theOAP

At the risk of making a fool of myself in public one more time, I'll add the following:

I concur with nun, pension income is not earned, and can not be included on Form 2555.

The figures in the example were constructed to point out a risk for those in this particular range of income. Then I cocked the whole thing up! The UK personal allowance for 2013/14 will be £9,440 ($14,160 @ 1.5 to 1). The US standard deduction (over 65) plus 1 exemption (MFS, no other exemptions) for 2012 is $10,900. It will not likely be much higher in 2013.

Foreign pensions remitted and taxed in the UK are only taxed on 90% of the amount remitted, so 10% is tax free (given the right circumstances). ISAs are tax free in the UK. For someone with a US tax obligation, both are taxed in the US although US SS can be reduced to $0 by the US/UK treaty/SS agreement.

You can use foreign tax credits (Form 1116) to reduce your US obligation, but there's an area of $3,200 plus ($14,160+tax free in the UK minus $10,900 in the US) where you do not have any tax credits from the UK to use. As a result, given the right circumstances (retired, resident and domiciled in the UK, and paying UK tax on the arising basis), you will owe the UK no tax, you will owe the IRS many hundreds of dollars, and your US SS may be reduced by 50% due to WEP. The inequity can continue past the $14,160 figure for some amount; the more you earn that is finally taxed by the UK continues to add to the US tax obligation. It's several more thousand in gross income before that goes away.

That's why it is of upmost importance to fully understand the US and UK tax regulations to take full advantage of the potential tax reductions (especially for the US). For the time being, there is nothing you can do about WEP.

If the example helped one person to realise the situation, then my cock up will not have been in vain .

nun

Don't panic or jump to conclusions.

If you are a US citizen resident in the UK and taxed on an arising basis then you will be liable to tax on retirement income in both the US and the UK:

If you have income from retirement accounts you pay income tax to the UK and then take a foreign tax credit on your US tax return. You will have 10% or 20% tax withheld from a US based retirement account which you'll probably get back as a refund when you file your 1040 and apply the UK tax credits.

You can exclued ~$90k of foreign earned income from your US taxes, or take credit for the UK taxes you pay on that income on your US taxes.

If you have US or UK investment income, like dividends and capital gains, that is outside of a retirement type account, then the tax treaty provides a formula for dividing the tax due between the US and the UK. The total amount of tax you pay will end up being the larger of the tax due in either the UK or the US.


SS payments are a bit different. US SS will only be taxable by the UK. If you get UK state pension then that is taxable in both the UK and the US due to some unfortunate wording in the treaty. Tax free UK benefits are also US taxable when paid to US citizens.

If you are not a US citizen then things will be different. In the case of a UK resident (not a US citizen) who has income form US based retirement accounts you would only pay tax on withdrawals in the UK. You would file a W8-BEN with your retirement account manager to identify yourself as an NRA and there would be no US tax liability.

holly_1948

Pity the poor soul of modest income who can't understand all the nuances and can't afford to employ tax accountants.

nun

Yes that is a perennial issue, but by doing some fairly simple things you can keep your taxes manageable.

Bud the Wiser

I've agreed and disagreed with this theory so many times I've ended up falling out with myself. :-(

From a purely financial point of view it seems to make sense. Of course, if you have a UK pension that kicks in at 65/66 and WEP to consider, then taking the US pension at 62 may/maynot be a beter option.

However, several other factors come into play, not the least being health. I'm fairly sure we'll all become less active as the decades progress, therefore our financial needs/wants will be greater in our 60's than say our 80's ( health insurance/costs not included. )

The other factor is governments(s) moving the goal posts in future years. Raising retirement age, means testing, forced asset sales etc.

There's never going to be a 'one size fits all.' I just wish it weren't so darn complicated.

Thanks all for the input.

Mummy in the foothills

Hey you talking 'bout me
Only good think in all this is the WEP won't apply as Dh worked well over 30 years in US.

dunroving

One simple principle for me (who will be WEP'd) is that if I am going to postpone anything it should be receipt of my US social security pension (maybe until I am so poor that I really need it).

nun

That's my strategy too. I'll defer both US SS and UK state pension so that those "guaranteed", inflation linked incomes and maximized for the time in my life when I won't be able to work and to insure against my retirement savings running out. The size of my UK state pension is irrelevant to my WEP because it's been paid for entirely by voluntary payments. Spending my US IRA/401k etc money before 70.5 is also a good way to reduce US RMDs and hence tax.

Perth

Nun, is there an age cap at which US SS and UK pensions no longer grow through deferment?

Bud the Wiser

I'm inclined to be more of a "Bird in the hand is worth two in the bush." type.

The break even age especially with reinvesting makes a definitive answer impossible.

nun

US SS stops growing throgh deferrment at age 70. I don't think there is an age can for the UK state pension deferrment.

nearpost1

Thanks for a great thread. Once I start drawing my U.K. State pension, I will be impacted by WEP as I only have 24 years of substantial earnings in the U.S., and 11 of my 30 u.k. units will be from the eleven years I actually worked on the U.K. as a kid" back in the 70's.

The remaining 19 units will be from voluntary NI contributions.

Can Nun, or one of the other experts on here tell me the correct way to declare the 11 units only, so that the whole of the U.K. Pension does not get included in then depot of SS WEP calculation?

Many thanks

nun

Only 11/30ths of your UK state pension should be used in the WEP calculation. So when SSA asks about non SS wage pensions just declare 11/30ths of the UK pension.

nearpost1

Many thanks Nun, sorry for the Ipad induced typos.

Thank goodness I don't have to disclose the entirety of my U.K. Pension, and trust them to allocate the 19/30ths in my favor. From what I read in this thread, that could be problematic.

From what you say, this has nothing to do with my tax return, I simply have to call, or write to the department of social security.

May I run a scenario by you, just for my own peace of mind?

I will start collecting my U.K. Pension in 2018. Let's say that after currency conversion, it equates to $1,000 per month. Also, let's say that a year later when my full social security pension starts, I will receive $2400 per month.

May I assume that after declaring $366 of "wep" income (11/30ths) of my U.K. Pension, the folks at the dept. of ss will deduct $183 from my social security?

That would be 50% of my "wep able" pension, the maximum reduction allowed I believe.

This would leave me with $1,000 from the U.K. And $2217 from social security.

Also, not that I would dream of concealing anything, how does anyone at ss know you are receiving a U.K. Pension, and if they are aware of my U.K. pension, why would they simply take my word that 2/3rds of it is free from " The WEP penalty" ?

Finally, as ones U.K. Pension receives cost of living adjustments as the years go by, is there a mechanism in place that allows, or demands, that the recipient inform social security about the increase in the "11/30ths" subject to WEP?

Many thanks again.

nun

I'm not sure how much you'll get WEPed, use the WEP calculator on the SSA site.

When you apply for SS you will be asked about any non-SS wage pensions. It's up to you to tell SSA and get the amounts correct. The vast majority of WEP situations involve state workers and the state does tell SSA about your non-SS pension or defined contribution account balances.

I'm not sure about cost of living adjustments.