Uk Pensions, ISAs, and stock

Hi,

I'm new to the site, but have been spending days reading up on a few things that I didn't understand about US tax filing for expats.

I've been living in the UK for 11 years and filing tax returns each year.  Looking into how to handle a pension contribution (adding money to the pension) here led me to realize that I've been missing some important documents like FBAR(!!) and possibly 3520. 

On the FBAR, I'm putting together forms for the last 7 years (as recommended by their help line) plus an explanation as to why I didn't file (any suggestions? - I declared all interest and dividends and wages from the UK on my 1040 previously).


Some questions:
1) how do I handle UK based pensions (employer defined contribution) - I've read here and on other sites the differing views on how to handle these:
  a) as pre-tax deductions from wages and invoke the tax treaty
 or
  b) use foreign tax credits (FTC) and cover the employer contributions. 
My concern with b) is that I've made a few big contributions recently and I'm not sure that my tax credits would cover everything given that my UK tax has gone down (tax relief) due to putting money in a pension.  For other years, FTC would work fine.

2) I have an ISA (opened in 1997 when first lived here) that I've not contributed to or withdrawn from since 1998.  It looks like an ISA is deemed a foreign grantor trust and therefore I should have been filing 3520 and 3520-As for years.  Is this designation of an ISA correct?  i.e. that they incur heavy overhead (and mine had no investment advantage)? How many previous years should I send 3520s and 3520-As for (since 1997 or 2005 (last 7 years) or)?

3) When I started doing the returns, there was no apparent need to complete schedule B according to the 1040 instructions - clearly, I should have been completing this for foreign accounts - again, any ideas on how many years to send amended 1040s with schedule B in?  How does the IRS look at amended returns? The pension contributions have made me file returns in the UK (due to refunds) which will result in more amendments to US returns...

4) My previous employer had a stock share scheme which when I left converted to a stock certificate in the company.  Is this handled normally on the 1040 (no income besides dividends which I already report) or is there a special form for this, too?

5) Does any of this require PFIC/QEF forms? 

Would really appreciate any help or advice as I'm trying to amend/repair/file all of this before the June 15th deadline.... (thought it was a simple rehash of last year!)

Thanks!!!

This looks like a pretty complicated situation, are you working with a tax professional?

For what it's worth here are my observations.

1) The simplest way to handle your UK defined benefit pension contributions and gains will be to use the treaty to exclude them from US tax......make sure you did not contribute more than the US tax free allowances though.

2) If you have a cash ISA all you need to do is declare any interest so it can be taxed by the US. If its a stocks and shares ISA then that is a foreign grantor trust.

Your company stock probably doesn't require PFIC, but if you hold any UK unit trusts etc they will need PFIC forms.

As you are trying to dig yourself out of a hole here I strongly suggest that you talk to a tax professional.

Based on the ISA being a grantor foreign trust, I'll need to fill in 3520/3520-As for several years, but it should be largely a repeat as there haven't been any transactions (no income, distributions, sales, etc).

Am taking your advice on getting professional help, but still looking into this separately to speed up the process and understand the situation better. 

Any idea what is the pension contribution limit in the US for a defined contribution DC (not defined benefit unfortunately) pension?  I had a look at http://www.irs.gov/newsroom/article/0,,id=229975,00.html [nofollow] and it's unclear what the limits are for a DC pension. (There different values depending on the type of pension and level of income.)  It seems the one-off pension contributions are the biggest issue as they could alter tax return values and cause back taxes (plus penalties and interest) to be owed. It seems to me that this tax recalculation is due to the UK government now wanting to refund the taxes on these contributions while the US government is happier if I had paid taxes on them.  Seems odd to be unhappy about a tax refund from one government

I find it hard to believe that there have been no gains, or losses, in your ISA. Is it a stocks and shares Isa or a cash ISA? This is important as they are completely different for US tax purposes.

For a single DC plan the 2012 IRS contribution limit is $17k

Ah, thanks for the DC limit - $17k for 2012 and so $16.5k for 2011.

It's a stock and shares ISA and maybe I'm wrong on the ISA gains/losses.  The two funds in the ISA have changed value (3k down to 1.5k back up to 2.7k) as they're composed of underlying stocks (and the funds themselves may be on open markets).  I was thinking that my 'grantor trust' had no income (contributions from me) and no distributions (to me or fund manager charges) thus there were no sale/purchase events in the last 13 years and thus no capital gains/losses to report.  In other words, the number of units in the fund has been the same for the last 10 years. Is it that the change in value from year to year needs to be reported as a gain/loss for the 'grantor trust'? 

Ok, I was focusing on capital gains and losses and missed the need to report ordinary gains/losses as well as the yearly valuation needed (although was hoping that would was an easy part.)  I'll have to look into that more so thanks for pointing it out.

Another question on the DC pension contributions - my one-off contributions will have exceeded the limit for at least 2 years.  I take it this is ok as long as I count the excess as taxable income on my US taxes.  With the UK government refunding taxes on the contribution, the FTC will drop possibly below the equivalent US tax level.  I take it that the only path is to pay US taxes due to the excess contribution, correct?

Do FTC carry forward?

Found the answer:

FTC carry forward for up to 10 years and carry back one year except before 2005 when the limit was 5 years forward. 
For me, the credit doesn't apply for taxes when there are pending refunds (makes sense).

Opinions differ about the treatment of ISAs. Some say that the IRS ignores the ISA structure and taxes the underlying product. So if you have individual stocks in the ISA, then report as normal but if it's a mutual fund type object then you have a PFIC problem. Whatever the correct answer is (and the IRS isn't telling), statistics show that very few people fill out 3520s. See

http://isaacbrocksociety.com/2012/05/29/almost-no-u-s-persons-abroad-properly-report-their-foreign-retirement-accounts-on-form-3520/

If you have a PFIC problem, the following posts may be helpful:

http://hodgen.com/category/pfic/

Re employer based pension contributions - I don't want to complicate your life but under certain circumstances, it can be beneficial to you to declare them as income and pay the tax on them, even if your tax credits don't cover it. Once you do that, you've established a basis in your pension (like in a house). Later when you get distributions, that percent isn't taxed. If you're going to be getting large contributions, or over a long time, or you're not just at the beginning of your career, it really might be worth your while to consult a professional. Or file now, and amend your return later if you decide to go that route.
There are some good posts in this forum on the issue.

Yes, the ISA is composed of what looks to me like mutual funds, what a painful investment!   this thread helped, too: http://talk.uk-yankee.com/index.php?topic=73717.0 [nofollow]

Maybe a stupid question, but if pfic applies for this ISA, do I also need to do 3520/3520-A trust reporting as well?  Or is the pfic reporting sufficient? 

Related to this, in 2005/6 I was in a company share savings plan - is that a trust or something equally painful?  In 2006, I cashed out and converted to holding real shares.

What's the time requirement for filing amended returns? I'd like to maximize FTC as well as needing to correct for pension contributions in 2008 and 2010 and then's there's reporting pfic/trusts...

Maybe a stupid question, but if pfic applies for this ISA, do I also need to do 3520/3520-A trust reporting as well?  Or is the pfic reporting sufficient?  

I think you will need 3520A, 3520, 8621 plus possibly an 8833, FBAR and 8938.

Re employer based pension contributions - I don't want to complicate your life but under certain circumstances, it can be beneficial to you to declare them as income and pay the tax on them, even if your tax credits don't cover it. Once you do that, you've established a basis in your pension (like in a house). Later when you get distributions, that percent isn't taxed. If you're going to be getting large contributions, or over a long time, or you're not just at the beginning of your career, it really might be worth your while to consult a professional. Or file now, and amend your return later if you decide to go that route.
There are some good posts in this forum on the issue.

Building up a US tax free basis in your pension is only useful if you are  planning to retire back to the US. If you stay in the UK you will be subject to UK income tax on any pension income. It's also mostly a strategy for people who think they'll have a lot of retirement income and would rather pay capital gains than income tax. So you need to have a good idea about current and future taxation rates, where you'll retire, and be prepared to do a lot of foreign trust filings and mark to market calculations if you invest in mutual funds.

IMHO the regular person (ie those who were never the intended target of FATCA) is better to defer tax by making a treaty claim.

I hope to return to the US maybe before retirement; not sure that declaring pre-tax vs post-tax will make much of a difference as I expect to be on much lower income when retired (part of the reasons for the contributions is to make up for starting a pension late).  However, it almost seems like less work to use the FTC to cover contributions, I'm talking to a professional, but the information/his time seems very limited. 

The suggestion to file 3520, 3520-A, and 8621 (and definitely the FBAR, probably the 8938 since pensions are included) - is that taking the conservative view?  I saw on the other thread (http://talk.uk-yankee.com/index.php?topic=73717.0 [nofollow] ) a long discussion on whether the ISA wrapper mattered which I took to mean the trust filing wasn't relevant, is that reading the conversation correctly?

Another question:
This ISA (worth far less than the hassle) contains two funds/shares.  Can the combination of the two, i.e. the whole ISA, go on one pfic/8621 forms or does it require two pfic reports?

I hope to return to the US maybe before retirement; not sure that declaring pre-tax vs post-tax will make much of a difference as I expect to be on much lower income when retired (part of the reasons for the contributions is to make up for starting a pension late).  However, it almost seems like less work to use the FTC to cover contributions, I'm talking to a professional, but the information/his time seems very limited. 

Going the treaty route with your pensions seems simpler to me as it will remove the foreign trust and PFIC issues. If you ignore the treaty you will have to use the unmodified IRS rules for foreign grantor trusts and PFICs, but if you have enough FTC to cover any tax due on the contributions and you intend to return to the US it might be financially beneficial.

The suggestion to file 3520, 3520-A, and 8621 (and definitely the FBAR, probably the 8938 since pensions are included) - is that taking the conservative view?  I saw on the other thread (http://talk.uk-yankee.com/index.php?topic=73717.0) a long discussion on whether the ISA wrapper mattered which I took to mean the trust filing wasn't relevant, is that reading the conversation correctly?

A cash ISA is not considered a foreign trust, but a stocks and shares ISA definitely is a foreign trust and will require 3520 etc etc. I don't know anything about the practicalities of dealing with ISAs and PFIC because I decided to avoid them entirely once I had looked into them. I would work with your tax professional on this and take steps to simplify your situation.