Need Tax info for expat in usa
 

Husband is retired and drawing a pension from UK. Should he pay UK taxes or pay USA taxes, if given a choice?:confused:

Re: Need Tax info for expat in usa
 

I doubt he has a choice, technically.

For most kinds of income, the UK-US tax treaty determines who gets to tax you. Generally it will be the country of residence. That doesn't mean the other country won't try to tax you.

If they do, you could try, in descending order of preference:

1. Arrange not to be taxed on the income
2. Apply for a refund of the tax paid
3. Claim the tax as a "foreign tax credit"
4. Invoke the tax treaty

Re: Need Tax info for expat in usa
 

If he has a choice you need to work out what taxes he would pay in the US. We have State as well as Federal income tax and when I worked mine out it was better to be taxed in the UK. It so happened I didn't in fact have a choice and it had to be taxed in the UK I later found out.

The other thing to consider depending on the amount involved, is can all the tax paid in the UK be off set against US tax. Normally if you pay in one country you don't pay in the other, but the US has a limit on the amount.

Re: Need Tax info for expat in usa
 

I believe you have to declare all income, from whatever source, to the IRS, but the UK will not tax the pension if your husband can prove he is no longer resident there. There is a form for this on the Inland Revenue site. http://www.hmrc.gov.uk/cnr/us_individual_2002.pdf
I filled it out and sent it to the IRS in Philadelphia as directed and it came back with a request for $35 and instructions on filling out an Application for United States Residency Certification http://www.irs.gov/pub/irs-pdf/f8802.pdf which is basically the same thing but from the US angle. They send that to the UK for you.

Re: Need Tax info for expat in usa
 

You do have to declare the income but you can offset any tax paid in the UK against US taxes.

It is incorrect that the UK will not tax your pension if you are no longer resident in all cases. It depends on the type of pension it is. Mine is taxed in the UK even though I have lived in the US for 17 months and it will be for however long I'm resident here, even when I become a US citizen. There was no choice. I don't pay tax on it in the US under the UK/US tax agreement.

Re: Need Tax info for expat in usa
 

Sorry - I could almost swear to having seen something on the IR site which said they do not tax at all if you can prove you have a permanent home overseas. Needless to say, I can't find it now! However everyone in this position should at least try using the form for Application for relief at source from United Kingdom income tax.

Question: How and where on the IRS form do you declare your income from the UK in such a way that it is not taxable in the US? I am currently trying to decide whether or not to declare my lump sum which was not taxable in the UK and therefore shouldn't (in my mind!) be taxed here either. Where on the form do you enter your pension income and how do you mark it to avoid being taxed twice?

Re: Need Tax info for expat in usa
 

I believe you're correct in general:
"Under most of the double taxation agreements that the United Kingdom has with other countries, pensions are normally only taxable in the country of residence. The exception is pensions which result from government service..." from Zurich Expatriate Tax and Investment Handbook.

Pension income would go on line 16 of the 1040.

I think your challenge is to establish what the IRS considers your lump sum to be: income or the return of your own money. If it's the former, and it hasn't been taxed elsewhere, then the IRS might well want to tax it. Because your UK pension won't be a "qualified plan", you won't benefit from any special treatment that a US pension plan would receive.

The closest thing I can find to an answer is in "Distribution Before Annuity Starting Date From a Nonqualified Plan" in Publication 575 http://www.irs.gov/publications/p575/

If there's a lot of money at stake, some professional advice might be worth it. It also looks like the IRS will make a determination for you if you pay them a fee.

Re: Need Tax info for expat in usa
 

Some pensions, mine is from a government job, you have no choice this was what I was told when I spoke to the tax office before I moved over. The UK will tax it at source less the usual tax free allowances you would get if still in the UK.

Now I'm not sure where on the US forms you declare all this as we have an accountant do it, but certainly since I've been here I have not paid any US Federal or State income tax on my UK pension. You are allowed to deduct the income tax paid in the UK from the US income tax normally paid on that money. In other words the UK income tax is a deduction on the US return. In Oregon where we have State income tax I can use the balance of any tax paid in the UK and not need to offset Federal tax to offset State tax. For example UK income tax say $6000, US Federal income tax $4000 that leaves a balance of $2000 I can offset against State income tax.

I hope I've explain it correctly but I find the US tax system very complicated even before you introduce added complications such as reciprocal tax agreements. Of course I assume our accountant knows what he is doing :ohmy:

Re: Need Tax info for expat in usa
 

Thanks to both REW1000 and Lansbury for your help. We'll look at the IRS information and see what we can find. I think what we are doing really is trying to pull a fast one as I am pretty sure the IRS won't care that the income was not meant to be taxed in the UK. We want to find a way to slip it in so we would be covered against them saying we hid the income, but declare it non- taxable and hope they do not question that! When all's said and done it is not a big amount - only $12,000 (my husband is American so we only have to go through this once), but we don't really want to have to find the money to pay tax on that right now and also, it's the principle of the thing!

I've been here 20 years and am still amazed at how complicated they make things over here. I received my first tax form from the Inland Revenue recently and it was so simple! Also they sent nice clear letters to explain everything.