Moving2Texas

I'm an American citizen. My husband (a Brit who has never lived in the US) and I are considering retiring to the States at the end of this year, beginning of next. I've always filed US tax returns for my income though I haven't been liable for US taxes as my income was below the limit for expats living abroad and paying income tax in their country of residence. After retirement, we'll be living off my husband's pension fund. I'm assuming he won't have a problem getting a green card but I'm worried that the IRS will try to tax the pension fund he accumulated abroad (and already will have paid taxes on abroad). Anybody have any experience with this? Thanks!

Michael

Certain UK pensions are tax free due to tax treaties but the majority are taxable in the US. However if he UK pays taxes on the pension annually, those taxes can be used as a foreign tax credit against taxes owed in the US.

im9907620

If he's bought an annuity or is taking the company pension then tax will be deducted at source but, as already said, this can be used as a tax credit under the treaty, though in either instance you might be able to get it paid gross if you can show that you've moved abroad and are clear with HMRC.

If the pension is in 'draw-down' then this is more complicated. Typically, it will be classed as a foreign trust and therefore he will need to report all income which should be able to be paid gross (see above). As for the fund itself then if it is invested in any kind of unit trusts/collectives then these will fall almost certainly fall foul of the US PFIC rule and be subject to potentially onerous taxes. If it is invested in stocks and gilts for example then any tax paid on interest or dividend can be used as a tax credit under the treaty.

If unit trusts etc then he will need to consider a US tax compliant portfolio, specifically with funds that can report annual income and gains in a format that is acceptable to the IRS. In general most UK collectives do not report in such a fashion which is why they are a red flag in pensions or ISAs.

Moving2Texas

Hi, Thanks for the replies. I'd better explain - we don't live in the UK, we live on the Continent. My husband will have a pension (in a lump sum) + cash from the sale of our home - prior to moving to the States. As he will pay tax locally here (where the money was earned), if we move to the States will he be liable for paying tax on wealth accumulated abroad (prior to the move) by a non-US citizen (who has never lived in the States - his case)? Thanks so much!

Michael

There isn't any wealth tax in the US. If the sale is in any year prior to moving to the US, there won't be any tax due. If the sale is during the year that he moves or later to the US, the distribution or gain on the sale would likely be taxed but the US tax law has an exclusion of $500,000 (married filing jointly) on the gain of a sale of a primary residence (must have lived in the residence for 2 of the previous 5 years).

Therefore if he has a lump sum distribution, do that during the year before the move to the US. The sale of your home will likely not make any difference when it is sold as long as it was your primary residence for 2 of the previous 5 years.

Moving2Texas

Thanks so much for the information!