Helford

Hello all,

My first post and upfront having read many posts on this issue I can testify to the outstanding resource that is BE and, notwithstanding my current needy status, look forward to being a supportive member.

My situation: I’m a member of the British Armed Forces, but am in the process of leaving after a long career. I’ve accepted a new job in the US (civilian), and we are moving to NJ next month on an O-1 visa, at which point I become a UK non-Resident for tax purposes from FY 16/17, and am resident in the US for tax purposes. I am a UK national. My question is about my government pension payments and how I should treat them when filling in my US (and UK?) tax return. I have a specific query regarding how to treat the tax free departure payment I receive from the military when they begin to pay my pension. To try to put this simply:

• My last paid day of military service is in Aug 16, and I will be salaried in the UK up to that point.
• I start with my new employer in May 16 (the military allows us to do this having secured certain permissions from our HR dept).
• My government pension payments begin in Aug 16, and at the same time I receive a tax free departure payment as part of my pension, which is considerably less than 25% of my total pension pot.

My questions: Having read many posts on this site prior to this post (as an admin on a separate forum, I know it can annoy some members when new folk dive in with questions that have been answered many times before; I hope to avoid that):

• Under the Dual Taxation Treaty, Article 19.2, I believe that my UK Armed Forces pension will be taxed in the UK, and so there is no mechanism for me to have my UK Government pension paid to me tax free and so pay tax in the US. If that is the case, how do I incorporate this into my US tax return to avoid being taxed twice on it? The IRS document (page 33) says, I think, that tax is paid in the UK.
• The remaining 4 months of my UK military salary will be taxed by the UK government, withheld at source. How should I treat this on my US tax return? Is it at all relevant and worth including given that I understand the DTA ensures that an individual cannot be taxed twice?
• Finally, how should I treat my tax free pension departure payment? This is a sizeable sum given the time I have served in the military, and is paid tax free in the UK. From all the posts I’ve read on this forum that discuss pension “lump sums” (noting that this has a different meaning in the US), I have been unable to determine how to treat a payment by the UK government for military service, and how – or indeed whether – to include that in a US tax return. This is the area where I’m most confused and would really value the thoughts of the collective body.

A few final points that might help: there is no option to delay the pension payment or the tax free departure payment. However, we are given the opportunity to take maximum commutation on a military pension thus increasing the single payout (considerably) whilst reducing the income provided by the pension. We are always advised that the most tax efficient solution is to take maximum commutation, but given my situation and a move to the US, I have no idea whether this is now correct.

Apologies for such a long first post! I hope someone can help point me in the right direction; perhaps those that have found themselves in a similar situation.

Thanks in advance.

lansbury

A UK government service pension paid to a UK citizen who lives in the US and isn't also a US citizen can, under the UK/US tax treaty, only be taxed in the UK. The tax free lump sum will that be paid to you before you leave the UK, or after you arrive in the US. It helps to be paid before you leave the UK and you become resident in the US. However as it is a tax free lump sum on a government service pension it shouldn't be taxable in the US even if you are resident here when it is paid, (providing you are not also a US citizen). Getting it paid before you leave the UK stops any arguments with the IRS.

nun

You can enter the pension on line 16a of the 1040 and enter zero on line 16b, the taxable amount. Then claim tax treaty exemption on a form 8833......you can write UK military pension on the 1040 too.

As the salary was earned while not US resident don't even bother to enter it in your 1040.

Try to take the payment before you become a US resident to avoid any issues. If you get it after becoming a US resident I would treat it as being covered by Article 19.2 and hence claim tax treaty exemption form US tax.

Helford

Lansbury, Nun,

I'm grateful to you both for your responses, which are reassuring. Thank you.

Alas, I am unable to advance or delay payment of the "lump sum", so it will be paid whilst I am a non-resident UK citizen residing in the US (Aug-Sep 16).

But Nun, your comment about me earning the last few months of my military salary whilst not a US resident intrigues me. If I cease to be a UK resident from Apr 16 in HMRC eyes, am I not automatically a US resident? Or given that I move to the US at the end of Apr 16, and noting that the US tax year is calendar, does that mean that for the purposes of the IRS I am not deemed to be a US resident for the US tax year 2016? I'm not entirely clear what you mean.

Related, would New Jersey seek to take a chunk out of my tax free final payment and my military pension, or does state tax law have to follow that set out by federal state-to-state treaties?

Thank you again for your forbearance.

mrken30

From what I can see the OPs salary was paid last tax year so no need to report it.

Will he be treated as a part time or full time resident with moving in May? I think UK wise he probably won't be classed as resident with only one month of residency in 2016

Helford

MrKen30, thanks. Lest I confuse you, I am salaried by the UK military until August 2016 (pension kicks in thereafter). I start my new position with my new US employer in May 2016. So forgive me, but wouldn't my April-August 2016 (last few months of) military salary be paid in the tax year that falls under the US' bailiwick?

mrken30

You may need to declare both incomes and then claim back foreign taxes using something like IRS form 1116. I am assuming the UK salary will have tax deducted at source. I am no expert, someone else may have more idea.

Owen778

I would be wary about what MrKen says on something like this. He is rather prone to guessing, rather than looking things up. (Sorry MrKen). Nun, however, is extremely respected here on issues of taxation.

I had a quick look into things on tax residency. I know the US rules, and, unusually, they are considerably simpler than the UK rules:

For the USA, the relevant rule is the substantial presence test. You will count as a dual status tax resident in the US for the 2016 tax year, meaning you will be liable for taxes after you arrive in the US.
https://www.irs.gov/Individuals/Inte...-Presence-Test

For the UK, the relevant rules are the statutory residence test. It sounds like split year rules will apply (the equivalent of dual status in the US), but you will need to investigate with the precise details.
https://www.gov.uk/government/upload...ted_078500.pdf

My suspicion is that for the period when you are paid in the US and UK, you will count as tax resident in both. The US has the most complex taxation system in the world, and the tax treaty is often ambiguous, especially when it comes to pensions. Unravelling this will be difficult, and will likely require a professional.

mrken30

I agree with Owen , Nun and Iansbury are very knowledgeable on this subject. I just try to highlight possible option, which may of may not apply. I am still learning.

HMRC rules New Residence Rules

IRS rules https://www.irs.gov/Individuals/Inte...r-U.S.-Tax-Law

You may want to use a tax attorney or international tax advisor. But its good to have some background knowledge as you may have questions.

Previous tax advisor thread http://britishexpats.com/forum/usa-5...dation-868962/

lansbury

His pension situation is quite straightforward. He will be in receipt of a government service pension. As long as he remains only a UK citizen that pension can only be taxed in the UK. If in the future he chooses to become a US citizen and live in the US, it can only be taxed in the US.

Having been in receipt of a government service pension myself since 2007 it has been the easiest of all my income sources to deal with.

mrken30

I thought the OP was receiving salary until August 2016 and then will be receiving a Government service pension. That to me is more complex (salary).

lansbury

Which is why I said his pension situation is straightforward. It was said "the tax treaty is often ambiguous, especially when it comes to pensions". In this case it isn't it is quite clear.

nun

So you will still be receiving UK military salary between May 2016 and August 2016 and you will become US resident in May 2016. I think under Article 19.1 your UK military salary is only taxable by the UK.

Helford

Thank you again for the helpful replies.

Lansbury - it's helpful that you're a former UK government employee. I think I read from one of your previous posts that you're a former police officer. As an aside, we're often told that whilst the military pension is very good, the best of the bunch is the police pension. I hope it feels that way if that is your background!

Nun and others - I will be in receipt of a UK military salary until August 16, so there is this period of overlap, which is why I posted my question on how to treat it in the US return. Having taken some time to do yet more reading, it seems that:

1. My UK salary paid until August 16 will be taxed by the UK Govt at source as normal. This is in part because I will be working in the US on 'work experience' of sorts so am seconded away from the military and nothing more.

2. From what I understand of the helpful posts here, due to the DTA my UK military pension will be taxed in the UK at source. It will also be paid into a UK account so as Lansbury has noted, there should be little confusion about this as far as the IRS are concerned.

3. My US salary paid to me in US$ by my US employer is solely a matter for my US tax return.

One last attempt at trying to see if anyone can provide any guidance on these remaining areas that confuse me still:

1. Am I correct in thinking that the tax free pension payout that I will receive after my final paid day in the military will be treated in the same was as the monthly pension income under Article 19.2 and so will not need to feature on my US return given that it's solely a matter for the UK? My concern is opening a can of worms by incorporating it somewhere on my first US return and regretting it thereafter.

2. Given the above point, will New Jersey seek to tax my UK military pension and - potentially - my tax free payment, or are the states subject to the DTA? Or is the DTA just federal?

3. I will have an income from my property in the UK, which I assume will feature on both my UK and US returns in some format or other. I assume I will not pay tax on UK rented property in the UK but will do so in the US?

I can't thank you guys enough for this advice. It's accelerating my learning considerably.

nun

Yes, as this is a UK military pension Article 19 applies because Article 19.2 states that,

I believe that NJ is one of the state that does not recognize US Tax Treaties and so your UK military pension will be taxable by NJ if you are a NJ resident. I would ask the NJ department of revenue directly.

You will have to pay UK tax on the UK rental income first. Then you will use form 1116 to take a foreign tax credit of your Federal return.....I assume NJ also has a way of taking a tax credit.