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UK State Pension and US tax return

UK State Pension and US tax return

Old Feb 6th 2024, 2:46 am
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Default Re: UK State Pension and US tax return

I've been reporting a UK pension on form 4852 for 20 years. That way it gets reported as taxable on the pension line 5, but qualifies for the state deduction which we wouldn't get if it went in as other income. This year I'm using Free Tax USA and they don't support form 4852, so I'm creating a substitute 1099R and entering it in that way. I hoping they're not too bothered as long as we pay the tax on it.
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Old Feb 6th 2024, 3:11 am
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Default Re: UK State Pension and US tax return

Originally Posted by USADragon
….hoping they're not too bothered as long as we pay the tax on it.
100% correct!
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Old Feb 6th 2024, 4:47 am
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Default Re: UK State Pension and US tax return

I did a search but couldn't find a definitive answer on this... first year doing federal tax return including income from UK state pension. If a proportion of my payment is attributable to after-federal-tax voluntary contributions, is some of my UK pension income free of federal tax? If so, how does one calculate said proportion?
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Old Feb 6th 2024, 6:18 am
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Default Re: UK State Pension and US tax return

Originally Posted by Giantaxe
I did a search but couldn't find a definitive answer on this... first year doing federal tax return including income from UK state pension. If a proportion of my payment is attributable to after-federal-tax voluntary contributions, is some of my UK pension income free of federal tax? If so, how does one calculate said proportion?
I understand where you are coming from, very much like a deductible IRA where contributions are tracked so on making distributions the taxable portion of each distribution is apportioned appropriately. The same applies to annuities bought with after tax dollars. However, I have not heard of anyone doing what you suggest. The voluntary contributions made from after-federal-tax money does give you a break when you start taking SS because they reduce the amount of WEP applied as it did with my wife. It would be strange if those same after tax contributions also were not taxed on payout of OAP benefits.
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Old Feb 6th 2024, 6:31 am
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Default Re: UK State Pension and US tax return

Originally Posted by durham_lad
I understand where you are coming from, very much like a deductible IRA where contributions are tracked so on making distributions the taxable portion of each distribution is apportioned appropriately. The same applies to annuities bought with after tax dollars. However, I have not heard of anyone doing what you suggest. The voluntary contributions made from after-federal-tax money does give you a break when you start taking SS because they reduce the amount of WEP applied as it did with my wife. It would be strange if those same after tax contributions also were not taxed on payout of OAP benefits.
Fortunately, WEP doesn't apply to me.

I think, but am not completely sure, that the proportion of the State Pension that represents a return of after tax contributions divided by your IRS life expectancy is non-taxable. Given how cheap Class 2 contibutions are, for me this would represent ~$60 in untaxed State Pension income per annum!

https://www.irs.gov/taxtopics/tc411

Some more info under "Partly Taxable Payments" in here:

https://www.irs.gov/publications/p57...link1000226781
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Old Feb 6th 2024, 7:06 am
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Default Re: UK State Pension and US tax return

Originally Posted by Giantaxe
Fortunately, WEP doesn't apply to me.

I think, but am not completely sure, that the proportion of the State Pension that represents a return of after tax contributions divided by your IRS life expectancy is non-taxable. Given how cheap Class 2 contibutions are, for me this would represent ~$60 in untaxed State Pension income per annum!

https://www.irs.gov/taxtopics/tc411

Some more info under "Partly Taxable Payments" in here:

https://www.irs.gov/publications/p57...link1000226781
Sounds like a lot of work and potential IRS audit for $60/year, but it certainly sounds like a possibility. Not clear though whether the OAP, being a State Pension as mentioned in section 17 of the tax treaty, can be counted as a “nonqualified pension plan” and treated as described.

I have 2 UK private pensions which are treated as and taxed by the IRS as nonqualified pension plans, reported using form 4852. I am also receiving OAP which is not taxed at all by the IRS because I am a USC living in the UK. Just an example of the different treatment the IRS has on the OAP as opposed to other foreign pension plans.

Last edited by durham_lad; Feb 6th 2024 at 7:12 am.
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Old Feb 6th 2024, 2:10 pm
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Default Re: UK State Pension and US tax return

Originally Posted by durham_lad
Sounds like a lot of work and potential IRS audit for $60/year, but it certainly sounds like a possibility. Not clear though whether the OAP, being a State Pension as mentioned in section 17 of the tax treaty, can be counted as a “nonqualified pension plan” and treated as described.

I have 2 UK private pensions which are treated as and taxed by the IRS as nonqualified pension plans, reported using form 4852. I am also receiving OAP which is not taxed at all by the IRS because I am a USC living in the UK. Just an example of the different treatment the IRS has on the OAP as opposed to other foreign pension plans.
It's a good question. Many links state that a non-qualified plan is one which isn't subject to the ERISA law, which obviously UK State Pension doesn't. For example:

"Nonqualified plans are those that are not eligible for tax-deferred benefits under ERISA. Consequently, deducted contributions for nonqualified plans are taxed when the income is recognized."

Of course, as you allude to, it may be that foreign equivalents of Social Security are neither qualified nor non-qualified retirement plans making the issue moot. Hmmm... for $60 of non-taxable income a year, it doesn't feel worth it.
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Old Feb 8th 2024, 10:27 am
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Default Re: UK State Pension and US tax return

Originally Posted by Cook_County
The UK State pension is entered as pension income on Lines 5a and 5b on Form 1040. It is foreign source, so is also entered pe Form 1116, which may assist if there are foreign tax credit carryovers from any of the past 10 years. It is exempt from UK tax under Article 17(3) of the UK-US tax treaty.
Yes you are correct it should be entered on Form 1040. The person I saw at H & R Block wasn't entirely sure so consulted with their international tax lawyers.
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Old Feb 10th 2024, 10:38 am
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Default Re: UK State Pension and US tax return

Originally Posted by Cook_County
The UK State pension is entered as pension income on Lines 5a and 5b on Form 1040.......
Why is the UK State pension not entered on line 6A/B as a "Social security benefits"?

I appreciate it makes no difference to federal taxes, but it would make a difference in those States that have income tax but don't tax social security.
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Old Feb 10th 2024, 10:53 am
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Default Re: UK State Pension and US tax return

Originally Posted by lansbury
Why is the UK State pension not entered on line 6A/B as a "Social security benefits"?

I appreciate it makes no difference to federal taxes, but it would make a difference in those States that have income tax but don't tax social security.
The tax treaty states that portions of pension income that is tax free in one country shall be tax free in the other. On line 6 for Social Security at least 15% is tax free, more if the total income is low enough. UK State pension is 100% taxable in the UK so should be 100% taxable in the USA. Maybe that is the reason?
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Old Feb 23rd 2024, 4:57 am
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Default Re: UK State Pension and US tax return

Originally Posted by durham_lad
What I do, and have done for about 15 years, is complete a substitute 1099R for each of my 2 UK private pensions and enter the Federal Tax id as 99-1234567 in order to get TT to e-file. In the explanation on that form, line 10, I put “THIS IS A PENSION PLAN FROM AN EX-EMPLOYER IN ENGLAND AND THEY DO NOT ISSUE US STYLE 1099-R TAX FORMS“
For receiving a UK State Pension - which boxes need to be completed on the Substitute 1099-R in Turbo Tax?
Also there is no box for entering Comments
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Old Feb 23rd 2024, 5:18 am
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Default Re: UK State Pension and US tax return

Originally Posted by davidjackson
For receiving a UK State Pension - which boxes need to be completed on the Substitute 1099-R in Turbo Tax?
Also there is no box for entering Comments
If you are using the substitute 1099-R route fill out all those boxes for which you have the information to do so. Personally I use the miscellaneous income method, much easier and never caused a problem. The IRS refund for 2023 went into my bank last night.

They are several comments on the Turbo Tax Community help pages that the IRS have instructed people not to use false tax ID numbers. But either way returns seem to be accepted without problems because of it. It's about time TT resolved this bug of not being able to e-file with an ID number.
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Old Feb 23rd 2024, 5:28 am
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Default Re: UK State Pension and US tax return

Originally Posted by davidjackson
For receiving a UK State Pension - which boxes need to be completed on the Substitute 1099-R in Turbo Tax?
Also there is no box for entering Comments
TT prompts for and enters the information on form 4852 which accompanies the substitute 1099. I have done this every year for the UK pension for 16 years now, so it is a hard habit to break.

As stated above it doesn’t really matter where it is reported as the tax is the same.

Now that I am living in the UK my wife is receiving her SS (I will start next year). SS is only taxable in the UK when you live there but TT does not allow you put zero in the taxable box on the 1040 line SS is reported, so on advice from TT members I put a negative value in “Other income” on the 1040 to zero it out, with a comment referring to the tax treaty. I’m sure the IRS prefer this to receiving a paper return, they haven’t rejected any such return.

Last edited by durham_lad; Feb 23rd 2024 at 5:30 am.
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Old Feb 23rd 2024, 9:06 am
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Default Re: UK State Pension and US tax return

Originally Posted by lansbury
If you are using the substitute 1099-R route fill out all those boxes for which you have the information to do so. Personally I use the miscellaneous income method, much easier and never caused a problem. The IRS refund for 2023 went into my bank last night.

They are several comments on the Turbo Tax Community help pages that the IRS have instructed people not to use false tax ID numbers. But either way returns seem to be accepted without problems because of it. It's about time TT resolved this bug of not being able to e-file with an ID number.
Exactly —use the miscellaneous income line and don’t mess about with creating substitute 1099s. It just isn’t necessary.
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Old Feb 23rd 2024, 9:10 am
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Default Re: UK State Pension and US tax return

Originally Posted by Nutmegger
Exactly —use the miscellaneous income line and don’t mess about with creating substitute 1099s. It just isn’t necessary.
Does anybody now if the UK State pension, in addition to Federal tax - is it also liable for State tax (California).
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