jopavi73

Hi everyone:

I've been a visitor here a couple of times for fun but now I have a concern about what effect my UK state pension is going to make this year when I do my taxes.

I have been a resident alien since 1978 and started collecting Social Security back in 2010 at the age of 62. I would have waited until I was 65 but I was unemployed and it was income!

I turned 65 this last July and started collecting my UK pension and at this time my SS was reduced under the Windfall Elimination Provision by about 27% but as the addition of the UK pension more than makes up for this it was not a problem.

Having spoken with US SS they say that the UK pension will be treated much the same way as my SS payments in that they will not be taxed. However, I have read reports that say the UK pension will be taxed as an annuity and that I need to fill out forms that will exempt me from paying any UK tax and letting SS know that I receive it. Well, they already do know and I have not had any deductions taken from the UK payments.

Since SS made the WEP adjustment it would seem that what I get from the US and the UK would be the same as if I had lived and worked in the US all my life and not be taxed. I have not been taxed on my US SS for the last 3½ years why would they start now?

From some of the research I have done it seems the UK and US have a treaty that protects me from being taxed on the UK pension.

Is anyone out there in a similar position or can point me in the right direction and keep me out of trouble with the IRS and SS? My local SS office can be quite unhelpful at times and I have already had issues with them, thankfully now resolved.

robin1234

Neither of us gets our US SS yet, but my wife started receiving her British State Pension about a year ago, it'll be a few years before I get mine.

First off, as you mentioned, the UK authorities do not tax your British pension, since from the application that you sent in to start receiving the pension, they know you are a US resident and so are not subject to UK income tax on the pension.

Next, it is taxable in the US. You declare the total amount in line 16a of the 1040, and put the same amount in line 16b. We also filed a form 4852. Probably not strictly necessary, but gave us a good paper trail for future reference.

This is my two cents, others will have further insights ..

jopavi73

Thank you for your reply.

As I have already had my US SS reduced to bring it in line with the WEP I have already "paid" the penalty of having a UK pension I, misguidedly, thought that it would be treated as combined to my SS. To have it taxed as well may put me back to a position where my UK pension would be eradicated.

As neither of you are getting US SS and I'm assuming you are working, in your case it may well be treated as additional income and thus taxed. Do you pay the normal rate of taxation? If it is different what percentage do they take?

I work only part time and below the threshold of what I'm allowed to make when collecting SS.

Maybe this is all wishful thinking on my part but having not paid taxes on my US SS for 3+ years, I believed that would continue.

I have always done my own taxes with the aid of a computer program but it looks like this year I may have to invest in some accounting advice.

robin1234

Well, we are both retired now but in 2012, the year my wife started to receive the British State Pension, we were both working. Certainly, our income for 2013 is very low as we didn't start our various pensions and our US SS yet. As to whether one actually pays any tax on income or not, that'll depend on how much income one earned that year. I just meant that the British State Pension is potentially taxable in the US ....

nun

In your circumstances your UK state pension is not UK taxable, but it is taxable in the US.

File form US-Individual2002

http://www.hmrc.gov.uk/cnr/us_individual_2002.pdf

with the IRS and they will send it to HMRC to make sure no UK tax is withheld from your pension.

When you get your UK pension you must enter it on line 16a of your 1040 as the IRS treats it like an annuity. It is not considered as SS. You can also do the maths to calculate any part of the payment that is return of already taxed principal and enter the remaining taxable amount on 16b. This could be significant for those who have made many voluntary NI payments.

jopavi73

Having not made any voluntary NI contributions since becoming a permanent resident I don't think that will affect me.

If I am to be taxed on my UK pension will it be included as income?

Having done some number crunching I find that I will barely exceed the earnings allowance for someone younger than full retirement age if my employee earnings and the UK pension are combined.

As I will turn 66 in 2014 the earnings allowance should increase to an amount that will accommodate both my earnings and the pension.

I expect that the 2014 has already been calculated and I can find it on line.

nun

Yes, it is "passive income" and will be included in you US income total. It is treated just like a US source retirement annuity. Your taxable income will then be calculated after the usual deductions and exemptions.

jopavi73

In the event that I may exceed the earnings allowance, even fractionally, I guess the IRS will pass that on to SSA and my payments will be adjusted accordingly.

The good news is that they have increased the earnings limit for those turning 66 in 2014 to $40,400 and change and after your birth date your earnings will be unlimited.

Thanks for your assistance.

nun

Your UK state pension is not classed as "earned income" so won't be included in your earnings for purposes of the earnings allowance.

jopavi73

Good to know. As you said it is passive income however SSA was not very confident in their explanation when I spoke with them and advised me it would be treated within the earnings allowance. Like the IRS, SSA is such a convoluted system that no one person really knows all the details. Thanks again.

nun

Well I won't contradict the SSA on that, but UK state pension is not classed as earnings by the IRS and I believe that it would not count towards the SS earnings allowance. Of course it will count towards your income and if that is large enough some of your US SS might be taxed.

jopavi73

I don't think there's much chance of that, I only work part time if I want or need to (to keep me from vegetating) I just want to stay on the right side of the Fed. Gov!

Michael

Your US social security is taxable but there is a complicated formula to determine how much is taxable. For many people, they don't pay any tax since there is an exclusion of up to a $25,000 for single ($32,000 for married filing jointly) and when your total income reaches a certain level, the government will tax 85% of your social security.

For a single person, social security will normally not be taxable at all until your total income exceeds about $32,000 and after that, the government eats away at the amount that is excluded. However if your other income is long term capital gains or qualified dividends, you should be able to make about $47,000 including social security before you will have to pay any taxes at all.

Your UK pension is considered as normal income and doesn't get the tax benefits of social security.

http://www.bankrate.com/finance/mone...y-taxable.aspx

If you have a tax preparation program on your computer from last year, look at the social security worksheet to see how everything is calculated. You can then also add other income and see what happens to your taxes. I do that for tax planning purposes to determine if I should sell stocks, etc. during the year. That is the easiest way to determine approximately how much tax is owed since the social security calculation is complex and capital gains are qualified dividends are tax free until your top marginal tax bracket reaches 25%.

jopavi73

Thanks for the information, it confirms my gut feeling on the whole thing. I do have my tax software from 2012 and I'll create another return with this years details, however, based on the past couple of years my NTI will be well within acceptable limits.

durham_lad

I report my UK private pension as an annuity as you point out. It is good to have confirmed that when I start receiving my UK OAP that it should also be treated as an annuity and that I need to keep track of all voluntary NI payments as they are after tax payments and will be treated as a return of after-tax principal.

Thanks for the reminder.