UK state pension taxable in the US

I always thought we included UK pension income on our US returns (I'm about to get mine - and I know all about WEP).

But this:

https://www.expattaxonline.com/report-uk-pension-on-us-tax-return/

Says:

<<Is the UK State Pension taxable in the US?

The UK State Pension is an exception and does not need to be reported on your US tax return.>>

What am I missing?

R

We don’t report our UK State pension on our US taxes. We do report my 2 UK private pensions. Our US SS is reported on our US return but the taxable portion is shown as zero.  On our UK tax return only 85% of our SS is reported, with a reference to the tax treaty because only 85% of it would be taxable for us if we lived in the US. We’ve also been taking Roth distributions which are tax free in both the US and UK.

We are both dual residents living in England and use a London based dual qualified tax accountant.

I always thought we included UK pension income on our US returns (I'm about to get mine - and I know all about WEP).

But this:

https://www.expattaxonline.com/report-uk-pension-on-us-tax-return/

Says:

<<Is the UK State Pension taxable in the US?

The UK State Pension is an exception and does not need to be reported on your US tax return.>>

What am I missing?

R

The UK State pension paid to a resident of the United Kingdom is ALWAYS reported as FULLY taxable on a US return. The only exception here is in Article 17(3) which requires that the payment is made to a resident of the United States. There is no debate on this amongst qualified tax professionals in the UK.

Durhamlad - what's your reasoning behind this? Guya just said something different I think?

Durhamlad - what's your reasoning behind this? Guya just said something different I think?

I use a tax firm in London to do our taxes, have done since we moved back in 2016. Just like the firm you linked to, expatonline.com, they differ in their opinion to Guya.

I am not qualified to argue against Guya. If we did declare the OAP it would be zero’ed out anyway due to foreign tax credit as our marginal tax rate in the UK is higher.

I use a tax firm in London to do our taxes, have done since we moved back in 2016. Just like the firm you linked to, expatonline.com, they differ in their opinion to Guya.

I am not qualified to argue against Guya. If we did declare the OAP it would be zero’ed out anyway due to foreign tax credit as our marginal tax rate in the UK is higher.

As you correctly observe, this is a moot point in terms of possible US tax liability because the US gives credit for UK tax. Nonetheless, most folks prefer to take conservative and supportable positions when they file US tax returns. The official IRS Directory of qualified tax professionals can be viewed here: https://irs.treasury.gov/rpo/rpo.jsf

Is there a difference if the recipient is US resident (as I am) versus UK resident (as Durhamlad is). I have NT tax code in the UK.

Ta

Rick

Is there a difference if the recipient is US resident (as I am) versus UK resident (as Durhamlad is). I have NT tax code in the UK.

Ta

Rick

For sure if you are resident in the US then I think both SS and OAP are fully taxable only in the USA. While I was resident in the US I had an NT tax code with HMRC and my private UK pensions were not taxed in the UK, nor were my US private pensions.

Regarding taxation of US Social Security for UK residents:

Article 17(3) of the DTA states:
"Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State"

I am confused by Durhamlad's post that a UK resident pays income tax on no more than 85% of US Social Security benefits because this is the maximum liability for US residents. I thought that HMRC could tax this income according to its own rules -- i.e. adding the total Social Security received to other income sources on a Self  Assessment form. I have been reporting, and paying tax, on  the total so would appreciate a DTA reference to show I need only report 85%

(Before 6 Apri; 2017, only 90% of foreign pensions were taxed, but that was a different issue)

Regarding taxation of US Social Security for UK residents:

Article 17(3) of the DTA states:
"Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State"

I am confused by Durhamlad's post that a UK resident pays income tax on no more than 85% of US Social Security benefits because this is the maximum liability for US residents. I thought that HMRC could tax this income according to its own rules -- i.e. adding the total Social Security received to other income sources on a Self  Assessment form. I have been reporting, and paying tax, on  the total so would appreciate a DTA reference to show I need only report 85%

(Before 6 Apri; 2017, only 90% of foreign pensions were taxed, but that was a different issue)

Article 17 1.b states that any portion of a pension in one State that is exempt from tax is also exempt in the other. Thus, the 15% of SS that is tax free in the US is also tax free in the UK. This also includes distributions from a Roth IRA which is tax free in both countries.

The technical explanation of the treaty also talks about the tax exempt status of pension payments although it doesn’t specifically talk about SS.

https://home.treasury.gov/system/files/131/Treaty-UK-Protocol-TE-7-22-2002.pdf

See page 63

Paragraph 1 provides as a general rule, in subparagraph (a), that the State of residence of
the beneficial owner has the exclusive right to tax pensions and other similar remuneration. For
this purpose, a payment is treated as a pension or other similar remuneration if it is a payment
under a pension scheme, as defined in sub-paragraph (o) of paragraph 1 of Article 3 (General
Definitions). While the term "pension" generally would include both periodic and lump-sum
payments, paragraph 2 of the Article provides specific rules to deal with lump-sum payments, so
they are not subject to the general rule of paragraph 1.
However, the State of residence, under subparagraph (b), must exempt from tax any
amount of such pensions or other similar remuneration that would be exempt from tax in the
State in which the pension scheme is established if the recipient were a resident of that State.
Thus, for example, a distribution from a U.S. "Roth IRA" to a U.K. resident would be exempt
from tax in the United Kingdom to the same extent the distribution would be exempt from tax in
the United States if it were distributed to a U.S. resident. The same is true with respect to
distributions from a traditional IRA to the extent that the distribution represents a return of non-
deductible contributions. Similarly, if the distribution were not subject to tax when it was “rolled
over” into another U.S. IRA (but not, for example, to a U.K. pension scheme), then the
distribution would be exempt from tax in the United Kingdom.

Well shucky darns, then, I overpaid my UK taxes! (I had reported 100% of the SS as taxable, not the 85%.)

 

Thank you, Durhamlad! 

Article 17 1.b states that any portion of a pension in one State that is exempt from tax is also exempt in the other. Thus, the 15% of SS that is tax free in the US is also tax free in the UK. This also includes distributions from a Roth IRA which is tax free in both countries.

Sorry, sorry - but another myth. Extensively discussed when the treaty was signed, but no qualified professional interprets the treaty in this fashion, none.

Article 17 1.b states that any portion of a pension in one State that is exempt from tax is also exempt in the other. Thus, the 15% of SS that is tax free in the US is also tax free in the UK. This also includes distributions from a Roth IRA which is tax free in both countries.

17(1)(b) only refers to payments from pension schemes. Social security is not a pension scheme. Incidentally, although not relevant here, HMRCs interpretation of payments from Roth IRAs may not be the same as the US Treasury. We continue to discuss this with HMRC.