Occupational pension & US Tax

Hi

I have carried out a search on this both on this forum and on google in general and have been reading for hours over several days and still am confused.

Say for example someone is a dual UK/US citizen married to UK spouse settled in the UK for many years.  This person works, has paid all her UK taxes and filed all her US taxes as best she could.  As income was low, wasn't too hard and she has always filed Foreign Earned Income Exclusion under Married Filing Separately. Lots of zeros and no worry.

Now, this person has hypothetically taken on a government job where a couple different occupational pension schemes are offered, obviously best ones have both employee and employer contribution.  Said person is chuffed but then reads about pensions for US expats abroad and starts to realise US will tax her on pension. Person's brain no matter how hard she tries just does not make any sense of the US tax system and needs help. Person can't afford accountant.

Contributing to the pension and having the employer contribution -- how would person reflect both these in US taxes on tax forms?

It is the person's understanding that she must figure out how to pay taxes on pension now on her US returns otherwise when she retires and receives her money the US will try and tax her for the whole amount.  Is this correct?  Or will the US tax you on both your and employer's contributions as well when you collect anyway and isn't that like being double taxed?

How can person exclude or credit (or whatever) the pension contributions (self and employer) each year so as to not have to pay US tax on this occupational pension when retired? Please help.

Hypothetically, this is not an unusual query, and would have the usual answers.

Realistically, this may be a complicated situation, if it’s assumed that the person (dual UKC/USC) is accepting a position with the UK (National) government, and intends to retire in the UK on a civil service pension.

Your answer possibly lies in the US/UK Treaty, Article 19, paragraph 2, but dual citizenship may not make interpretation easy. I’m afraid you’re not going to appreciate my nonprofessional advice, but this needs to be answered by either one of two possibilities. Your first is the IRS who are usually reluctant to give opinions on queries involving a treaty (over the phone, for example). Your likeliest response would come from posing the question to them in writing, asking for their opinion. Your second option is a professional US/UK Tax Advisor.

I also trust that you’ve clarified, hypothetically, if there is any impact on US citizenship in accepting this particular UK (National?) government position. I assume you have, and that there are no problems.

Without the two above options, we can hope that someone who has been through this can respond, but given the complexity of the situation, I would want to be very certain of the expertise of the responder. I sincerely hope the situation is much simpler than I see it.

If in fact you were to be taxed by the US upon receipt of the pension, and since this would possibly be a nonqualified pension plan (no taxable amount shown on a Form 1099-R, a form you wouldn’t receive), you might want to read IRS Publication 939, The General Rule, for the deduction of contributions on taxable pension payments from nonqualified plans.

Hypothetically, this is not an unusual query, and would have the usual answers.

Thank you for your response.  Hypothetical person is so worried and scared about all this.  She has to make a decision on which pension to choose in the next few weeks and the wrong choice and not knowing how to deal with that choice on her annual federal taxes could really mess up her life.  She is poor already.

Realistically, this may be a complicated situation, if it’s assumed that the person (dual UKC/USC) is accepting a position with the UK (National) government, and intends to retire in the UK on a civil service pension.

Hypothetical person would be accepting a position with a non-departmental body of the UK government. Her intentions are as you state at the moment, but life is not rigid and anything can happen.

Your answer possibly lies in the US/UK Treaty, Article 19, paragraph 2, but dual citizenship may not make interpretation easy. I’m afraid you’re not going to appreciate my nonprofessional advice, but this needs to be answered by either one of two possibilities. Your first is the IRS who are usually reluctant to give opinions on queries involving a treaty (over the phone, for example). Your likeliest response would come from posing the question to them in writing, asking for their opinion. Your second option is a professional US/UK Tax Advisor.

The treaty mentions nothing about dual citizenship.  US citizenship, in my opinion, is all that should matter with respect to the hypothetical person's interpretation of this treaty.  But if you think hypothetical person should contact the IRS about it, then maybe she should; she can't afford to pay a tax advisor.  Reading the article 19 paragraph 2 applies to employer contributions only though, but what about hypothetical person's contributions?  If IRS determines that her employee contributions would not be double taxed, assuming her contributions are taxed, would that not make it easier for her to choose a pension -- the one where only the employer contributes?!

Also, paragraph 1 seems to say that wages from government employer also shouldn't be double taxed.  Would this mean that hypothetical person would have no US income tax???

I also trust that you’ve clarified, hypothetically, if there is any impact on US citizenship in accepting this particular UK (National?) government position. I assume you have, and that there are no problems.

As it's a routine-level job & hypothetical person doesn't intend on losing US citizenship, I can't imagine a problem here.

Without the two above options, we can hope that someone who has been through this can respond, but given the complexity of the situation, I would want to be very certain of the expertise of the responder. I sincerely hope the situation is much simpler than I see it.

Me too.

If in fact you were to be taxed by the US upon receipt of the pension, and since this would possibly be a nonqualified pension plan (no taxable amount shown on a Form 1099-R, a form you wouldn’t receive), you might want to read IRS Publication 939, The General Rule, for the deduction of contributions on taxable pension payments from nonqualified plans.

I will read the publication, thanks. I have no idea what a nonqualified pension plan is though. Hope the publication explains.

Thanks again for your response.