Kittsune

Hi, after looking around, I hope I am posting in the right place to get an answer.
Quick intro. I moved here in 2004, live in South Cal, and am a Permanent Resident. Absolutely love it as my disability is far less here than in damp and cold east England, which is why I moved.

I just applied for and got a UK pension, it's a small, basic one, and I got it backdated a year because of when I applied for it. They also messed up on my bank info, so it was 2 months late as well and that was added to it. It is a largish sum, just over $10,000. I have read about making sure it is not double taxed, and the forms etc to fill in, but I am afraid of how much tax I will owe the US IRS! I have also just been made redundant and am looking for work, so I know that will affect tax too. I do not want to find out I owe more than I can pay in tax. The job I had was low paid anyway.

Advice really appreciated on who to ask for Tax advice that will maximize what I can keep. I need to get a new wheelchair for one thing. I am just afraid of getting into tax debt or losing most of it to tax especially when it will already have been taxed in the UK. So, who do I ask for advice, please? Thanks in advance!

Woods.usa

Hi,
It might be worth ringing a CPA or some other tax type person for help with this...typically I email a buddy of mine who works for H&R Block...but I'd feel more comfortable with a properly certified tax preparer.

The IRS website may be able to shed some light, too.
http://www.irs.gov
Or, you might try giving them a call, but my experience with them is that they aren't all that friendly and like to make people pay lots of taxes, lol!

Good luck...my husband will have to deal with this a ways down the road, too.

nun

Exactly what type of pension is it? Who is paying it?

Kittsune

It is my State UK Retirement Pension because I am over 61, and the UK Government is paying it on a per monthly basis for me. Not that I am retired or likely to be able to do that...

lansbury

If it is just the basic pension, the normal amount is below the personal allowance in the UK, so you should receive it without tax being deducted. That is provided you have no other income in the UK.

You declare it on your US tax return. I pay my US taxes at an estimated amount quarterly and this includes a sum to cover my UK State pension. The back payment is a complication as I think the full amount needs to be declared for US tax in the tax year it was received. You may well be advised to speak with a CPA about the back payment, and a possible requirement to pay the IRS estimated quarterly payments in the normal course of the US tax year on the UK pension.

Kittsune

I believe it is the basic pension, it is 133 UK pounds week I am getting. Not huge, but a life saver here. OK so ask a CPA for tax here, and you don't think it was taxed in the UK? I don't have any other UK income at all.

Do I still need to do the forms HMRC US-Individual-2002 to claim relief from UK tax, along with an IRS form 8802 Residency Certification" I want to do it right and not get into any kind of tax debt.

Michael

If someone paid 100% of their tax in the previous year or pays 90% of their taxes owed in the current year or the tax owed is less than $1,000, penalties will not be accessed.

http://www.irs.gov/taxtopics/tc306.html

lansbury

UK personal allowance is £10,500 per year, your pension is £6916 so there shouldn't be any UK tax to pay on the normal payments.

The one off back dated payments may have UK tax deducted. You would need to look at any payment advice the pension department sent you. If you need to find out contact the International Pension Center in the UK.

[email protected] .uk
Telephone: +44 (0)191 218 7777




I submitted those forms for my other UK income. When I claimed my UK State pension 2 years later I didn't submit a form for that. Neither did my wife for her UK State pension. So far it hasn't caused a problem, we both receive our basic UK State pension with no tax deducted. If it makes you feel more comfortable to do so there is a fee to the IRS (I think $35) and the whole process takes a few months.

lansbury

You're referring to the quarterly payments. Not knowing the OPs tax situation that's why I suggested getting advice and if quarterly payments are required.

They might like to make them anyway to avoid a lump sum being due come April each year.

Michael

If there is UK tax withheld, the OP should be able to file form 1116 to use foreign taxes paid as tax credits against taxes owed for that income. I don't believe that Turbo Tax has a menu for foreign pensions but it will allow form 1116 to be manually filled out in Turbo Tax and it will calculate taxes owed using that form.

http://www.irs.gov/pub/irs-pdf/f1116.pdf

Michael

If the OP again starts working, I find it less hassle to just increase the withholding on the W-4 to pay for the taxes incurred by the pension then to file quarterly estimates. The IRS doesn't care which way it is done as long as they get their money in a timely fashion. So if he calculates that he will owe about $2,500 in taxes for the pension, he could just change the W-4 to withhold an additional $200 per month.

Michael

Make sure you work at least 40 quarters in the US before you retire since you will then be eligible for both Social Security and Medicare. It sounds like you might be currently about one year short of 40 quarters.

nun

Yes you should file those forms to make sure HMRC has your tax status as NT, (No Tax).

You enter the UK state pension on line 16a of your 1040 and enter the taxable amount on line 16b. It is treated as an annuity payment. FYI the taxable amount of the UK state pension might be less than the total you receive if any of it was paid for with after tax dollars.....ie with voluntary NI contributions while you lived in the US. You might also file a 4852 as a substitute 1099R.

If you have less than 30 years of US FICA payments report the portion of the UK state pension that is due to non-SS wages to SSA when you take US social security so WEP can be calculated.

robin1234

I didn't think of this when I filed for 2012 (my wife began to receive her British state pension in 2012.)

She has 19 years of NICs, twelve for working in the UK and seven Class 2. We simply paid tax for 2012 on the whole amount. Are you saying that in fact seven nineteenths of the amount is not taxable as that portion derives from after tax NIC payments? And if so, I can just pay the proportion with no further explanation to IRS, or maybe craft a brief explanation to insert in the Form 4852?

nun

Not exactly.

As the UK state pension is taxed like a non-qualified annuity you can use the General Rule to calculate the taxable portion of the annuity. Basically any after tax amounts you contributed to the principal would not get taxed again, so you have to work out your Cost in the annuity. If you paid Class 3 NICs your cost would be greater than if you paid Class 2 NICs while in the US. Because the value of the UK state pension is so much more than a full record of Class 2 NICs most of it will be US taxable. I have 30 years of Class 2 contributions and my Cost is still a fraction of the value of the pension. I did a rough calculation and I think around 95% of it is taxable in my case.

http://www.irs.gov/pub/irs-pdf/p575.pdf