yxw610

Hi everyone,
I'm looking for some information that I just can't seem to find. I've recently relocated to the UK from US and filling out both tax returns for the first time. I got through form 2555 with help from blogs/forums and it is the 1040 that I'm currently stuck on.

I have a bit of savings in a US bank account that I have not transferred to the UK yet. I received just over $10 as interest on that sum and also have a 1099-INT from my bank. I earned well below the Foreign Earned Income Exclusion so I do not need to pay tax in the US for my UK earnings, but I'm not sure what that means for my US taxable interest. Do I owe tax on the $10? Or, is that covered by the standard deduction?
I know it seems silly to worry about tax on $10 but I really want to figure this out and have my US tax liability to be zero.
Many thanks!

Hotscot

Either way you're obligated to report the $10.00 as earned income. Just do it in next years filing.

bakedbean

Hi there and welcome to the forum

I'm not sure whether this is US reporting or UK reporting. You may wish to look in the USA section and post something in there, if it is USA related.

If it's UK related, try the Moving Back to the UK section on here.

Both sections are full of helpful posters. I'm sure you'll find an answer.

Sue

Hi yxw610,

Welcome to BE. I wasn't sure the best place for you post, but I've moved it to our USA forum for you and hopefully some of our other members will be able to share their experiences.

Michael

It is not earned income covered by the foreign income exclusion so you need to include it as income on your return. I believe the standard deduction is available if you file form 2555. Just enter the amount in the interest column and calculate everything out to determine if tax is owed.

theOAP

Assuming you only have UK earned income for the US tax year; unless you have a substantial amount of UK interest, your US tax will be $0.

On 1040:
UK earned income goes on line 7 (in dollars, of course).

Do you have any interest from accounts in the UK (or any accounts in the UK, interest bearing or not)? If yes, file Schedule B. List the US interest on Sch. B along with the UK interest. Then, complete Part III of Sch. B.

If you have no UK accounts, skip Sch. B (unless you have dividends), and enter the $10+ on line 8a of 1040.

On line 21, take the exemption for FEIE (2555).

Line 22 will be the amount of the interest only.

Line 37 will be the same (if no adjustments).

On line 40 you will take the Standard Deduction.

On line 42 you will take exemptions.

The combination of lines 40 and 42 should be larger than the amount on line 38 (C/O from line 37), thus, you will have no taxable income (line 43).

This assumes a very simple return, with only UK earned income (below the FEIE threshold) and US and UK bank accounts. Any additional income/benefits/investments/personal pensions/FBAR/Form 8938, etc., may alter the above.

Michael

As Nun stated in another post, sometimes it is better to take foreign tax credits than the earned income exclusion if you plan to live in the US during retirement. Since UK taxes generally exceed US taxes owed, the excess tax credits can be carried forward and can be applied against US taxes owed on foreign income (UK pensions, etc.) in the future. This can be important since US/UK tax treaties usually only tax UK pensions in the US if the person is a resident in the US and with previous excess foreign tax credits, no taxes may be owed.

I don't know how true that is but according to Nun, that works.

yxw610

Thank you TheOAP and Michael!

I don't have much £/$ in my UK account and no interest earned either so don't see a need to fill out the FBAR quite yet. I will however use 1040 Schedule B. Originally I interpreted that one would fill it out only if you were earning $1,500+ in taxable interest but upon closer inspection it does look like the right form to use for small sums as well.

Michael - I had no idea that the credit could be applied to UK pensions in the future. Will have to reevaluate.

Speaking of pension. If my UK employer does pay money into a pension plan do I need to report this somewhere?

Michael

After I think about it, I'm not sure that is correct and need Nun to chime in. I believe a Brit living in the US is not taxed on UK government pensions in the UK but is taxed in the US and that is considered earned income. However I thought the income was reported on form 1040 and not form 1116. If that is the case, I don't believe foreign tax credits can be used since only income reported on form 1116 can use foreign tax credits. Unfortunately tax preparation programs (i.e. Turbo Tax) don't automatically handle form 1116 for foreign earned income (income has to be entered and tax credits calculated manually) because if it did, all you'd have to do is use a tax preparation program each year importing the previous year and enter foreign income and foreign tax credits and all the excess foreign tax credits would keep accumulating and when the time came, it could use those tax credits if needed. It would be nice if it calculated tax credits for unearned income since all your would ever need to do would be to import the last year's return to apply the tax credits when needed.
No.

nun

I'll do my best, OAP and you will keep me honest.

If a UK citizen (not US citizen) is resident in the US and receives a UK Government pension the pension would only be taxed in the UK. Pensions are usually thought of as passive income.

I don't agree with Michael's comment that the OP does not need to report employer contributions to a UK pension plan. They are classed as remuneration by the IRS and so must either be entered as income on the 1040 or excluded from income under the US/UK tax treaty. The first way is often the best as those excess UK tax credits can be used to pay some or all of the US tax due on the empoyer and employee UK pension contributions. This will build up a US tax free basis in the UK pension. If the US citizen then returns to the US the pension will only be taxable in the US so income tax on withdrawals would only be payable on amounts in the the pension above the tax free basis.

nun

+1, no Schedule B is required if taxable interest and dividends are under $1500, but make sure you don't need to file it for another reason, like having a foreign bank account.

Michael

My mistake, I should have said if he/she was a USC and living in the US, then UK pensions will be taxed in the US only.

Since you previously did make a comment that it is better to use foreign tax credits so that they could be applied against pensions in the future, I assumed that pensions are classified as earned income. Although pensions may be passive, it appears to be passive with limitations (like interest, qualified and non qualified dividends) since capital losses beyond $3,000 can't be written off against pensions. I wonder how they keep track of foreign tax credits against pensions so they can only be applied to pensions in the future since I don't think other passive tax credits can be used.

Tax law hurts my brain.

theOAP

Tax credits from form 1116, be they from passive income or general limitation income, can only be carried forward for ten years. After ten years, they're useless. So, any thought of building up tax credits more than ten years before retirement, to use when retired, is a lost cause anyway. The kicker is credits from general limitation income can only be applied (in future) to income categorized as general limitation. They can not be applied to income categorized as passive. Same thing for passive credits.

We can now start the debate as to whether pension income is passive or general .

theOAP

We still haven't answered this question.

I nominate nun .

theOAP

The following is my understanding, and it could be wrong. Passive and general income are only defined in Title 26 of the code in one place. (I used to know where, but I doubt I could find it again.) AND, general income is only defined as "income that can't be classed as passive". The definition for passive income relates to a certain type of entity or such (again, I forget the exact type).

When reading the definition, you come to the conclusion that pension income is general, because that type of entity can not have a pension. ALL the respected tax advisors say it has to be general (Guya, Liz, etc.). But when you question any IRS agent as to whether a pension is passive or general (even in writing), the answer I have always received is it must be classed as "passive". No matter how you, or your tax advisor, complete form 1116, someone will disagree.

NOTE: Just to complicate the issue: if you claim the pension income as passive, and the tax rate paid on the income was greater than the highest tax rate charged by the IRS, then the income must be allocated to the general catagory due to HTKO (high tax kick out).