I am in search of a few clarifications on the use of Form 1116 foreign tax credits to account for the UK tax I will be paying when I start receiving distribution from my UK pensions. After chatting with dual enrolled agents and reading through past posts on this forum, I have come across a few differing suggestions hence the need for more clarification.
Many thanks in advance for any comments.
Some key details
-I am a retired USC with NRA UK spouse.
- I file 1040, Schedule B, Schedule C, 2555, 8938 and FBARs. I file MFS and I use the standard deduction.
-I have a USS (UK) deferred final salary pension. Value reported on 8938 using the estimate I request yearly from USS. I do not report this on my FBAR after advice from multiple London tax advisors which agrees with several posts in this forum.
- I do not have a US social security pension
-I have a full deferred UK state pension
- As all pensions are currently deferred, at present I do not have any US taxes to pay once FEIE and my standard deduction are considered.
The use of Form 1116 foreign tax credits to account for UK tax of my UK pension distributions once I start receiving them.
-My income streams will be the two pensions and interest from UK/US savings accounts with the two UK pensions forming no less than 75% of my total gross income.
- Final Salary Pension. The yearly gross sum received from my final salary pension would be entered into line 5a and line 5b (Pensions) on 1040 (as per 2024 layout). I would keep an external record of each monthly payment from this pension to track the amounts received and the UK taxes paid. This would allow for GBP to USD monthly conversions to be performed for each payment using Treasury data.
- Final Salary Pension and Foreign Tax Credits (1116). The amount of foreign tax credits I can use on my US return due to UK taxes collected on my UK final salary pension will be determined on the 1116. My gross “all sources” salary used in 1116 would be the sum of final salary pension, UK state pension and US/UK bank interest. On 1116, is it agreed this pension would be in the General Category as it is a retirement distribution?
- UK State Pension. Again, differences in opinion here. Which option do you favour?
Option 1.) I have advice from one camp saying that I do not report this at all in my IRS return. This would not be my default choice.
Option 2.) Combine the state pension figures with the final salary pension figures and enter the sums of the two pensions on 1040 line 5a and 1040 line 5b (Pensions) with both pensions being treated as taxable (i.e. 5b) and then claiming back the UK tax paid on each UK pension through FTCs using form 1116.
Option 3.) Combine the two pensions incomes in 1040 line 5a but use a taxable value of 0 for the UK state pension in the sum for 1040 line 5b.
If option 2 is used, is it agreed this pension would be in the 1116 General Category as it is a retirement distribution?
