tax credit for US company pension for widow UK perm resident?

Hello, I'm new here, but I did look at all the US/UK tax posts first - I still have a question: this is for my mom.

She receives my dad's pension (he's deceased) which comes from a US company.
They both lived in UK since 1970s, still US citizens, UK perm resident.

She pays taxes on the pension and her UK pension in the UK, that seems ok.
Then, she has to pay tax on the pension here in the US, that seems like a double tax.  They have taken out tax on it already here.

She also has US SS income (which is not taxable) and an IRA (distributions are taxable).

A couple years ago I filled out the form 1116 and she got a credit but I think I did it wrong, and if you read the language, it is very confusing.  Then there is a form 2555?  I just don't know what to do.

I would like to apply for a credit of her 1550 pounds tax that she paid in UK on the US taxes.

Any advice is helpful, I know there are some pretty good tax experts on here but it seems the advise already given doesn't apply to this situation.
Thanks!

A complicated situation, but it can be eased somewhat with double taxes avoided. First, forget about Form 2555 since it only pertains to earned income. None of your mother’s income is ‘earned’. (A bit of a misnomer since I’m sure your parents worked hard to accumulate it.)

I assume your mother is still living in the UK, not the US (since she pays UK tax). A minor point, but is the ‘UK pension’ a works pension, or UK State Old Age pension, or both? Is the survivor’s pension truly from a ‘company’ (like GM, or Bank of America)? Is the source of the US pension truly from within the US, and not a UK pension paid by a US company? Based on the fact that she pays taxes in the UK, I assume her income is over £9,940 (if she is over 65, or £10,090 if over 75) and due to the US Social Security, IRA, the US pension, and possibly (if it’s her only UK sourced pension) the UK State pension, she completes the Self Assessment Form for HMRC. I assume the IRA is a periodic payment, as is the US company pension. I assume she does not receive UK pension credits.

Fortunately, you have two allies, the US/UK Tax Treaty, and Form 1116 (Foreign Tax Credits). Unfortunately, as you’ve discovered, Form 1116 requires a great deal of understanding, and invoking the treaty in either the US or UK can be complicated. As you mention, the treaty will allow for tax to be collected on US Social Security in the UK only. But you will need to file Form 8833 to invoke the treaty for the Social Security, and possibly, to ‘resource’ the IRA to UK income (but it still has to be declared in the US, hence another reason for Form 1116). A credit for tax paid to one country can be accomplished either on Form 1116 (US), or on the HMRC Self Assessment form (UK).

As you can tell, this all becomes a bit of a challenge, and we haven’t yet discussed the company survivor’s pension. For that reason, I would urge you to seek competent assistance. A competent UK accountant may be able to handle the UK side but I, personally, would select an advisor in the US very carefully. They should have a proven record of dealing with the US/UK treaty. My own preference would be to seek an advisor based in the UK who understands the HMRC implications, as well as the US tax code. Allow them to do the returns for a year or two, and after that, you will have a template to use if attempting them on your own. If you prefer to go ahead and attempt them on your own, then you should be aware that each pension has its own unique situation. For example, a UK State pension is taxed in both the UK and the US, but for the US, you use Form 1116 for a credit on the UK taxes paid.

For a person on a fixed income, it’s a bit uncomfortable paying the amounts of monies involved, but I’m afraid that’s solely due to the US Citizenship. If seeking advice in the US from the normal sources (H & R Block, tax help at senior citizen centres, etc.), you may find you know more about the issue than they do.

As always, I am not a professional tax advisor, and my comments may well be incorrect.

For example, a UK State pension is taxed in both the UK and the US, but for the US, you use Form 1116 for a credit on the UK taxes paid.

A quick question about this statement as it would apply to a US citizen, resident for tax purposes in the UK and receiving UK State pension payments. My understanding is that such Government social security payments are only taxable in the country of residence, Article 17.3, and they are specifically exempt from the Savings Clause by Article 1.5, so there would be no tax due to the US. Also if the US citizen resident in the UK gets US SS that is also only taxable in the UK.

Isn’t it curious why I happened to pick that particular example? First, my mistake: I wasn’t clear in the wording (or perhaps, too clear) and I admit I was trying to be too clever. But, my point: What if you don’t invoke the treaty (if it applies), and are looking to build up excess credits (for future ‘passive’ taxed income) if the income has been taxed in the UK at 40%? My understanding is that if you invoke the treaty (again, if it applies), the UK taxes paid on the exempt income can not be used on Part II (n), Foreign Taxes Paid or Accrued, of Form 1116 (which, as I understand it, is true of UK taxes paid on US SS if the treaty is invoked).

Granted, it’s swings and roundabouts. For retirees with predominately UK income, the result can often become ‘no tax due’ after applying the credit no matter whether you’ve invoked the treaty or not. It’s a prime example of needing to calculate all ways to accomplish what benefits you the most. With your particular US income, the result may be different. Then again, I’ll be the first to admit that I may have this totally wrong. You’re going to love it when you retire here, NUN!

OK OAP we're on the same page. The 20% or 40% UK tax due often wipes out US tax due when the credit is taken so invoking the treaty doesn't accomplish anything.

One place where the treaty is very useful is if you have US ROTHs. My strategy is to do IRA to ROTH rollovers before I return to the UK and invoke the treaty so I pay no tax in the UK or the US on withdrawals.