Amend previous returns to include employer pension contribution?

I have recently learned of the need to include employer contributions to my pension as income on my US tax return; I have not included it until now (I have been in the UK for 6.5 years). 

Should I amend returns for previous years to include this income?  It will not increase my tax liability.  I have not bothered filing Sch A to claim a larger-than-standard deduction using interest on my mortgage, and if I increase my income (on the return) I can use the Sch A deduction to cancel out the increase and still end up with zero liability. 

So, is it worth the hassle to correct the returns?  Are there tax implications on drawing the pension if I retire in the US?  If I should amend, how far back should I go? 

The whole business is a bit odd: the IRS has no idea (apart from my return) how much I actually earn and no way (that I'm aware of) of verifying the interest payments as the basis for the non-standard deduction.  Obviously I should file according to the legal requirements, but it's not clear to me what would be at stake in regard to previous years in particular. 

By the way, the way I normally file is to use 1116, not 2555 - that way I get to file 8112 for Additional Child Tax Credit.   Not sure if this matters here. 

If your returns were wrong because you omitted reporting income such as UK child benefit, employer pension contributions etc then you should amend them in so far as the statute of limitations is open.

The IRS may ask for evidence if the returns are audited.

Where do employer pension contributions go on the 1040? Line 16, Pensions and Annuities, appears to refer to distributions. I don't want to get double taxed on the same income when I am retired and receiving the money in the form of distributions.

Where do employer pension contributions go on the 1040? Line 16, Pensions and Annuities, appears to refer to distributions. I don't want to get double taxed on the same income when I am retired and receiving the money in the form of distributions.

I include these in "wages, salaries, tips" on Line 7

As a note to grupt, it's worth submitting amended returns so that when you retire you can say you alreay paid your US tax on this income.  Important if you plan on taking 25% lump sum tax-free on retirement which is allowed in UK and which would lead to tax liability in the US!

I realised afterwards that for my 2006 taxes I included them with other income (line 21).

So line 21 was the sum of a negative number (my foreign earned income exclusion) plus a positive number (employer pension contributions).

I attached a page showing the breakdown for line 21. (I do my taxes with pen and paper - I don't know if you can add comments/attachments electronically.)

So I did the same for 2007.

Whether you put the employer pension contributions under wages, salaries, tips or other income, it all becomes part of total income (line 22) so doesn't really matter in the long run.

I realised afterwards that for my 2006 taxes I included them with other income (line 21).

So line 21 was the sum of a negative number (my foreign earned income exclusion) plus a positive number (employer pension contributions).

I attached a page showing the breakdown for line 21. (I do my taxes with pen and paper - I don't know if you can add comments/attachments electronically.)

So I did the same for 2007.

Whether you put the employer pension contributions under wages, salaries, tips or other income, it all becomes part of total income (line 22) so doesn't really matter in the long run.

It does matter slightly because the IRS Code specifically excludes employer pension contributions from income that qualifies for the foreirgn earned income exclusion...

It does matter slightly because the IRS Code specifically excludes employer pension contributions from income that qualifies for the foreirgn earned income exclusion...

I did not count it as foreign earned income. I counted it as "other income", which also includes foreign earned income. I attached a separate sheet which said:

Form 2555 ($xxxx) - a negative number - this only includes my gross salary.
Employer pension contribution $xxxxx - a positive number
Total Line 21 "other income ($xxx) - The sum of the two above.

Next to line 21, where you are supposed to explain the source of income, I write "See attached". I do not list the total source of income as Form 2555.

I am not excluding the employer pensions contribution as I am including it as a positive, rather than a negative number.

I believe this discussion is based on some incorrect information given to the original poster. (I've seen several erroneous statements on this forum and I think people should give their sources of information.)   If you read the US/UK tax treaty, you will see that (1) the contributions you make to your UK employer's pension plan can be deducted from your US-taxable wages etc. (line 7 on 1040) and (2) your UK employer contributions to your UK pension plan are not counted (they are treated as though they are equivalent to employer contributions to a "qualified" pension plan in the US).  Notice, also, that you do not pay UK tax on your UK employer's contribution to your pension.  You WILL be taxed on your (and your employer's) pension contributions WHEN you receive the distribution (i.e., when you start collecting your pension). Under the US/UK treaty, you will be taxed on your UK and US pension income only by your country of residence when you collect the distribution.  (One "tax professional" on the internet has screwed this up, saying that UK pension distribution is only is taxable in the UK...).  However, any UK tax-free lump sum given by your UK pension will not be subject to US taxes even if you live the the US when you get it.

Just by including your UK employer pension contributions on your current 1040, you will not be absolved from US tax when you receive your UK pension if you are  living in the US when you retire. This of it this way: if your employer's pension contributions were subject to US tax now, then you would be taxed twice by the the US: now, and when you actually receive the money when you collect your pension..  Wouldn't make sense, would it?  Also, what if your employer's pension plan went bust before you retired.  I think you are wasting your time filing the amended 1040 etc.

NOTE: I am not a "tax professional" so get real advice if you are unsure; however, be careful as some of these guys don't seem to know how to do their job.  I had one guy try
to charge me money because he had to spend time to "research the tax code".  If anyone
has more/better information about this, please speak up!

Regarding my previous reply,  I'm assuming by "pension" you mean a defined benefit
plan (like the University Superannuation Scheme) and not a personal pension operated by a bank where you actually have the money in an account..

Again, please sort me out if I'm mistaken!

There are many ways to address this issue – the first and best way is to hire a qualified person to advise you on your individual circumstances.  If that qualified person gets it wrong you can then complain to the professional body where she or he is a member.  You are also more likely to have reasonable cause to get US or UK tax authority penalties waived if she or he gets things wrong.

Your comments are interesting reading but somewhat confuse the issue. I find it helps to think of this in terms of firstly domestic US law and then – secondly – what the treaty says.

In terms of domestic US law IR code section 402(b) is quite clear.  Contributions made by your employer to a non-US qualified plan (including a UK plan) are taxable when contributed.  If you are highly compensated then the growth is also taxable.

In terms of the treaty this can be used to override that specific US section of the tax code if – and only if – you file an annual treaty claim on form 8833.  There are specific limits within the treaty as to the maximum that can be claimed as deductible using that form. 

Nonetheless, for 99% of US citizens, claiming the benefit of the treaty on contributions makes not a pennies worth of difference to the bottom line because most folks have excess foreign tax credits (on form 1116) so that making this claim when contributions are made is not worthwhile.

The piece of the puzzle that helps most is that if you do not claim this treaty position you then have a larger cost basis when you come to draw a pension so (under IR code section 72) you get a larger amount returned to you free of US tax throughout your retirement years because you have a larger basis in the pension.

If you are a US citizen you would be taxed on the pension distributions – wherever you are – the treaty does not help on this, but the fewer treaty claims you make as you put the money into the plan, the less tax you’ll owe on the pension distributions when you take money out.

I have no problem with treaty claims in general, but you can’t make them without filing form 8833 and truthfully – in this case – they almost always make no sense.

If you, personally, have a tax adviser who is not familiar with the issue (and yes pension schemes are one of the most important investments for us all) then I’d suggest looking for another adviser…

Actually, I was personally referring to matching employer contributions to a money purchase scheme, which would be a simple percentage of salary. I assume the principal for a DB scheme would be the same, although I don't know how you would calculate the yearly contribution, which would be based on a projection that could change. I suppose there is a formula to calculate this, but I don't know what it is.

From Guya below - "In terms of domestic US law IR code section 402(b) is quite clear.  Contributions made by your employer to a non-US qualified plan (including a UK plan) are taxable when contributed.  If you are highly compensated then the growth is also taxable."
I do not see how this would lead to double taxation. When you received your distribution, you would just have to remember that you had already paid tax and keep complete, accurate records in case the IRS questions.

My earlier question was about what line on the 1040 to enter the information on, not about what amount was taxable.

OK, here's paragraph 5 of Article 18 of the UK/US tax treaty:

5. a) Where a citizen of the United States who is a resident of the United Kingdom
exercises an employment in the United Kingdom the income from which is taxable in
the United Kingdom and is borne by an employer who is a resident of the United
Kingdom or by a permanent establishment situated in the United Kingdom, and the
individual is a member or beneficiary of, or participant in, a pension scheme
established in the United Kingdom,
(i) contributions paid by or on behalf of that individual to the pension
scheme during the period that he exercises the employment in the United
Kingdom, and that are attributable to the employment, shall be deductible (or
excludable) in computing his taxable income in the United States; and
(ii) any benefits accrued under the pension scheme, or contributions
made to the pension scheme by or on behalf of the individual’s employer,
during that period, and that are attributable to the employment, shall not be
treated as part of the employee’s taxable income in computing his taxable
income in the United States. This paragraph shall apply only to the extent
that the contributions or benefits qualify for tax relief in the United Kingdom.
b) The reliefs available under this paragraph shall not exceed the reliefs that
would be allowed by the United States to its residents for contributions to, or
benefits accrued under, a generally corresponding pension scheme established in the
United States.
c) For purposes of determining an individual’s eligibility to participate in and
receive tax benefits with respect to a pension scheme established in the United
States, contributions made to, or benefits accrued under, a pension scheme
established in the United Kingdom shall be treated as contributions or benefits under
a generally corresponding pension scheme established in the United States to the
extent reliefs are available to the individual under this paragraph.
d) This paragraph shall not apply unless the competent authority of the
United States has agreed that the pension scheme generally corresponds to a pension
scheme established in the United States.

This seems to be pretty unambiguous: (i) you exclude your UK pension contributions from
line 7 1040 and (ii) you also do not include your UK employer's  contributions  to your pension from line 7 1040.  I don't see how the dreaded form 8833 is needed?  Are you saying that one has to fill out 8833 to activate the treaty for me as an individual?  That doesn't seem to make sense.. Also, I don't see how including all the pension contributions on line 7 1040 would eventually allow me to lower my taxes when I retire and start collecting the money. Could one of you explain that a bit further?

Dear gldms

This is an open forum where it is fair and reasonble to "chat".  This is something we all enjoy.

If you do not understand the tax laws in the US and the UK you can ask the IRS or HMRC or research their published information.

You can also instruct a qualified professional to advise.

I hate to say this, but if you misread the IRS Code and Regulations - as you appear to be intent on doing - then you lay yourself open to penalties for willful negligence.  I strongly recommend you urgently seek qualified advice before proceeding further down your present line of thinking. 

You mentioned you had tried and failed with instructing professionals in the past.  What qualifications did that adviser possess?

The esteemed Professor Potts asked one question about figuring the annual cost of employer contributions for a DB scheme.  The answer is quite straightforward, one is required (under IRS Code/Regs) to use actuarial tables based on age, anticipated final pension and expected mortality.

Please forgive me if I'm confusing things.  Also, please forgive me if it seemed like I was slagging off any tax professionals on this forum.  I've gotten some terrific advice on this forum (in particular doing 1116 rather than 2555 to get additional child tax credit..).

As I understand the previous posts, anytime I use the provisions of the tax treaty, I should also attach an 8833.   I was thinking then that I should now send it off with an amended return (ugh..) to explain that, in accordance with the tax treaty, I didn't include contributions I and my employer made to the pension scheme on line 7 1040. But then I read the instructions for form 8833 and find that you do not have to include an 8833 with your tax return if...

"You claim a treaty exemption that reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship and fellowship grants"

Here, "income from dependent personal services" mean wages as an employee (why can't they just say that??).  So, do you think I still should file and amended return with an 8833?  Am I really misreading the tax code? 

The advice given in earlier posts suggest that I should recalculate my income without using the treaty provisions because it would allow me to deduct my pension contributions from my pension when I collect it in 20 years as calculated using the "general rule" for non-qualified pensions.  This seems like a great idea provided it doesn't push me into the AMT.  However, what is the point of including the employer contribution?  Surely, that will not be part of the cost-basis I could claim under the simple or general rules otherwise I would have a huge windfall and almost none of my pension would be taxable under the general rule.  (Actually, for foreign pensions prior to 1963, you could claim the employer contributions as part of the cost basis!  I guess expats in the old days made out like bandits..).

There are thousands of Americans in the UK using the same pension scheme as mine and I bet hardly any of them think they need to include the employer pension contribution (14% of gross salary) in their non-exclusionable (non 2555) income on 1040.  I have no idea what they do with their employee contributions (6%) ..

So my tentative conclusion would be that (1) the tax treaty allows you to not include employer contributions and you don't need to file 8833 just for doing that but (2) you should include employee contributions to the pension plan as you can use them for your future cost-basis on your pension distribution.    On the other hand, (2) seems  to give us a blatant loophole since we get a tax deduction on contributions that avoided tax by the UK (via tax relief) and US (via tax credit) in the first place.  (We get the contributory benefits of a qualified plan but the distribution benefits of a non-qualified plan). It almost seems like article 15 of the tax treaty is just a way to trick us out of doing this..  Actually, when I read the tax treaty, it seems to actually require that you exclude both employers and employee's contributions.  Is the tax treaty just an option?  That  doesn't seem reasonable.

I would sure like the opinion of a grown-up on this.  Is the IRS person at the US embassy very helpful?  What would a UK/US taxconsultant charge for advice?  Thanks for your help!

Re Guya's comment: 

"In terms of domestic US law IR code section 402(b) is quite clear.  Contributions made by your employer to a non-US qualified plan (including a UK plan) are taxable when contributed.  If you are highly compensated then the growth is also taxable."

Guya is misleading.

IR Section 402 to which he refers is specific to US plans only - that is "an employees’ trust described in section 401 (a)."
401(a) in turn limits application to a "a trust created or organized in the United States."

There is a reasonable summary of the treaty provisions here:

newcomer link: http://www.weil.com/news/pubdetail.aspx?pub=6797 [nonactive]

This states:

"US Citizens Residing in the UK and Participating in a UK Pension Plan. The Tax Treaty allows US citizens resident in the UK to deduct, for US tax purposes, contributions to a pension plan established in the U.K. This deduction is only available while the US citizen continues to reside in the UK. The US citizen’s deduction is limited to the lesser of (1) the amount deductible in the UK for contributions and benefits under a UK-established pension scheme and (2) the amount that would be deductible in the US for contributions and benefits to a generally 'corresponding pension scheme' established in the US. In addition, US citizens will not be taxed by the US as the pension benefit accrues, provided the UK-established pension scheme is a generally 'corresponding pension scheme' (as described below).

Corresponding Pension Schemes: "The Notes to the Tax Treaty state that “corresponding pension schemes” include: In the UK: (1) Approved employment-related retirement benefit schemes (for purposes of Chapter 1 of Part XIV of the Income and Corporation Taxes Act of 1988) and (2) Personal pension schemes approved under Chapter IV of Part XIV of such Act)."


HOWEVER you should be aware of several things:
 
1.) The US limit on pension contributions  stated as above as "the amount that would be deductible in the US for contributions and benefits to a generally 'corresponding pension scheme'" are very significantly lower than the UK limits. See newcomer link: http://www.irs.gov/newsroom/article/0,,id=174873,00.html [nonactive] for the IRS current limits.

2.) UK plans often permit early withdrawl and/or lump sum distributions. This would likely be "double taxed" both in the UK and the US under the savings clause. (See section 'Lump Sum Exception' at newcomer link: http://www.weil.com/news/pubdetail.aspx?pub=6797 [nonactive] ) and also see comments at newcomer link: http://www.uscib.org/index.asp?documentID=1940 [nonactive]

3.) It is currently nigh impossible for a US citizen or US tax resident to transfer or rollover the assets of a UK plan into a US plan without paying US tax on the transfer amount. This exposes returning US ex-patriots to future currency and/or tax risk with possible PFIC complications.
   
Whilst the UK permits such a transfer under QROPS (see UK HMRC website), the US treats it as a lump sum withdrawl. See HMRC website at newcomer link: http://www.hmrc.gov.uk/pensionschemes/newsletter23.htm#b [nonactive] which says:
"In particular, it is APSS’ understanding that transfers to US “qualified” retirement plans, including individual retirement arrangements (IRAs), cannot be made as such plans are not permitted to accept a transfer of funds from a UK registered pension scheme. Administrators and members should contact the relevant overseas authority, not APSS, for confirmation."
See also newcomer link: http://www.britishpension.com/faq.html#3 [nonactive]

With regard to benefits: Weil Gotshel's artcile above states: "Article 17 of the Tax Treaty provides, as a general rule, that pension benefits paid to an individual will be taxable only in the country in which that individual then resides. However, the country in which the individual then resides must exempt from tax any amount of such pension benefit if such benefit would be exempt from taxation in the country in which the pension plan was established."

Remember that lump sum distributions are the exception here so if a lump sum distribution is anticipated then I would think that guya is correct and by using a higher basis and any available corresponding Foreign Tax Credits it may be a better strategy to declare the employer's contribution (affectively opting out if the treaty as provided for in Article 29.) This is confirmed by Buzzacott at newcomer link: http://194.131.210.216/eappub/includeimages/200510031MN0VW2OI_The%20American%20%20-%20Mar%202005%20article.pdf [nonactive]

HOWEVER my understanding with regard to US tax returns (at least according to newcomer link: http://www.taxationweb.co.uk/international/ustax/article.php?id=150 [nonactive] anyway) "employer contributions into such plans no longer need be included in gross income of the employee on their US tax return" presumably PROVIDED they are below the US threshold.

Like most other dual taxation issues, it seems this is a very complex area with many facets yet undecided. I strongly recommend discussion with an expert which I am not!

M