Tax

Old May 13th 2012, 6:03 pm
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Default Tax

I could use some help, please.

While I am an expat living in the US, I never worked in GB. However, my relative did and, while he's been in the US for the past 40+ years, is currently receiving social security from GB. He's concerned that, while the money goes into an account in England, should it be taxed? If so, by whom? (I think GB was taxing it for a while). Should he be declaring it on his US tax return?

While I'm trying to educate myself on it all, I'm confused with the terms I see thrown around; social security is not a pension, right?

Thanks for any insight.

zman
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Old May 13th 2012, 6:12 pm
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Default Re: Tax

Welcome to BE.

Whether the money is taxed in the UK or not...as he is a US resident he should have been declaring it on his annual US tax return.

I am moving your thread over to our US forums.
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Old May 14th 2012, 11:34 am
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Default Re: Tax

Originally Posted by zehutiman View Post
I could use some help, please.

While I am an expat living in the US, I never worked in GB. However, my relative did and, while he's been in the US for the past 40+ years, is currently receiving social security from GB. He's concerned that, while the money goes into an account in England, should it be taxed? If so, by whom? (I think GB was taxing it for a while). Should he be declaring it on his US tax return?

While I'm trying to educate myself on it all, I'm confused with the terms I see thrown around; social security is not a pension, right?

Thanks for any insight.

zman
If your relative is a US resident then the UK state pension is not taxable in the UK, but is definitely US taxable. He/She should use the form US-Individual-2002 to claim relief from UK taxation and include the UK pension on line 21 of the 1040.
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Old May 14th 2012, 11:05 pm
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Default Re: Tax

Originally Posted by nun View Post
If your relative is a US resident then the UK state pension is not taxable in the UK, but is definitely US taxable. He/She should use the form US-Individual-2002 to claim relief from UK taxation and include the UK pension on line 21 of the 1040.
Thanks for the help.

If you could indulge one last query: Do you think it matters if they keep the money over there and never bring it state-side? They've only accessed it when they've visited family over there.

Thanks once again.

zman
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Old May 15th 2012, 12:46 am
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Default Re: Tax

Originally Posted by zehutiman View Post
Do you think it matters if they keep the money over there and never bring it state-side? They've only accessed it when they've visited family over there.
No, it doesn't matter where they keep the money - the tax implications (whatever they may be) are the same regardless of whether the money stays in the UK or gets moved to the US.

The one thing that does matter is that if keeping the money in the UK results in them having a total of more than $10,000 in overseas accounts then they need to make sure that they file the appropriate FBAR disclosure every year.
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Old May 15th 2012, 12:55 am
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Default Re: Tax

Originally Posted by md95065 View Post
No, it doesn't matter where they keep the money - the tax implications (whatever they may be) are the same regardless of whether the money stays in the UK or gets moved to the US.

The one thing that does matter is that if keeping the money in the UK results in them having a total of more than $10,000 in overseas accounts then they need to make sure that they file the appropriate FBAR disclosure every year.
I was waiting for someone to mention FBAR.
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Old May 15th 2012, 1:20 am
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Originally Posted by md95065 View Post
No, it doesn't matter where they keep the money - the tax implications (whatever they may be) are the same regardless of whether the money stays in the UK or gets moved to the US.
I don't agree.

Under the Tax Treaty a UK state pension paid to a US resident is only taxable in the US. However, if the pension is paid into a UK account any interest or capital gains will be taxable in both the UK and the US. If the UK pension was paid into a US account there would be no UK tax liability on the interest and gains, tax would only be due in the US.
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Old May 15th 2012, 2:42 am
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Default Re: Tax

Originally Posted by nun View Post
I don't agree.

Under the Tax Treaty a UK state pension paid to a US resident is only taxable in the US. However, if the pension is paid into a UK account any interest or capital gains will be taxable in both the UK and the US. If the UK pension was paid into a US account there would be no UK tax liability on the interest and gains, tax would only be due in the US.
OK - granted - if they invest the money in the UK so that they are generating interest or capital gains then that is a different matter - just as it would be if they invested any other money in the UK - but if you just keep the money in the UK and do nothing with it then it doesn't matter.
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Old May 15th 2012, 5:02 am
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Default Re: Tax

Originally Posted by md95065 View Post
OK - granted - if they invest the money in the UK so that they are generating interest or capital gains then that is a different matter - just as it would be if they invested any other money in the UK - but if you just keep the money in the UK and do nothing with it then it doesn't matter.
Well there is the possibility of FBAR if the money is kept in the UK. Not strictly a tax implication, but another form to worry about
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Old May 15th 2012, 12:54 pm
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Default Re: Tax

Originally Posted by nun View Post
Well there is the possibility of FBAR if the money is kept in the UK. Not strictly a tax implication, but another form to worry about
and a hell of a lot of money in fines if it's not declared.
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Old May 16th 2012, 4:05 pm
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Default Re: Tax

Thanks to everyone for some very valuable info.

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Old May 16th 2012, 4:49 pm
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Default Re: Tax

Originally Posted by nun View Post
I don't agree.

Under the Tax Treaty a UK state pension paid to a US resident is only taxable in the US. However, if the pension is paid into a UK account any interest or capital gains will be taxable in both the UK and the US. If the UK pension was paid into a US account there would be no UK tax liability on the interest and gains, tax would only be due in the US.
The Department of Work and Pensions pays US residents their UK State Pension in US dollars, unless a UK account is given for the purpose.

It is correct that all State pensions are taxable (under the US-UK agreement) in the state of residence. On the other hand, government service pensions are taxed (under that convention) only by the state paying them, although a US state can also tax them even if the IRS cannot. Doesn't help a lot of people, but those it does help save a lot of tax (their marginal rates in the two countries are lowered).

Another issue: the Totalization Agreement (on state pensions) does not prevent the US from imposing its Windfall Elimination Provision. In my case that reduces my US Social Security from a projected $900+ a month to $350. That's because SS is skewed to help the low-paid, and it is assumed if you are getting a foreign pension you were not necessarily low-paid. It's a complex formula; I think it reduces your SS by 50¢ per dollar received, and is phased out, and eliminated if you had "substantial US earnings subject to FICA or SET" for 33 years.
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Old May 16th 2012, 5:57 pm
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Originally Posted by punktlich2 View Post

It is correct that all State pensions are taxable (under the US-UK agreement) in the state of residence.
This is not strictly correct. If you are a US citizen the wording of the Treaty allows the IRS to tax UK state pension paid to a US citizen resident in the UK.

On the other hand, government service pensions are taxed (under that convention) only by the state paying them, although a US state can also tax them even if the IRS cannot. Doesn't help a lot of people, but those it does help save a lot of tax (their marginal rates in the two countries are lowered).
The taxation of government/state pensions also depends on the citizenship of the recipient.

Another issue: the Totalization Agreement (on state pensions) does not prevent the US from imposing its Windfall Elimination Provision. In my case that reduces my US Social Security from a projected $900+ a month to $350. That's because SS is skewed to help the low-paid, and it is assumed if you are getting a foreign pension you were not necessarily low-paid. It's a complex formula; I think it reduces your SS by 50¢ per dollar received, and is phased out, and eliminated if you had "substantial US earnings subject to FICA or SET" for 33 years.
That WEP amount sounds too high to me. The maximum WEP for 2012 is $383 and it can never be more than half the amount of the non-SS wage pension.
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Old May 16th 2012, 11:41 pm
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Default Re: Tax

Originally Posted by nun View Post
This is not strictly correct. If you are a US citizen the wording of the Treaty allows the IRS to tax UK state pension paid to a US citizen resident in the UK.
Indeed. I have read the treaty and its notes written by the Treasury and it's a horrible piece of tautology. But at its core, it only seems to assume either: US citizen getting US pensions living in UK, or vice-versa.

It doesn't spell out a US citizen getting UK pensions (in addition to US pensions), living in UK.

At face value you initially interpret Article 17 as 'state pensions are taxed in the state of residence'. But read paragraph 3 carefully and draw a flow diagram of 'contracting state' and 'other contracting state' and who is taxing what and you come to nun's conclusion.

Geez - I'm a dual citizen and will be retiring in the UK with US SS, UK state pension, US 401k and UK company pension and my wife with a similar mix. It's a bloody nightmare. And my wife has to figure out whether to take US SS with totalization (based on UK NI contributions, she doesn't have enough SS) or just take UK state pension, or take US spousal SS based on my contributions, with offset for her UK company pension and WEP.

I was hoping for a simpler life in retirement - not!
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Old May 17th 2012, 2:08 am
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Originally Posted by sunnysideup View Post

At face value you initially interpret Article 17 as 'state pensions are taxed in the state of residence'. But read paragraph 3 carefully and draw a flow diagram of 'contracting state' and 'other contracting state' and who is taxing what and you come to nun's conclusion.
The treaty "explanatory memorandum" for Article 17 p3 actually says that SS pensions are only taxable in the country of residence and the IRS will probably tell you that too. Unfortunately the treaty's wording only deals with cross border SS payments so the situation of a US citizen resident in the UK and receiving UK state pension payments is not covered and it can be taxed by the IRS. That particular situation is covered in other US tax treaties so the US/UK treaty is a bit of an anomaly.

Geez - I'm a dual citizen and will be retiring in the UK with US SS, UK state pension, US 401k and UK company pension and my wife with a similar mix. It's a bloody nightmare.
Things can get complicated, but once you wrap your mind around things US retirement accounts are not too bad to deal with. The complications really start if you are a US citizen with UK company or personal pensions and how they are treated by the IRS.

I'm in a very similar situation to you and here is how I understand things for a US/UK dual citizen resident, ordinarily resident in the UK. ie taxed on an arising basis by HMRC.

UK state pension - taxable by UK and US

US SS - only taxable by UK

US 401k - taxable by US and UK, there will by 20% US mandatory tax withholding and you can take that as a FTC on your UK taxes. If you roll the 401k over to an IRA the withholding goes down to 10%. This won't change your overall tax bill, but might reduce the amount you need to claim back from the IRS due to excess withholding.

UK company pension - US and UK taxable. These can be tricky as tax professionals disagree about how these should be taxed. If it is a defined benefit/final salary pension it is definitely covered by the treaty. If it is a personal pension with defined contributions (similar to a 401k) then some say it is covered by the treaty and some say it isn't or decide not to use the treaty. This is more for how gains prior to distributions are taxed and to implement a strategy for people who expect to have high incomes in retirement so that the distributions are not treated as income, as a tax free basis and capital gains. But that's not relevant for a UK resident.
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