punktlich2

It has been said that the US may tax Social Security and UK State Pension after the UK has taxed it (presumably meaning with credit for tax paid). In another forum for tax experts we have discussed this. Tax treaties are variable with respect to two words on taxing pensions: "may" and "only". Where the treaty states "only" the pension is taxable by one country exclusively.

In my case the IRS has never questioned my listing of 4 foreign state pensions and then deducting them all, citing the US-UK treaty. TurboTax has no provision for that, but it can be done either by listing them as "notarial earnings" and then making a pen-and-pencil correction or omitting them for printing the tax return and listing them (with the 100% deduction) using Adobe Acrobat Typewriter on the PDF before printing. Of course anyone not agreeing with me is free to compute the tax on them and take the credit.

As for the $900/$350 WEP: It seemed odd to me, and it may well be that because I paid Medicare tax (and not Social Security FICA/SET) for many years, whoever gave me the $900 figure made a mistake. I don't believe the $350 figure is wrong. I also get QPP and NI and another European state pension. Not a generous total, but still welcome. The QPP (I worked for years on the Canadian border) is paid in US$, as is SS. The others are paid in local currency into local accounts, at my request.

Normally there is an escape clause whereby the US can tax its citizens regardless. With respect to the UK, this seems not to be the case for SS. It is true that Government Service pension taxation depends on nationality and it is for that reason that I would not seek naturalisation in the UK (I have another EU/EEA/Swiss nationality, so it's not an issue). I know at least one Amcit who took Irish nationality (Irish grandparent) and who receives her US Civil Service pension free of tax in the UK as well.

The point I would make is to qualify for as many State pensions as you can. Except maybe for Greece. Generally they are cheap insurance, inflation proofed, and often skewed to the advantage of the low-paid.

punktlich2

I remember now that the $900 figure came from one of the annual statements from the SSA predicting what I was eligible for. Since I was not covered by SSA for many years (more than ten, but most of those at low pay while a student) I didn't take it seriously.

nun

In the case of the US citizen resident in the UK and receiving a UK state pension it has to be entered on line 21 of the 1040 and you can take a tax credit for UK tax paid. Under the treaty the US will not tax US social security paid to the same person.

Do you mean excluding or exempting rather than deducting when you describe how you deal with foreign pensions on your US taxes. This may well be correct for non-UK state pensions......It is not correct for the UK state pension, however, the IRS often gets this wrong and as I said before the explanatory memo and the treaty contradict each other in this particular case.

I agree. I now have 29 years of NI payments with 25 of those being voluntary and 17 years of US SS payments. I've also worked for a US state for the past 8 years that opts out of SS, so both that state's pension and my UK state pension go towards calculating my WEP, although either alone will max out the WEP amount. I calculate that at 66 my UK state pension will be $1500/month, and my US SS will be $2000/month and that the WEP amount will be $600. You can estimate the max WEP value by taking today's max value of about $380 and inflating it by 3% per year to the year you expect to take SS.

punktlich2

I am not telling anybody else what to do, and of course errors on my part might slip below the radar. But at the time I researched it and discussed it with others, I thought we understood the Treaty and practice.

Looking at Form 1040, Line 20a, I combine all state pensions from all countries and list them, then put "0" in 20b and add the statement: "Taxable ONLY in United Kingdom per Treaty art. 17(1)(a)". I declare the same total (adjusted for rates of exchange and fiscal year) to HMRC and to my other country of nationality (which has the rule that the UK and Canada once had, of imposing income tax on imputed rent of owner-occupied housing (including vacation dwellings). The point is to equalise the situation of renters and owners: very un-American, very un-Thatcher.)

My total income isn't so great as to attract the attention of auditors, nor would auditing and reassessment probably be worth the time invested by the tax police.

nun

Obviously we are all responsible for our own taxes.

I would do a few things differently though. I would not enter foreign SS on line 20 as it is for US social security. I would enter my US SS on line 20 and put "0" on line 20b and add the statement: "Taxable ONLY in United Kingdom per Treaty art. 17(1)(a)".

I'd enter my UK state pension on Line 21 and add "UK state pension". I would then take a FTC for UK tax paid on it on a 1116. People who read the explanatory memo that goes along with the treaty would be lead to your approach, but careful reading of the treaty leads to the interpretation I use.

punktlich2

I take your point. But the tax difference might be small, but could lead to a problem I would rather avoid: the IRS arguing that I need not/ought not have paid tax to the UK or the other country. However much the IRS hates Competent Authority, they sometimes claim that the taxpayer ought to have fought a foreign claim to tax to that point.

Since I spend half the year in the UK and half in our vacation home elsewhere, I'm already probably dual-resident, which is not a nice tax situation to be in. The UK-US tax treaty is more favourable to me than the other one.

As I said, it's my relatively low income that keeps me safe. And with UK interest rates the way they are and the euro in the doldrums, this is not going to change for years.

I have occasional access to RIA in exchange for library projects I work on (for free). I may research the issue. It may even be among the downloads of WG&L commentary still on my hard drive and not read yet.

theOAP

Interesting conversation.

Those with a situation similar to punktlich's (multiple countries involved) will probably increase due to the number of proactive professionals taking on challenging roles in several countries during their career. The desire to tax on citizenship increases the number of tax 'levels' (basic tax on 1040, then AMT, and then the problems of foreign income and treaties), and leads to any number of questions in preparation which are simply not answered, other than by interpretation of whichever particular tax advisor (and then possibly re-interpreted by the IRS).

One of the smaller issues is Form 1116 and it's different categories. Most 'experts' on various sites claim foreign pensions should be included in the General Limitation category for FTC since it does not fit the criteria for Passive income. Reading the tax code tends to reinforce this position. Yet when the IRS is questioned, which I've done repeatedly, the answer has always been that the foreign (registered, company, final salary) pension goes in the Passive basket. I've also run into the issue of multiple foreign countries paying both State and company pensions, the treaty agreements between the foreign countries and the right of taxation, and then applying this to the US return and its treaties.

In all honesty, (and punktlich will possibly know any case results) there appears to be no correct answer to many of the situations arising, and all depends on whether or not a return is selected for random audit, and the resulting IRS determination. I'm afraid my conclusion is we're at the whim of the IRS. Returns can go unchallenged for years, and then the whole applecart could be upset by one examiner. At times, it really seems a lottery. The best anyone can do is to fully understand their justification for preparing their return as they have. They then have to hope they haven't fallen foul of any 'informational reporting' and the resulting penalties.

Everything was fairly straightforward prior to retirement. Investigation usually resulted in a solution, even if it was complicated within itself. Since retirement, searching for solutions to the correct procedures to declare foreign pensions, both State and company, has been exasperating. The majority of my income and investment assets are foreign. At times, I feel defeated.

punktlich2

The IRS can be gratuitously nasty. I recall a tax inspector I was dealing with at the (then) Inland Revenue opining that even he thought the IRS was a bunch of gangbuster cowboys. Google the Charlie Engle mortgage "fraud" conviction, engineered by a rogue IRS guy when he couldn't find anything worth pursuing about his tax returns. I recall a fight up to the Tax Court to allow Lloyd's losses to offset real estate gains as being in the same "basket" of passive income. IRS caved on the courthouse steps in the pro-se case.

FBAR, FATCA, Forms 3520 & 5471 "automatic penalties" of $10,000 and/or half the undeclared assets per year -- these are going to lead to incredible fights with, I believe, the foreign treaty partners being obstructive in cases concerning their own citizens. Have a look at The Wall Street Journal article and blog today on expatriation, and some of the hundred-plus comments. It's interesting to see how US nativists want (implicitly) to bring back "perpetual allegiance", re-fight the arguments between Jefferson and Hamilton (and the War of 1812) and punish for "apostasy" those, including "accidental Americans" who would expatriate themselves.

My favourite case, which would have avoided the whole Expatriation to Avoid Tax law, concerns the brother of a friend, a Green Card holder who gave up his long-term residence ... to become a quasi-diplomat at the World Bank in Washington. Even today the IRS wouldn't be able to go after him. But as the WSJ mentions, the State Dept. did refuse to allow Dart to return to the US as a consular officer for Belize. I think Forbes, among others, made Dart too notorious. But I digress.

It's worth recalling how, when the US imposed certain unilateral private rights of action against foreign firms violating its trading standards, the UK, Canada, Mexico and other countries enacted statutes allowing for recovery in its courts. I would not be surprised to see blocking statutes, or some kind of retaliatory provision bearing in mind Van deMark v. Toronto-Dominion Bank and also the Wegelin case, where the IRS has gone after US branches of foreign banks to seize correspondent banking assets where the IRS had no jurisdiction over assets of the (non-)taxpayer himself.
http://uniset.ca/other/cs6/68OR2d379.html (Van deMark v. Toronto Dominion Bank)
http://www.scribd.com/doc/19350839/W...xes-and-Assets
http://www.scribd.com/doc/80340374/Wegelin-Indictment
http://www.scribd.com/punktlich/d/92...-S1-Indictment

nun

FYI

http://talk.uk-yankee.com/index.php?topic=73998.0

punktlich2

I have read through the cited thread. Too many newspaper columnists and bloggers to count have reported on the inconsistent answers of IRS call centre personnel to give credence to what they are saying except as guidance for further research. We will not know the law until such time as the US Supreme Court has ruled on it. But we can say that any IRS Regulation or any official position taken by the IRS is to be given respect, and indeed presumption of correctness in law.

The fact is that if you take the most favourable position offered by USG publications (including the Treaty Explanatory Memorandum) you will not have to face penalties for having understated your income. Any interest charge will be trivial.

Treaty-speak is special. Years ago I did some research on VAT matters. I actually interviewed an ex-Ambassador of the UK who, as a junior FCO officer had been part of the UK team negotiating the Vienna Convention on Diplomatic Privileges and Immunities. I wanted to know whether the UK position prior to its entry into the EU mirrored the US view that VAT is a direct tax and not an indirect tax and thus (like a US sales tax) required to be exempted for accredited diplomats. He said that it was. I also spoke to the UK head of VAT issues and heard him rail against the negotiators of the Status of Forces Agreement that exempts UK military entities from VAT.

The irony there is that US diplomats are eligible (under the SOFA and US law) to use the AAFES and similar facilities (US equivalent of NAAFI).

The State Department refuses sales tax exemption cards to EU diplomats in Washington (by way of reciprocity/retaliation), but not those accredited to the UN in New York.

I mention this to show how picayune interpretation of treaties can be, and how that interpretation can change over time.

Bear in mind that accountants, by and large -- and especially today when they can be personally penalised for a wrong call -- err on the side of the IRS. The more so the larger the firm of accountants involved. In the days when I did US tax returns for others I would occasionally refuse a client simply because I thought that s/he could successfully take a particular point of view, but it wasn't worth whatever I could earn to share that risk with him or her. (I wasn't in it for the money, but I liked to do tax returns to keep abreast of the cross-border issues and to share the cost of my tax software. The professional versions of tax software are expensive, but much more flexible than the retail ones.)

Each person's comfort with degrees of risk naturally determines the position s/he takes on tax returns. But my view is that one ought not pay any government more than one is obliged to do. There will be no gratitude from anyone if one pays more. You will not get a thank-you note from the USG, from your Congressperson, or from society as a whole.

nun

I agree. In the particular case of UK state pension paid to a US citizen resident in the UK not invoking the treaty is the most conservative and safest approach and as you can take a FTC you might actually come out ahead.

punktlich2

I have spent some time on this issue today and conclude there can't be any definitive reply. In part I base this on experience and education (neither of which I need go into here since this note isn't offering an opinion on what the law is, but rather why the "law" is unclear). Before I go any further, I caution readers to disregard the Constitutional working with respect to treaties of "supreme law of the land". Whatever that once meant, the Supreme Court has replaced it with a "last in time" rule. Brian Dooley's somewhat ungrammatical take on that is correct: http://www.intltaxcounselors.com/blog/?p=1766

The US-UK tax treaty is sloppily drafted and hence ambiguous in the sense that it does not seem to articulate exactly what was intended, or else it was left deliberately or negligently ambiguous because the drafters couldn't bother to resolve domestic-law inconsistencies. I give one example: Art. 1(5) , insofar as it relates to Art. 19 Government Service Pensions, applies the savings clause to "individuals who are neither citizens of, nor admitted for permanent residence in" the state of residence.

The US and UK versions of the Technical Explanation differ. Suffice to say that the UK has no concept of admission "for permanent residence", which for the US is defined as having a "green card", presumably as contrasted with some kind of B, E, I, J or L visa, among others but those being the most relevant. The UK has a concept of "indefinite leave to remain" which might apply to most but far from all permanent residents arriving on US or other non-EU/EEA/Swiss passports. (I omit US A & G visa holders and Americans arriving on Visiting Forces visas and on diplomatic or official passports to take up official positions since they come under other rules.) Parenthetically, Irish citizens are not considered aliens in Britain (Ireland Act 1949). This has some tax and nationality consequences, especially in Northern Ireland, too arcane to discuss here.

In its dissonance, the (US) Treasury and IRS interpretation and application of the Treaty provisions seem to reflect the sloppiness of drafting and the fact it doesn't say what the drafters may have thought and wanted it to say. And on that I refer to Article 32 of the Vienna Convention of the Law of Treaties 1969 http://untreaty.un.org/ilc/texts/ins...s/1_1_1969.pdf (other sources of interpretation)

I also note that despite wording that would seem to apply the savings clause to green-card holders, other rules refer back to the tie-breaking rules for residence. There are suggestions in some places that dual residence is possible, and other places where this is ignored.

The fact is that the Treaty was drafted not on behalf of individual taxpayers potentially suffering double taxation but more to respond to concerns of industry and the US Chamber. Eventually Congress or Treasury may act to remedy tax rules that are widely flouted and impossible of enforcement. (One waits to see whether the draconian 3520, 5471, FBAR and FATCA penalties will go the way of Carter-era taxation of foreign earned income effectively greater than 100% of cash income received in some countries of overvalued exchange rates and high housing cost.)

What is unfair about such situations is that those who prepare their own tax returns on the basis of "treaty intent" will usually not face any audit or any consequences. Senior IRS officers have told me that unless such cases are forcefully brought to their attention (which could happen if IRS computers were programmed to find likely instances) they will not look for them. But in this day and age when tax preparers are being made into IRS enforcers and feel they must fire the client if a tax sparing argument is week, the practice of trying to "stay below the radar" is limited to self-preparers. http://www.taxalmanac.org/index.php/...reaty_question

I haven't found any joy in RIA or CCH; the issue of foreign pension holders resident abroad apparently doesn't arise with sufficient notoriety: Thus RIA's ¶ J-1483. ("Foreign social security payments") addresses only taxation of US residents. ("RIA observation: Many tax treaties exempt foreign social security benefits paid to U.S. residents from U.S. taxes completely or partially (e.g., the foreign payments are treated as if they were U.S. benefits) or otherwise provide relief from double taxation of such benefits.")

My conclusion: I have found no directly relevant Tax Court decisions, Revenue Rulings or Technical Advice Memoranda. I have reason to think that, should the issue be addressed in a request for Private Letter Ruling the answer, today, might be unfavourable to the taxpayer. A comment in TAM 6602043150A ("We are reviewing the conclusion we reached in Rev. Rul. 56-135.") suggests that the IRS no longer assimilates foreign social security pensions to US Social Security, as it once did. But until a policy is published by the IRS those (perhaps few) US citizens resident abroad who receive foreign state pensions and who don't pay enough UK tax to benefit from foreign tax credit have a plausible argument regarding the savings clause.

As i wrote earlier, everybody has his own threshold of risk. It's a pity when tax authorities use fear of audit to get some taxpayers to pay more than they have to.

nun

I can't know the intent of the Treaty. Until there is some IRS ruling on a particular topic I go with my best understanding ofwhat's written. As I read Article 17 p3 it only deals with cross-border SS payments so that UK state pension paid to a US citizen resident in the UK isn't covered by the treaty at all.

Another area of much confusion is the taxation of other company and private pensions. There I take the position that if it is considered a pension account by the UK then it is covered by the treaty and I say fooey to all the foreign grantor trust arguments.

punktlich2

The "plain meaning" rule is long discredited or, more exactly, subject to exceptions. The whole point of technical memoranda is to explain what each side meant when it agreed to wording. I spent hours on the project yesterday and don't intend to revisit it. Academic principles of treaty interpretation will not help much here: they are useful in trying to get the parties to address a doubtful issue in a future treaty protocol that the parties need to undertake for other (more politically important) reasons. The only reason I bothered to post here is to make my comments available to any researcher using a search engine. They won't much help taxpayers now, except those arguing against the (unlikely, I think) imposition of a penalty by the IRS.

I participated in treaty negotiations as a linguist; and was peripherally involved in the 1970s in the totalization agreements. (The totalization agreements, heavily promoted by Treasury and HEW, are the best argument for rationalising and equating treatment of all state pensions.)

I'm not sure what you mean in saying "UK state pension paid to a US citizen resident in the UK isn't covered by the treaty at all." In fact, everything is covered by the treaty in some way, even if it's not evident to the non-lawyer reader. One of the more important issues is which country gets to tax first. And then second, and third (as in my case). What falls between the cracks is when an item of income comes from a third country and because the Amcit taxpayer isn't a resident of that country, the IRS would not apply any treaty benefits to it. HMRC has a page that seems to allude to the issue: http://www.hmrc.gov.uk/helpsheets/hs302.pdf

One of the citations I gave referred to government service pensions. Here the Treaty is wrongly (or badly) drafted and the US and UK disagree on meaning. Accountants (I provided the link) are afraid of applying the rule given in Pub 901. British residents with green cards are being told by accountants to pay US tax (with FTC, after paying UK tax) on UK Crown service pensions. However if they declare their situation and only pay State income tax on that UK pension, the IRS does not object. (The clause was, in fact, inserted at the demand of the UK negotiators who insist as a matter of policy that Crown pensions are taxable in the UK. It is not unusual for treaties to deal with government pensions by saying that the paying country "may" tax them; when it says "only" that's an indication that it was not intended for the IRS to do so. The savings clause should recognise that. But Art. 1, 17 and 19 (the ones of concern to me yesterday) need to be cleaned up.

Reading through the TAMs and PLRs yesterday I found 2 or 3 opinions that addressed the taxability of savings account interest paid to accredited ambassadors of foreign countries. Essentially the IRS says that tax is due but that they have no jurisdiction to force the ambassador or other accredited diplomat to pay (but of course a bank can require presentation of a TIN). (Meanwhile Treasury and State are these days squirming over the closure of accounts held by certain embassies and their diplomats by reason of anti-terrorism law, but that's another story. An embassy can't operate without a bank account, but after the Riggs Bank scandal other banks don't want to get involved.) See e.g., Private Letter Ruling 6306214420A, 06/21/1963; General Counsel Memorandum 32845, 05/13/1964 (I haven't checked the continuing validity of these.)

At a time when State is telling American diplomats that they don't have to pay the Congestion Charge in London because it's a tax, and is retaliating in Washington for imposition of VAT on its embassy and diplomats, it seems curious that it would impose income tax on foreign diplomats in Washington on the curious assumption that it's outside the scope of the Vienna Convention.

The issue of private pensions remains urgent with respect to countries with old tax treaties. The focus of negotiation in the 1990s was to allow deduction from income for US tax purposes contributions from foreign income to such foreign pensions. As you can appreciate, the most successful work has been with Canada -- although even there (as in treatment of cross-border estates) it can take a decade to get a change drafted and ratified. One problem was the imposition of US income tax on income and gains of foreign pension funds: state and private, respectively; and of sovereign wealth funds. That has largely been resolved in respect of major treaty partners. There are lots of PLRs on the subject. This is HMRC comment: http://www.hmrc.gov.uk/manuals/dtmanual/dt19939zd.htm

Some of the problems in this area (and the impetus for the totalization agreement action) relate to "integrated pensions". For tax reasons, US defined pensions were "integrated" with US social security, and multinational firms were under pressure to waive any rights not to pay FICA on the wages of their expatriate staff abroad. (This was explained to me by the chief of the International Section of the SSA at a meeting we had in London in the late 1970s.) It seems to me that the demise of defined pensions and the rise of 401(k) and other defined contribution schemes has changed the universe of issues. I have had no reason to consider the issue closely in recent years.

I think the above is all I can contribute to the dialogue. The point is that there is a lack of homogeneity screaming out in the various documents and treaties and policies. It will not help to say that Art. 17(3) is "wrongly drafted" or that "resident" or "admitted for permanent residence" don't mean what they say if one has recourse to tie-breaker rules unless there is a consistent Treasury (not just IRS) policy and we know what it is.

I can remember decedent estates that I have been involved in where a careless or incompetent drafter copied words from a model will into a will of a much less wealthy person ... and left the heirs with potentially hundreds of thousands of dollars in additional estate duty. Treaty words, like testamentary words, matter. But if they're wrong they can be amended.

Why should National Insurance contributions which have been totalized into a US Social Security account be treated differently from one that has not? If I were trying to get this corrected I would address the International Division of SSA in the first instance. (Unfortunately expatriate Americans have no constituency in Congress, and none at the IRS either.)

BTW it is incorrect to say that state pensions are not covered by the treaty. They are dealt with in some respects as ordinary private-sector pensions under 17(1) if 17(3) doesn't apply. And more importantly, they benefit from sovereign immunity on the one hand, and exemption from trust-fund reporting on the other. Much tax treaty analysis has to be done by analogy. Where would you put a TSP?

Last comment: As HMRC says, a treaty has to be read as a whole. If there are inconsistencies they may or may not be susceptible to resolution under Art. 26 (Mutual agreement procedure).

nun

Many professionals take the position that cross-border payments of state pensions are not explicitly covered in the treaty. In as much as the SS is income it is covered by the more general treaty articles. Each tax payer and professional advisor must be comfortable with the interpretation they use. I am not a tax professional and to do my taxes I have to rely on the material that the relevant tax authorities provide, the real difficulty comes when that material seems to differ form the advice given by official tax agents. In such a case I will take a conservative approach, hence, I would not be comfortable using the treaty to exempt cross-border US SS payments from US taxation. I also calculate that by not invoking the treaty I won't have a higher tax bill, so I don't see the need to even "tempt fate" with the IRS.

I'd say a TSP would be covered by Article 19.