Should UK State Pension be included in Gross Income?

It depends how "benefits" and "Contracting State" are interpreted, I think.

The Technical Explanation for 1.5.b says:

The benefits referred to are all intended to be granted to temporary residents of a Contracting State (for example, in the case of the United States, holders of non-immigrant visas), but not to citizens or to persons who have acquired permanent residence in that State. If beneficiaries of these provisions travel from one of the Contracting States to the other, and remain in the other long enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in the U.S. context, they do not become "green card" holders) and are not citizens of that State, the host State will continue to grant these benefits even if they conflict with statutory rules. The benefits preserved by this paragraph are: the host country exemptions for the following items: government service salaries and pensions under Article 19 (Government Service);

In my case, the US isn't the host country, because I'm resident in the same State that pays the pension.  If I were US tax-resident (and still a US citizen), I'd lose the exemption.

There's a paragraph in Pub. 901 that perhaps makes the intention a bit clearer:

Tax Exemptions Provided by Treaties
In addition to the tables in the back of this publication, this publication contains discussions of the exemptions from tax and certain other effects of the tax treaties on the following types of income.
- Pay for certain personal services performed in the United States.
- Pay of a professor, teacher, or researcher who teaches or performs research in the United States for a limited time.
- Amounts received for maintenance and studies by a foreign student or apprentice who is here for study or experience.
- Wages, salaries, and pensions paid by a foreign government

They don't want fear of double taxation on pay or pensions to put people off from coming to the US (or the UK) on a temporary basis, (as teachers, students, and government workers often do), but equally they don't want them to remain exempt if they are or become citizens or Green Card holders.  Is my guess.

I think the first sentence of the Technical Explanation for Article 19.2 makes it clear that it does not apply to US/UK dual citizens. In IRS 901 it looks like the Treaty is being applied without reference to Article 1.5.b.

I think the first sentence of the Technical Explanation for Article 19.2 makes it clear that it does not apply to US/UK dual citizens.

Not the version I'm looking at.

Sorry I meant to say the Technical Explanation for Article 1.5.b

I think you need to consider the underlying intention - which in this case, if I'm not mistaken, is to prevent treaty-shoppers from abusing residence rights in an attempt to avoid taxation.  1.4 enables the U.S. to prevent that, but without a mitigating clause it would be like using the proverbial hammer to crack a nut.  1.5.b makes it clear (ish) that the hammer's not aimed at temporary residents.   

And quite clearly the hammer's not aimed at retired employees of the UK Government, residing peaceably in the UK and receiving their UK government pension.  Who do you think gets these treaties through Parliament? 

I think you need to consider the underlying intention - which in this case, if I'm not mistaken, is to prevent treaty-shoppers from abusing residence rights in an attempt to avoid taxation.  1.4 enables the U.S. to prevent that, but without a mitigating clause it would be like using the proverbial hammer to crack a nut.  1.5.b makes it clear (ish) that the hammer's not aimed at temporary residents.   

And quite clearly the hammer's not aimed at retired employees of the UK Government, residing peaceably in the UK and receiving their UK government pension.  Who do you think gets these treaties through Parliament? 

I think you are mistaken. The benefits of 19.2 are aimed at temporary residents and 1.5.b takes them away from US citizens and US permanent residents. It's always dangerous to rely of things other than the treaty itself, but the flow chart provided by theOAP seems to be pretty accurate for pensions and helps to cut through the "neither, nor " stuff.

http://intltax.typepad.com/894_pension_taxation_uk.pdf

The bottom line is that under the strict rubric of the treaty both your UK local authority pension and UK state pension (social security) are fully taxable by the US. But, there are indications that the IRS either has a policy or mistakenly does not tax these payments in your circumstances.

I think you are mistaken.

I know.   

The bottom line is that under the strict rubric of the treaty both your UK local authority pension and UK state pension (social security) are fully taxable by the US. But, there are indications that the IRS either has a policy or mistakenly does not tax these payments in your circumstances.

Or that the IRS doesn't care, sub specie æternitatis, which method its non-resident citizens employ to escape the double taxation that would otherwise result from the CBT blunderbuss.

Or that the IRS doesn't care, sub specie æternitatis, which method its non-resident citizens employ to escape the double taxation that would otherwise result from the CBT blunderbuss.

I disagree with your description of the situation.....no double taxation as FTCs apply......you might be annoyed with CBT, but there is no double taxation here.

.....no double taxation as FTCs apply....

Exactly.  Double taxation of the pension can be avoided by claiming FTCs.  Result: US tax payable on the pension is nil.

Alternatively, if no FTCs available, double taxation can be avoided by entering the pension on the 1040 as non-taxable.  Result: US tax payable on the pension is nil.  8833 not required, since entering the pension as non-taxable does not reduce the tax that would otherwise be due.

Third scenario: enter the pension as fully-taxable, pay the tax, and claim a refund.  Result: US tax paid on the pension is nil.

For categories of income the US actually does want to tax (presumably the categories most vulnerable to abuse by tax evaders), none of these three escape routes is allowed.

I don't expect that would wash with the UKCA.  As I mentioned in my reply to TheOAP, I suspect unreasonable delay would simply strengthen my case, and unreasonable delay accompanied by a demand for interest covering the period of delay can be practically guaranteed to raise a British eyebrow or two.   

I'm pleased to see that as I thought would be the case, no interest is applicable while a case is under consideration.

DT19939ZB - DT: USA: Double taxation agreement, Exchange of Notes: Article 26

With reference to paragraph 2 of Article 26 (Mutual Agreement Procedure):

...[It] is understood that where the competent authorities are endeavouring to resolve a case pursuant to the Article, neither Contracting State shall seek to collect the tax which is in dispute until the mutual agreement procedure has been completed. Any tax which is payable following the completion of the mutual agreement procedure shall, however, be subject to interest charges, and, if appropriate, surcharges or penalties, as long as it remains unpaid.

http://www.hmrc.gov.uk/manuals/dtmanual/DT19939ZB.htm

For categories of income the US actually does want to tax (presumably the categories most vulnerable to abuse by tax evaders), none of these three escape routes is allowed.

For example, here's a case of a woman whose circumstances are in some ways similar to my own, in that she moved to Britain many years ago, spent most of her working life here, and is now retired and living on UK State Pension + occupational pension + savings. 

Her account makes clear that she avoids DTT on her pensions by using FTCs.  Unlike me, she has plenty of FTCs available, because unlike me she put her savings into stocks and shares ISAs, which the US views as very US-taxable PFICs.  Result: she pays a shed-load of US tax - all of it on the ISAs, whereas I won't pay any US tax at all on my cash ISA and NS&I bonds.

http://www.finance.senate.gov/legislation/download/?id=7dc45996-d4cb-4ca2-97a1-90c94253d4c7

Is this fair?  Clearly not.  Unfortunately she might not succeed if she brought a case before the Competent Authorities, since the taxation is in line with the treaty.

The ISA is transparent to the IRS, it has no meaning to them. They look through it and tax the investments inside.

You will get zero help from the UK with anything related to how the US taxes you as a US citizen. What you need to do is find out if IRS domestic rules or interpretation of the treaty render your UK state and LA pensions non US taxable.


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Thanks, nun, TheOAP, and others, for all your comments.  This has been a most helpful discussion.

Many happy returns.