Outlander

I have been in the USA for a couple of months now but think I should continue to pay NI incase we retire or move back to the UK (only in our twenties right now).

Are my NI contributions tax deductible against federal and state (CT) income taxes?

thinbrit

Short answer, No. The IRS does not consider NI contributions as taxes, so you can't put them in your Schedule A (besides, 'social security' taxes are specifically NOT deductible.) I suppose if your insurance costs were greater than 7.5% of your adjusted gross income you might be able to deduct a portion of the NI contribution that is related to health insurance.

My voluntary contributions this year were around £140. Even if all the stars aligned, my health insurance costs exceed 7.5% of my AGI, and I calculated the portion of my NI contributions that accounted for health (presuming they are even eligible in the IRS opinion) it seems like a lot of work for very little, if any at all, financial gain.

unique_boy

I thought you did not need to do voluntary NI contributions in the US as there is a tax treaty? Or did I read that wrong?

This link
http://www.hmrc.gov.uk/nic/work/ss-agree.htm#3a

Bob

You don't, hence it being voluntary.

It's cheap as chips though and depending on your age, might be worth doing so you can end up with two pensions rather than just the one.

If you're in your early 20's, it might not be as worthwhile doing though compared to someone in their 30's+.

unique_boy

Yes mid to late 20's (ohhh sh*t when did that happen)....I think I'll skip it as when I move back (if) I'm more than likely to be living in Dublin.

nun

You can't deduct voluntary NI contributions, but any UK state pension you get because of voluntary contributions will not be counted when calculating the Windfall Elimination Provision. Any portion of the UK state pension due to UK earned income is counted when calculating WEP.

Another nice US tax advantage is because you are paying for the UK state pension from already taxed money a portion of your UK state pension will be US tax free. You just have to estimate your lifetime contributions, know the level of the pension and run through the IRS annuity calculator to see how much of the UK pension is US taxable. If you have been making Class 2 NICs you don't get much of a tax break because the contributions are small when compared to the pension.

nun

Class 2 NICs are 140GBP per year right now so it's almost stupid not to pay them. If you are young and think you'll only be out of the UK for a few years so that you will be able to get 35 years of contributions back in the UK it's probably not worth making them......but if you intend to be abroad for longer than 5 years I'd probably pay them.

I came to the US when I was 25 and I had 3 years of free NICs from the time I was 16 to 18 years old. I started paying Class 2 voluntary NICs back in 1987 so in total I have 30 years. It was a very good move.

dunroving

+1 with knobs on.

kodokan

Thank you for yet another excellent tax pointer, Nun! I'm going to be paying Class 3 NICs, so this is especially useful for me. I've just found the relevant IRS pages, which mention about using either Simplified or General rules for calculating basis. Would this come under General do you think, since's it's a non-qualified plan?

hungryhorace

Wonder if the final bit of my English student loan I paid off this year (forgot about $1k I owed, ahem) is tax deductible? I know US student loan payments are, but not sure about English ones.

thinbrit

Unless you earn less than $75,000 ($155,000 if filing a joint return) it isn't, and even then, only the interest is deductible, not the payment towards the principal.

Steve_

If you're employed you only have to pay Class 2, which are much less. If you're paying Class 3 the calculation as to whether it's worth it gets more tricky.

kodokan

Nope, not employed in either the UK before leaving, or here, so I'll be Class 3.

I've run the calcs on the payback, comparing paying the Class 3 sub or taking that same money and investing it elsewhere until retirement age - in order to 'win', I'd need to live 10.6 years from withdrawal, so 77.5 in my case. I've grandparents who lived into their 90s and have absolutely no current health issues in my 40s, so seems worth a punt.

Anyhow, it's a question of regret risk. If I live, I'd certainly regret not paying. If I die... well, then I won't care! I view it as a way of taking longevity risk and the worst case scenario - pauperism in old age and outliving my money - off the table, at a relatively low cost.

JAJ

Is there any chance that payment of voluntary NI contributions would be considered an indication of wishing to retain a U.K. domicile? (normally, it is desirable to establish a non-U.K. domicile in order to avoid Inheritance Tax on non-U.K. assets).

kodokan

Interesting question... We don't have any other UK assets other than a minimal bank account for when we holiday there, and some very ancient pensions, no house or anything. All our assets are US-based: we own a house here, have retirement accounts and other investments, green cards (evidence of considering ourselves permanent residents), etc etc. The zombie UK pensions will be cashed out once we hit 55, and the money onshored here.

And it's not like a UK state pension is attached to any residency requirement, like having to return to the UK in the future in order to claim the pension, or at least pretend that you are. Having the right to pay into it and get a pension is a consequence of British citizenship (with a few provisos about having lived there and paid in X number of years in the past, etc).

So the circumstances of my British birth and earlier life there give me the right to pay for and claim a pension. The same British birth and early life there also gives me the right to pay for and claim a passport, but I don't hear anyone arguing that possession of a UK passport = British domicile.

What does anyone else think?