Glasgow Girl

The kicker is that depreciation can only be deducted against your income to the extent that it contributes to you making a loss on the rental, and even then you can only deduct a maximum $25,000 loss in any taxable year if your total Income from all sources is less than $100,000. If your income is between $100,000 and $150,000 it is phased from $25,000 at $100,000 to 0 at $150,000. So for anyone on a decent income, the depreciation simply gets stored up until you sell the property and then it gets released and recaptured. In effect a gigantic waste of time and effort.

vespucci

Someone correct me if I'm wrong, but wouldn't you still have to pay if you sold at $700k, as the depreciation has lowered the basis?

TKMAXX123

OK thanks for this caveat. So depreciation as overkill is pointless, because all that it does is put you in a negative rental income territory when you wouldn't enjoy the benefits of the negative income. Whereas when it is recaptured you do have to pay the tax on it, so a huge disadvantage!

In that case the perfect depreciation amount is such that it puts you to zero income on the rent, but no more. Gosh this is hard.

TKMAXX123

Yes a poster commented about this above, that it would be taxed at 25%.

TKMAXX123

One thing that I think Glasgow Girl has posted about before, is do my Social Security payments count towards my UK state pension NIC? My understanding is that the USA is one of the few countries the UK has agreed to do this for and so I don't have to volunteer any extra payments, and in the UK my payments to SS will count https://www.theamerican.co.uk/pr/ea-...-state-pension

Pulaski

My understanding is that years of SS contributions can help qualify you for a UK state pension, but it doesn't help you much unless your career has left you facing poverty in retirement as it gets you "years" to reach the minimum number of years to get something, but doesn't add to your pension. (?) IMO a much better plan is to accept your US SS contributions towards US social security in retirement, and then make voluntary contributions towards a UK state pension (which can be as little as £150 for a full year of contributions if your application to pay Class 2 contributions is accepted). Then, depending on your precise circumstances, including your age on entry to the US, you may be able to get both a full UK state pension, and full (un-WEP'ed) US social security in your retirement. I didn't realize it at the time I immigrated to the US, but that is the fortunate situation that I have, arguably through random dumb luck, found myself in.

Glasgow Girl

They only count if you would not otherwise qualify for social security or at least a partial UK pension in EITHER country. You need 10 years in the US to qualify for social security, and 10 years in the UK to qualify for a partial UK pension. Once you hit 10 years in either country they will give you the benefit associated with your contributions in that country and will no longer combine contributions from both countries.

You should do the voluntary NICs, unless you will get a full state pension without needing to do so. It is the deal of the century at Class 2 rates, and a good investment at Class 3 rates.

Glasgow Girl

You can only deduct passive losses against passive income. Rental income is passive income, so yes the best you can do is to reduce the profit on your rental income to zero in any one year. However, the negative income gets carried over to future years, so it is not all bad. The accumulated negative income can be used to reduce your rental income to zero in those future years if your profit increases so there is a tax benefit there if you would be paying tax on that income above the 25% recapture rate. Any unused negative income is released when you sell the property and you can use that to offset against the depreciation recapture, which means that it was all a waste of time because any unused depreciation is of no benefit to you but on the other hand you won’t be paying recapture taxes on it either. It is a real PIA but you have to do it, or you end up with the recapture taxes and none of the benefits, or anything to offset the recapture tax. The online tax preparation programs are actually very good on this, I use Turbo Tax and it keeps fantastic records and walks you through the process step by step.

TKMAXX123

Ok thanks, I will investigate the form to pay class 2 rates. What exactly is the benefit of the SSA between the UK and the USA then?

We are unlikely to qualify for US society security because we won't be there for more than 10 years (L1 visa is maximum of 7 and we want to raise kids near our parents). Can we not in any way take our US SS contributions and make them count for something in that case? Otherwise it's just another tax down the drain!

Pulaski

I've never paid too much attention to that as it doesn't apply to me, and doesn't apply to many people at all (which might be why it is available as a concession - hardly anyone needs it), but I think if you're in the UK but have made some years of contributions in the US, you can use those years to get more in the UK, ..... but if you're likely to get 35 years working, or deemed working, in the UK then it isn't going to apply to you either.
Yeah, I think if you can't get to 10 years, then yes, it's just another tax down the drain. .... But if you get sent to the US for a couple of years later in your career it could tip you over the 10 year threshold. On that point, bear in mind that you can qualify for a whole year of SS eligibility with as little as a few weeks of contributions, depending on your pay level. I started work in New York on November 12, but my pay level was such that my SS contributions met the requirements to be credited with 4 quarters of eligibility. That job didn't work out for me (all manner of issues with my employer and the location) and I resigned the following June (and didn't work again until the following January), but had also earned enough that year to get credited with 4 quarters for that year too, so I got credited with 8 quarters of SS eligibility having only worked for 7½ months, spread across 2 calendar years.

MidAtlantic

The benefit is for those who would not otherwise qualify for US Social Security or UK State Pension. As stated in the document you reference: A Totalization Agreement between the US and the UK can provide additional credits to reach qualification for benefits.

If you find that you do not meet the minimum requirements to qualify for a Social Security benefit in either the US or the UK, you may still be able to obtain a Social Security benefit as there is an agreement in place between the US and the UK called a Totalization Agreement

You are right, it can be a tax "down the drain".

Glasgow Girl

Here is the thing. In reality you have no idea where your life is going to take you. You have a plan but lo and behold opportunities arise, circumstances change and you are on a different path to what you anticipated. You are doing a great job asking the right questions and preparing for this move, more than most. So many people came here for a few years, and are still here many years later, or came back for a second time. So maybe your social security contributions are wasted, but maybe not. You can’t do anything about social security taxes (or depreciation) and I would keep focusing on the stuff you can manage, although I certainly understand you wanting to look at it from every angle.

On the voluntary NICs, as it stands today you can backfill up to 6 years, so perhaps you can hedge your bets on that one. Six years from now if you are still moving back to the UK you likely won’t need them, but if things change you can still add those 6 years. Also, bear in mind if you ever contracted out or were part of a company scheme you may not qualify for the full UK state pension even if you have 35 years in the system. If that is the vase, voluntary NICs can help get you get up to the full pension although you have to exceed the 35 years to do so.

TKMAXX123

Thanks that's clear. I probably don't want to work 35 years, and so if the US SS payments can help contribute to the UK one in any way that would be great. I will investigate further.

And thanks - getting 4 credits in a year seems quite easy... will keep in mind!

TKMAXX123

Thanks - there is a chance that I would want to retire before having worked 35 years in the UK. Getting US SS payments to count towards the 35 years would be very helpful.

TKMAXX123

Yes, you are so right. Taxes are taxes, and we will just budget based on post-tax income and ignore how our taxes are allocated.

Yes, thanks for mentioning the voluntary NICs, there was one year I saw on my NI system that hadn't counted fully! Definitely will top that up because I'm nearly past the 6 year mark. But why would I not need to make them if moving back to the UK? As in, moving back implies we would hit 35 years working in the future so we don't need these 6 years? Because I hope not to work for 41 years so I might have to use these 6 up to get the 35 years qualification, if the US SS does not count towards the 35.