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US/UK dual taxation treaty and pension income

US/UK dual taxation treaty and pension income

Old Nov 29th 2021, 8:17 pm
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Default US/UK dual taxation treaty and pension income

Asking for advice from the wise heads on this board. We are both US citizens and residents, originally both British.

A couple of years ago my UK occupational pension started. I told them that I would be taking advantage of the US/UK dual taxation agreement. I applied via the IRS in February, which sent the required forms to HMRC. Meanwhile, UK tax was withheld on the first two pension payments. By May, HMRC had given the correct tax code to my pension provider and my pension started being paid gross. I received a check from HMRC for the tax that had been withheld during the first two months. This was all within one US tax year so I included the total amount as income on our US taxes for that year. All foreign taxes paid had been refunded by HMRC, so foreign taxes didn’t come into it.


Fast forward to this year. DH started his pension in June and applied for exemption from UK tax under the dual tax agreement. Tax is withheld meanwhile. He has had a letter from the IRS that they have forwarded his paperwork to HMRC, however, the pension provider has not yet been given the correct tax code by HMRC. We are now coming up to the end of the year.

My question. I do our US taxes myself. The way I want to treat this is to claim the gross amount taxable in the US and forget about the UK taxes that have been withheld as we will be refunded these in due course, presumably because of delays due to Covid. DH thinks that we should claim these UK taxes as ‘foreign taxes paid’ on our US taxes. If we do this when we receive a refund next year, as I’m convinced we will, do we then amend our taxes for 2021? Otherwise, if we claim those refunds as additional income we will be surely taxed twice, erroneously, no?

How would you handle this situation?

What is the ‘correct’ way to handle this situation?

Thank you


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Old Nov 29th 2021, 8:34 pm
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Default Re: US/UK dual taxation treaty and pension income

Your situation sounds identical to what I went through. I always showed gross UK pension on my IRS return and didn’t consider trying claim a foreign tax credit. HMRC came good in the end and refunded the taxes that had been paid out of my UK pension.

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Old Nov 29th 2021, 11:39 pm
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Default Re: US/UK dual taxation treaty and pension income

Thanks for replying Durham Lad. DH is saying that if we've paid the foreign taxes we wouldn't be giving a 'true representation' of our situation by not putting them on the return. My view and I'm thinking you concur, is that the 'correct' situation is that we owe US taxes on this UK income and it doesn't make sense to claim the foreign taxes paid that we 'know' are going to be refunded. I have to say that DH has thrown me for a loop with the suggestion that we would be negligent by filing without them.

Of course, if by some weirdness HMRC refuses to refund the taxes paid, I can always file an amended 2021 return to get some relief.

I am hoping this is all going to be moot and we get this sorted out with HMRC before tax time next April.

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Old Nov 30th 2021, 1:30 am
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Default Re: US/UK dual taxation treaty and pension income

You need to report a foreign tax rebate as income in the year in which you receive it, and pay US taxes on it in that year. If you do not do this then you are under reporting foreign income and you really do not want to go down that path.

If you receive the UK tax rebate in the same year in which you paid the UK tax then you would deduct the UK tax paid against any UK income (pension and UK rebate) and the net result would be zero tax due to the US on the rebate which is the result you want, although of course you will still be paying US tax on the entire pension income. If you do not receive the rebate in the same year that you pay UK taxes then you can still claim the foreign tax paid as a deduction or credit against the pension income and you will owe less US tax on the pension income, which again is the result you want. If you never receive the rebate then you are all done and you avoided double taxation on the pension income. However if you receive the UK tax rebate in a subsequent year then you will effectively owe the US for the foreign tax credit or deduction they gave you in the prior year which you will pay back when the tax rebate is taxed as foreign income. Either way you will come out more or less whole and your taxes will have been filed accurately for each tax year. You also do not need to refile taxes for the previous tax year to claim the credit, a much cleaner situation all around. You could come out a little better off, or a little worse off depending upon your tax brackets in each of the tax years, and whether you take a foreign tax credit or foreign tax deduction but the amount is likely small change, and in any case it is what it is.

The bottom line is that you have to report and pay taxes pay on a foreign tax rebate. You have nothing to gain by not declaring the UK tax paid because if you never receive the rebate then you get credit for the UK tax paid without having to refile prior years, and if you do receive it then you have to report it and pay taxes on it in which case you will have to refile prior years to get the foreign tax credit.

This situation is similar to withholding more state tax than due in one year, and then having to report the refund and paying tax on it In the next tax year which is a very common scanario.
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Old Nov 30th 2021, 2:09 am
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by Anne Elliot View Post
Thanks for replying Durham Lad. DH is saying that if we've paid the foreign taxes we wouldn't be giving a 'true representation' of our situation by not putting them on the return. My view and I'm thinking you concur, is that the 'correct' situation is that we owe US taxes on this UK income and it doesn't make sense to claim the foreign taxes paid that we 'know' are going to be refunded. I have to say that DH has thrown me for a loop with the suggestion that we would be negligent by filing without them.

Of course, if by some weirdness HMRC refuses to refund the taxes paid, I can always file an amended 2021 return to get some relief.

I am hoping this is all going to be moot and we get this sorted out with HMRC before tax time next April.
Agree with the other replies, everything should be on a cash basis and on the US tax year, so if you don’t receive a refund by 31 Dec, it has to be declared the following US tax year, even if it’s in the same UK one.
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Old Nov 30th 2021, 7:48 am
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Default Re: US/UK dual taxation treaty and pension income

Regardless of the tax treaty the UK does not tax its citizens if they reside overseas so HMRC are going to have to stop taxing the husband’s pension and refund the taxes he has paid up to now. If this refund happens over the boundary of the calendar year then for sure he could file a foreign tax credit and then report the refund when it comes as income on the following year’s tax return. Depending on the exchange rate changes he may actually gain or lose a little money.

I really don’t know if I did the procedure right or wrong when this happened to me over a calendar year boundary but it was certainly easier since it only took about 3 months to get the refund out of HMRC.
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Old Nov 30th 2021, 6:08 pm
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by Anne Elliot View Post
Asking for advice from the wise heads on this board. We are both US citizens and residents, originally both British.

A couple of years ago my UK occupational pension started. I told them that I would be taking advantage of the US/UK dual taxation agreement. I applied via the IRS in February, which sent the required forms to HMRC. ...
Excellent information in this discussion.

This raises a tangential question to me; I'm a US citizen / resident nearing retirement, and have recently paid catch-up payments for the UK state pension and will be eligible for a partial state pension. It was my assumption that when I'm at retirement age, I will be applying directly to HMRC for my pension to be sent to my US bank account. But the OP applied 'via the IRS' ... is that a difference between 'occupational pension' and the 'HMRC state pension'? Will I need to apply 'via the IRS' also? I have a few years to go before I need to work this out but may as well get the wheels turning!
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Old Nov 30th 2021, 6:22 pm
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by Steerpike View Post
Excellent information in this discussion.

This raises a tangential question to me; I'm a US citizen / resident nearing retirement, and have recently paid catch-up payments for the UK state pension and will be eligible for a partial state pension. It was my assumption that when I'm at retirement age, I will be applying directly to HMRC for my pension to be sent to my US bank account. But the OP applied 'via the IRS' ... is that a difference between 'occupational pension' and the 'HMRC state pension'? Will I need to apply 'via the IRS' also? I have a few years to go before I need to work this out but may as well get the wheels turning!
I took it that what the OP applied to the IRS for was proof that they are US tax residents. This is what I also had to do. This is needed to stop HMRC from requiring the pension provider to take out taxes.

The IRS has nothing to do with applying for the UK State pension which you do through the UK Department of Work and Pensions. (DWP)
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Old Nov 30th 2021, 6:44 pm
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by durham_lad View Post
I took it that what the OP applied to the IRS for was proof that they are US tax residents. This is what I also had to do. This is needed to stop HMRC from requiring the pension provider to take out taxes.

The IRS has nothing to do with applying for the UK State pension which you do through the UK Department of Work and Pensions. (DWP)
Thanks. I just saw a related post from Sugarmooma that explained that part a little bit. So I will need to provide proof to UK that I'm a US resident for tax purposes, and that has to come from the IRS ... which makes sense.
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Old Nov 30th 2021, 6:51 pm
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by Steerpike View Post
Thanks. I just saw a related post from Sugarmooma that explained that part a little bit. So I will need to provide proof to UK that I'm a US resident for tax purposes, and that has to come from the IRS ... which makes sense.
IRS form 2002 is what you need to file and they inform HMRC

https://www.gov.uk/government/public...ndividual-2002
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Old Nov 30th 2021, 8:10 pm
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by durham_lad View Post
I took it that what the OP applied to the IRS for was proof that they are US tax residents. This is what I also had to do. This is needed to stop HMRC from requiring the pension provider to take out taxes.

The IRS has nothing to do with applying for the UK State pension which you do through the UK Department of Work and Pensions. (DWP)
Yes, precisely. Thank you for clarifying, Durham Lad
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Old Nov 30th 2021, 8:57 pm
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by Anne Elliot View Post
Asking for advice from the wise heads on this board. We are both US citizens and residents, originally both British.

A couple of years ago my UK occupational pension started. I told them that I would be taking advantage of the US/UK dual taxation agreement. I applied via the IRS in February, which sent the required forms to HMRC. Meanwhile, UK tax was withheld on the first two pension payments. By May, HMRC had given the correct tax code to my pension provider and my pension started being paid gross. I received a check from HMRC for the tax that had been withheld during the first two months. This was all within one US tax year so I included the total amount as income on our US taxes for that year. All foreign taxes paid had been refunded by HMRC, so foreign taxes didn’t come into it.


Fast forward to this year. DH started his pension in June and applied for exemption from UK tax under the dual tax agreement. Tax is withheld meanwhile. He has had a letter from the IRS that they have forwarded his paperwork to HMRC, however, the pension provider has not yet been given the correct tax code by HMRC. We are now coming up to the end of the year.

My question. I do our US taxes myself. The way I want to treat this is to claim the gross amount taxable in the US and forget about the UK taxes that have been withheld as we will be refunded these in due course, presumably because of delays due to Covid. DH thinks that we should claim these UK taxes as ‘foreign taxes paid’ on our US taxes. If we do this when we receive a refund next year, as I’m convinced we will, do we then amend our taxes for 2021? Otherwise, if we claim those refunds as additional income we will be surely taxed twice, erroneously, no?

How would you handle this situation?

What is the ‘correct’ way to handle this situation?

Thank you
For an individual generally US taxation is on a cash basis- taking a deduction for something not paid may not be caught, but quite sure it is incorrect.
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Old Nov 30th 2021, 10:11 pm
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by morpeth View Post
For an individual generally US taxation is on a cash basis- taking a deduction for something not paid may not be caught, but quite sure it is incorrect.
I'm not sure what you mean by this comment. I wouldn't be 'taking a deduction' for anything. I would be paying the full amount of US taxes on our foreign pension income.

Thank goodness I have asked this question before we get any further in the pension withdrawal process. What I didn't mention above, as it was not germane to the principle involved, is that this is a drawdown pension and we only took a small first draw in June to get the ball rolling. Of course, we fully expected to have the correct 'NT' tax code from HMRC by now. But as we don't, for this calendar year we will forget the whole thing and wait until 2022. Thankfully, we're not desperate for the money. I will take the small amount of UK tax withheld as 'foreign tax paid' on 2021 US taxes and then add this to our 2022 income when it is remitted to him next year. As it is a small amount, less than 2000 GBP it will not make a huge difference.

Thank you to all who have responded with their comments, knowledge and experience.
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Old Dec 1st 2021, 7:21 am
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Default Re: US/UK dual taxation treaty and pension income

Originally Posted by Anne Elliot View Post
I'm not sure what you mean by this comment. I wouldn't be 'taking a deduction' for anything. I would be paying the full amount of US taxes on our foreign pension income.

Thank goodness I have asked this question before we get any further in the pension withdrawal process. What I didn't mention above, as it was not germane to the principle involved, is that this is a drawdown pension and we only took a small first draw in June to get the ball rolling. Of course, we fully expected to have the correct 'NT' tax code from HMRC by now. But as we don't, for this calendar year we will forget the whole thing and wait until 2022. Thankfully, we're not desperate for the money. I will take the small amount of UK tax withheld as 'foreign tax paid' on 2021 US taxes and then add this to our 2022 income when it is remitted to him next year. As it is a small amount, less than 2000 GBP it will not make a huge difference.

Thank you to all who have responded with their comments, knowledge and experience.
I think I misunderstood your comment.
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Old Dec 1st 2021, 5:54 pm
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Default Re: US/UK dual taxation treaty and pension income

Not sure if this is helpful but a very interesting article with some great links to resources.
I have a few years to go and have an employer final pension scheme in the UK and don't want to pay tax should I elect to take a lump sum.

U.S. Tax Treatment of UK Pension Distributions

https://www.castroandco.com/blog/201...distributions/

Last edited by Minty; Dec 1st 2021 at 6:07 pm. Reason: More helpful info
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