a pain but it works.
Last edited by Richard8655; Dec 11th 2018 at 1:00 pm.
Dec 11th 2018, 1:09 pm
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Re: Foreign tax credit on US sourced income?
That is what the "Certain income resourced by treaty" box does. The Treaty says that US pensions paid to USCs resident in the UK are first taxed in the UK, so checking the box is stating that these pensions are being treated as if they are foreign pensions. My wife had US capital gains that were also taxed first by the UK so our joint return has 2 forms 1116. The first 1116 form has the "General category" box checked with the comment on line 1a stating "UK Pensions" (I have 2 UK private pensions). The 2nd 1116 form has the "Certain income resourced by treaty" box checked and the comment on line 1a states "US Pensions and US Capital Gains from 1099s".
Dec 11th 2018, 1:19 pm
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Re: Foreign tax credit on US sourced income?
That is what the "Certain income resourced by treaty" box does. The Treaty says that US pensions paid to USCs resident in the UK are first taxed in the UK, so checking the box is stating that these pensions are being treated as if they are foreign pensions. My wife had US capital gains that were also taxed first by the UK so our joint return has 2 forms 1116. The first 1116 form has the "General category" box checked with the comment on line 1a stating "UK Pensions" (I have 2 UK private pensions). The 2nd 1116 form has the "Certain income resourced by treaty" box checked and the comment on line 1a states "US Pensions and US Capital Gains from 1099s".
By the way, would social security benefits be totalled together with private pensions as gross income on the same 1116?
Last edited by Richard8655; Dec 11th 2018 at 1:47 pm.
Dec 11th 2018, 2:03 pm
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Re: Foreign tax credit on US sourced income?
I see how you're reporting it now. I wouldn't have thought US based pension would qualify based on the form's wording of income that's "foreign sourced", but good it works and is acceptable by checking "certain income re-sourced by treaty". But no wonder many expats hire tax accountants!
By the way, would social security benefits be totalled together with private pensions as gross income on the same 1116?
Dec 11th 2018, 2:24 pm
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Re: Foreign tax credit on US sourced income?
I would not think so because Social Security is only taxed in the UK so no foreign tax credits allowed on your US return. I'm not yet taking SS so can't answer for certain how the US return records this, but would expect it to be listed on line 20a on the 1040 which is the amount of Social Security not taxed. (Many folks in the USA have none of their SS taxed and at most you have no more than 85% taxed)
Since most SS is not taxed in the US (none if combined income below $32k, then progressively above that), it looks like all SS however would be taxed in UK regardless of income level. Also wondering if bigger tax hit on private US pensions in UK than comparatively at US tax rate if US resident.
Last edited by Richard8655; Dec 11th 2018 at 2:43 pm.
Dec 11th 2018, 5:00 pm
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Re: Foreign tax credit on US sourced income?
Yep, I see that on 1040, 20a. Makes sense only needed there.
Since most SS is not taxed in the US (none if combined income below $32k, then progressively above that), it looks like all SS however would be taxed in UK regardless of income level. Also wondering if bigger tax hit on private US pensions in UK than comparatively at US tax rate if US resident.
Dec 11th 2018, 5:17 pm
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Re: Foreign tax credit on US sourced income?
if you are not resident in the UK you do not pay UK tax on UK private pensions. When I first started taking a UK private pension while I was living in the USA then UK tax was taken until I filed form 2002 where the IRS confirmed I was a US resident taxpayer and HMRC then refunded that tax and changed my tax code to NT on my pension payments. It only took a few weeks so PAYE was taken for the first 2 months then refunded as part of my next pension payment.
Dec 11th 2018, 5:38 pm
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Re: Foreign tax credit on US sourced income?
Yes, understood about UK private pensions. But my question is how US SS and US private pensions are taxed in the UK, compared to the US. Since US social security benefits are not usully fully taxed in the US, it appears there is no such graduation in the UK, and all of it would be taxed. My other question is if your US private pension is taxed higher in the UK than it would have been in the US.
To your 2nd point it very much depends on your tax situation. In my case my US pensions attract more tax than in the USA. I know exactly how much when I run scenarios using TurboTax. If my wife was receiving a US private pension she would pay less tax in the UK than in the USA because you are taxed as individuals in the UK so her pension income would be taxed at our US marginal rate but she would have the first £11,500 tax free and then taxed at 20% in the UK. This is why we put all our after tax investments into her name before we moved so that she benefits from the dividend allowance and lower tax rate plus the capital gain allowance meaning that we pay no UK tax on our US dividends and capital gains from our US equity funds.
2017 was our first full year back and we have now completed our tax returns- a joint return in the USA and 2 individual returns in the UK. While we paid more UK tax the difference is swamped by the health insurance premiums we were paying in the US so overall we are in pocket by quite a bit before even paying for doctor and hospital copays and deductibles. This year I have had outpatient surgery to remove and test suspicious moles and lesions plus a number of tests on my heart plus AF Ablation surgery on my heart, and my wife has had tests followed by cataract surgery so the health cost savings in 2018 will be huge compared to what we would have paid in the US. Being over 60 all our prescriptions are also free.
Dec 11th 2018, 5:49 pm
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Re: Foreign tax credit on US sourced income?
sorry, misunderstood your question. The whole of your SS and your US private pensions are treated as regular income in the UK. The first year we were back (2016) was the last year that 10% of the US pensions was tax free.
To your 2nd point it very much depends on your tax situation. In my case my US pensions attract more tax than in the USA. I know exactly how much when I run scenarios using TurboTax. If my wife was receiving a US private pension she would pay less tax in the UK than in the USA because you are taxed as individuals in the UK so her pension income would be taxed at our US marginal rate but she would have the first £11,500 tax free and then taxed at 20% in the UK. This is why we put all our after tax investments into her name before we moved so that she benefits from the dividend allowance and lower tax rate plus the capital gain allowance meaning that we pay no UK tax on our US dividends and capital gains from our US equity funds.
2017 was our first full year back and we have now completed our tax returns- a joint return in the USA and 2 individual returns in the UK. While we paid more UK tax the difference is swamped by the health insurance premiums we were paying in the US so overall we are in pocket by quite a bit before even paying for doctor and hospital copays and deductibles. This year I have had outpatient surgery to remove and test suspicious moles and lesions plus a number of tests on my heart plus AF Ablation surgery on my heart, and my wife has had tests followed by cataract surgery so the health cost savings in 2018 will be huge compared to what we would have paid in the US. Being over 60 all our prescriptions are also free.
Dec 11th 2018, 10:30 pm
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Re: Foreign tax credit on US sourced income?
Durham_Lad, thank you so much for your insight on this - it helps to hear if from someone who is actually in the system as it were. Thank you Richard, it is always good to be aware of what is around the corner - US SS for one!
Dec 11th 2018, 10:36 pm
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Re: Foreign tax credit on US sourced income?
Good luck, brokenhearted. I think we're in the same boat on this. Durham_Lad has indeed provided good insight for us as being there already.
Last edited by Richard8655; Dec 11th 2018 at 10:50 pm.
