Reporting UK Child Benefit (Has a Solution Now)

Much love to anyone who can answer this!  

Quick facts about the application:

• $60k UK salary income
• $2.5k UK benefits income (Child Benefit)
• $12.5k taxes paid
• Filing as head of household (as my husband has no reason to file in the US)
• Filing 1116 to get the $1k child benefit in the US

The problem:
If we file 1040 and 2x 1116 (one for general and one for passive) we end up in the ridiculous situation where the general 1116 is comparing $12.5k taxes paid to $5k obligations - obviously we owe the US nothing.
However, on the passive 1116 we have paid $0 taxes (as child benefits are tax free) and US wants 4.4% of the $5,341 there, meaning that we'd have a tax obligation of $235.32 to the US.

This seems absolutely ridiculous and we're wondering how to get around this... alternatives that we have come up with, but aren't satisfied with are:

a) Just pay the $235 (or I guess, reduce the $1,000 to $765)
b) Combine the Child Benefit in to general income, and file only a single 1116 with the $12.5k easily overwhelming the full $5.3k
c) Somehow (how?) have one 1116 transfer some of its tax credits to the other one
d) Just ignore the child benefit - it's being paid to my European husband

Any opinions on what we should do?

---The Solution for those who don't notice my solution below---

The Solution for those seeking it in the future (Via the UK IRS Office at the Embassy):

All UK work tax benefits (for child care, etc.), UK child benefits, and other benefits are filed under the 1040 Line 21 "Other Income".

The Child Trust Fund does NOT require a 3250 OR a 3250-a.  He indicated that just because the UK calls it a Trust Fund, does not mean it actually is according to the US government.  He considered it to be akin to a Child's Saving Account in the states (such as the 529 Education Savings or Hope Accounts) because and his quote, "Your child has a fund who's trustee is herself, that is not a trust fund, that is a savings account.  It would be a trust fund if there were multiple trustees not herself" 

His recommendation was that we file a tax return for our child to show ONLY the amount earned from the savings account for the child (literally $88).  He said this would not affect her being a dependent.  Additionally, each parent is allowed to gift approximately $13,500 to a child so it did not matter that I had been making regular payments into the account because it is considered a gift.  Also, any payments by anyone else was considered a gift too (so in-laws, government, whatever, all a gift). 

The point of filing for such a piddly amount is 100% to have a paper trail for the future when the money will come out, nothing else.  Hope this helps others!

You should just call the IRS and ask whether child benefit is considered passive income or general income. It does not fall into any of the categories discussed here. The IRS office at the US Embassy should have a definite answer on this - I'm sure you're not the only USC whose family receives UK child benefit.

I'm not very familiar with head of household filing status, but if you were to file as married filing separately, you wouldn't need to report child benefit at all, since it belongs entirely to your husband. Is that an option for you?

If you do end up with a US tax liability, you may be able to reduce it by carrying back/forward any excess foreign tax you paid in another year on other types of passive category income, such as interest or dividends. You're allowed to carry forward 10 years and carry backwards 1 year.

I am not certain which piece of the US tax law and regulations you are thinking makes child benefit fall in the passive basket of form 1116?

The real nuisance is surely the trust filing for the child trust fund - not the child benefit itself?

The Child Benefit and the Child trust fund are two separate things.  And actually it just came to my attention that I may have to file something for my daughter's child trust fund... So going to look into that.

And the reason I assumed Child Benefit was under Passive is because last year when we filed we had two child benefits that came across the year.  1) from Finland (which was taxed) and 1) from the UK (which was not taxed).  When we went to the embassy they put both into a passive 1116.  However, now that we no longer have the Finnish benefit we are left with only a non taxed one and confused as to how to deal with it.

To be honest, I was hoping that it would be just an easy answer and someone would have had to deal with it previously.

The Solution for those seeking it in the future (Via the UK IRS Office at the Embassy):

All UK work tax benefits (for child care, etc.), UK child benefits, and other benefits are filed under the 1040 Line 21 "Other Income".

The Child Trust Fund does NOT require a 3250 OR a 3250-a.  He indicated that just because the UK calls it a Trust Fund, does not mean it actually is according to the US government.  He considered it to be akin to a Child's Saving Account in the states (such as the 529 Education Savings or Hope Accounts) because and his quote, "Your child has a fund who's trustee is herself, that is not a trust fund, that is a savings account.  It would be a trust fund if there were multiple trustees not herself" 

His recommendation was that we file a tax return for our child to show ONLY the amount earned from the savings account for the child (literally $88).  He said this would not affect her being a dependent.  Additionally, each parent is allowed to gift approximately $13,500 to a child so it did not matter that I had been making regular payments into the account because it is considered a gift.  Also, any payments by anyone else was considered a gift too (so in-laws, government, whatever, all a gift). 

The point of filing for such a piddly amount is 100% to have a paper trail for the future when the money will come out, nothing else.  Hope this helps others!

I agree that UK child benefit is indeed other income in the general limitation basket. This is my interpretation of the statute, other advisers may disagree. 

On the subject of the child trust fund I think you are saying that the "registered contact" is merely a nominee, not a trustee.  This is good news.

It won't eliminate FBAR reporting, PFIC reporting (and taxes) and 8938 reporting - but is better than foreign trust filing at least.

Hrm, can't figure out how to edit my post anymore, but just to follow on from this... I had also contacted the US IRS office "Just to be sure" and this was their response:

"You have identified that you and your family reside in the United Kingdom, England. That you and your child are considered citizens of the US, and the question you have is regarding a unique investment vehicle for a child in the UK. This investment vehicle is call the Child Trust Fund or CTF.

It appears that the government will match contributions to a limit, and that this matching program is under a change, and may end in the future. The account is identified that it is tax exempt for UK tax purposes and as such depending on the investment there may be not tax consequence for the minor child upon reaching the age of majority. Your question is whether this account has a filing requirement. This is not a conventional trust account, and is not similar in nature to US trusts. It is most similar to a Educational IRA or Coverdale Savings account.

A representative from the UK office located in the Embassy has identified that this is a foreign savings account for US tax purposes. There for Form 3520: Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A: Instructions for Form 3520-A, Annual Return of Foreign Trust With a U.S. Owner; are not required to be filed at this time.

However, although the UK identifies that this is tax exempt income it is not necessarily tax exempt income for US Federal Tax returns. We would recommend that you review the rules for minors required to file a US return as found in Publication 929: Tax Rules for Children and Dependents. "

Upon review of this publication, my daughter did not make enough to have to report, but if we so choose we can still file a 1040 for her with a deduction amount of $950 and because I had claimed her on my taxes she could NOT claim herself as a dependent. (I could have claimed her on mine as well, but chose not to).

I know this is an old thread but I read it so I'm sure other people are too. I needed to know how to report child benefit, child tax credit and maternity pay. These are considered UK social security payments:
newcomer link: http://www.hmrc.gov.uk/manuals/eimanual/EIM76100.htm [nonactive]
newcomer link: http://www.hmrc.gov.uk/manuals/eimanual/EIM76101.htm [nonactive]

UK social security payments are US tax exempt under the US/UK tax treaty 2001 Article 17 paragraph 3 and this is maintained despite the US saving clause under Article 1 paragraph 5. This is confirmed in the IRS publication 915 under 'US citizens residing abroad'. Under 'how to report your benefits-benefits not taxable' it says to fill in net benefits on 1040 line 20a and zero on 20b:

newcomer link: http://www.irs.gov/publications/p915/ar02.html#en_US_2014_publink100097885 [nonactive]

From what I read on the exemptions of 8833, an 8833 doesn't need to be completed for social security benefits.

I believe you are wrong in two respects.

1) child benefit etc is not a social security pension in the meaning of the treaty. They are 100% taxable by the IRS when paid to a US citizen. This was confirmed to me by the IRS office at the US Embassy in London.

2) even if they were to be classed as SS UK Social security (that means a pension) paid to a US citizen resident in the UK is fully taxable by the IRS because they are not a cross border payment. This comes out of some poor wording in the treaty and  I'm unsure whether the IRS implements the spirit or actual wording if the treaty.


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I may be wrong! I can't see anywhere in 915 that says social security 'pension' though. It says benefits and even says this can include benefits which are paid to children, whatever they may be!

I have emailed HMRC specifying the benefits I mentioned above to try to clarify this and will post their response (assuming I get one!).

All this hassle is exactly why I will be renouncing my citizenship at the earliest opportunity!  Only a trip to the US embassy to apply for a SSN, 5 years of tax returns,  6 years of FBARS and another trip to the embassy to renounce followed by another tax return, FBAR and an 8854 to go... All so I can declare I owe absolutely nothing!

I may be wrong! I can't see anywhere in 915 that says social security 'pension' though. It says benefits and even says this can include benefits which are paid to children, whatever they may be!

I have emailed HMRC specifying the benefits I mentioned above to try to clarify this and will post their response (assuming I get one!).

All this hassle is exactly why I will be renouncing my citizenship at the earliest opportunity!  Only a trip to the US embassy to apply for a SSN, 5 years of tax returns,  6 years of FBARS and another trip to the embassy to renounce followed by another tax return, FBAR and an 8854 to go... All so I can declare I owe absolutely nothing!

It's the meaning of social security under the treaty you need to get right.

915 does not apply to UK benefits, they are "other income" as far as the IRS is concerned. Any UK tax free amount is not recognized by the IRS and you cannot treat them as US social security. The bottom line is that any UK benefits paid to a US citizen are fully taxable by the IRS....even UK state pension if we are being really pedantic.

@ Jem76

Ah, the joy of trying to decipher tax treaties and IRS instructions.

I really do wish you were correct, but I have to agree with nun, I don’t believe UK child benefit, UK child tax credit, and UK maternity pay are covered by either the tax treaty or Publication 915 which deals specifically with “Social Security and Equivalent Railroad Retirement Benefits” (bold mine)

Let’s start with your reference to Article 17 of the tax treaty. The title of Article 17 is “Pensions, Social Security, Annuities, Alimony, and Child Support”. Paragraph 1a deals with “Pensions and other similar remuneration”, and the right to tax pensions or similar remuneration by the different parties.  Paragraph 3, which, as you point out, is not subject to the saving clause, begins with “Notwithstanding the provisions of paragraph 1 of this Article,…” and therefor relates to topics in paragraph 1a, ie: pensions and other similar remuneration (and the right to tax…).

Also, under “Relation to other articles”, and on page 65 of the Technical Explanation,
 
“Paragraphs 3 and 5 are exceptions to the saving clause. Accordingly, a U.S. citizen who is a resident of the United Kingdom will not be subject to U.S. tax on any U.S. social security benefits, child support payments or alimony.” (bold mine)

http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

For Publication 915, under “US citizens residing abroad”:

“U.S. citizens who are residents of the following countries are exempt from U.S. tax on their benefits…….United Kingdom……The SSA will not withhold U.S. tax from your benefits if you are a U.S. citizen. The RRB will withhold U.S. tax from your benefits un-less you file Form RRB-1001, Nonresident Questionnaire, with the RRB to provide citizenship and residency information.”

The RRB refers to Railroad Retirement Benefits. Railroad retirement pensions are long standing pensions taken in lieu of US Social Security pensions subscribed to by railroad employees (New York Central, Santa Fe, Chattanooga Choo Choo, etc.).

Both Publication 915 and Article 17 (3) are sustained by the instructions of “net benefits on 20a, and 0 on 20b”. That is how a USC, resident in the UK, reports US Social Security retirement benefits on a 1040.

There have been suggestions on other sites that one could argue if a US State (New York, Arizona, for example) offered child benefit, child tax credit, or maternity pay which was not taxed by the IRS on 1040, then it might be allowed for UK benefits. The problem I have with that is UK child benefit or UK child tax credit doesn’t exist in any US State.

My 2 cents worth, and all IMHO only, and all of this may be wrong as well.

(One of my more brief posts  )