Taxation of US Social Security and UK State Pension

For long time expats the taxation of state pensions eventually becomes an issue. For the US resident the taxation of US social security and UK state pension turns out to be fairly simple because the there's no requirement to file a UK Self Assessment and HMRC has a simple procedure in place so that UK tax is not withheld from your UK state pension. Here is my current understanding of the mechanics.

Again, this is for people RESIDENT IN THE USA.

State pensions (US social security and UK state pensions) are covered under the tax treaty and are ONLY taxable in the country of residence. If you live in the US and get a UK state pension you need to fill out an HMRC US-Individual-2002 to claim relief from UK tax

http://www.hmrc.gov.uk/cnr/us_individual_2002.pdf

along with an IRS form 8802 Residency Certification

http://www.irs.gov/pub/irs-pdf/f8802.pdf

and send both forms (with $35 fee) to the IRS in Philadelphia. They will send you a 6601 Residency Certificate back and also send the forms off to HMRC.

So now you will get your UK state pension with no UK tax withheld and you simply include it on line 21 of your 1040 and write something like "UK state social security pension" in the description. US social security goes on lines 20a and 20b.

The best bit of this at no point do you have to quote tax treaty Articles.
If you are UK resident and get a US SS and UK state pension, the equivalent process is more complicated. Maybe the OAP could do a version of this post from that perspective.

This is an interesting post that affects, or will affect many. Would your U.K personal pension and Stateside IRA, not go on line 15b and U.K old age pension not go on line 16b. It's taxable in the U.K only? I believe the tax treaty articles, filing of an 8833 is no longer needed with pension income.

This is an interesting post that affects, or will affect many. Would your U.K personal pension and Stateside IRA, not go on line 15b and U.K old age pension not go on line 16b. It's taxable in the U.K only? I believe the tax treaty articles, filing of an 8833 is no longer needed with pension income.

I'm specifically talking only about Government social security schemes. They are dealt with in the tax treaty Article 17 paragraph 3. This is exempt from the savings clause and provides for exclusive residence country taxation of social security benefits. We should deal with other pensions and retirement accounts in separate threads.

You are correct that UK state pension should go on line 16 and not line 21 as I said in my original post. There is some discussion over which line is appropriate, but this link

http://www.irs.gov/publications/p17/ch11.html

states:

"This chapter also does not cover the tax rules for foreign social security benefits. These benefits are taxable as annuities, unless they are exempt from U.S. tax or treated as a U.S. social security benefit under a tax treaty."

So it looks like UK state pension would be taxed as an annuity and therefore go on line 16 of 1040.

For a US citizen resident in the UK receiving US SS and UK state pension the situation is complicated as they have to file the UK Self Assessment and a 1040. I agree that the IRS says a 8833 need not be filed in some situations as given in the following extract from:

http://www.irs.gov/businesses/small/international/article/0,,id=96438,00.html

"You do not have to file Form 8833 for any of the following situations:
......................
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."

So I would enter US SS on line 20a and then write "0" for the taxable amount on line 20b and write a note about exempt under UK/US treaty. However, I'm open to suggestions on how to deal with the UK state pension. It isn't US taxable so would it be just left off entirely or would you enter it on line 16a and not include it on 16b as it isn't taxable? If so how do you handle form 1116 for tax credits. Now we need to find out what to do on your UK Self Assessment.

Maybe the OAP could do a version of this post from that perspective.

Whoa! This thread is going in all directions. A lot of statements are being made, and I'm not sure I agree with all of them.

Do you want the OAP's version of the method of reporting a store front tax service in Keokuk, Iowa would use, or a US tax specialist in a foreign country would use, or the method an IRS agent(s) would suggest (reserving the right to invalidate that suggestion at a later date)? I assure you, the conclusions they reach can be different. Given the lack of explicit directions, this does not surprise me. In fact, the lack of directions may be a clue. Or, do you want the method of reporting a self preparing Yank sitting in the middle of the UK with limited knowledge would use.

Form SSA-1099. You receive a copy. The IRS receives a copy. Box 3 lists the (gross) benefit paid for the year. Box 4 lists benefits repaid to SSA (mine says NONE.). There is space for a description of the amounts withheld in Box 4. Box 5 lists the net benefits. Box 6 lists the Voluntary Federal Income Tax Withheld. If you live in the UK, have your SSA check deposited into a UK account, and have no voluntary withholdings, Box 6 says NONE. There is no box that is devoted only to US federal tax withheld.

Before I start, I concede that the following will be deemed wholly incorrect by others, and will lead to the End of the World as we know it, and it will all be my fault.

After assimilating the information from all those listed in the 2nd paragraph, that self preparing Yank in the Cotswolds may do the following:
They would list the amount in Box 5 on line 20a of Form 1040. They would enter '0' on line 20b. Above line 20b, in pencil, they would note the SSA income is exempt under the US/UK treaty, Article 17. They would prepare 1040 in this way on the specific instructions of several IRS agents. They have recorded names, badge numbers, times/dates, information given, and message numbers if appropriate.

If they wish to invoke the treaty, (the SSA is not taxable by the US), they do not mention the SSA income anywhere else on their return. They may complete a Form 8833, if they wish, but according to the IRS agents, it's not obligatory for exempting SSA. They can file 8833 just to confirm the treatment of the SSA income, if the return is questioned. They do.

The Yank in the Cotswolds has multiple foreign pensions, including the UK State pension. They do not exempt the UK State pension from US tax. According to very specific instructions from IRS agents, they DO NOT enter these on line 16a, regardless of instructions in Publications stating otherwise. Instead, after deducting their allowable costs towards the pensions by use of Publication 939, they enter the total net amount on line 21, and label them 'foreign pensions'.

For Form 1116, they do not include the UK tax paid on the SSA income. They do this by apportioning the amount taxable by the UK of total pensions received (not the total of the pensions) to the (UK taxable) amount of the SSA income, and multiply total tax paid on pensions to the UK by the result. The stance taken is that if the SSA is exempt from US tax, then the UK tax paid on the amount would also not be allowed. This conclusion MAY NOT BE CORRECT, but in the case of the Yank, it makes no difference to the final US tax bill, and only results in reduced excess credits for carryover/carryback. They have tons already. Mileage may vary.

FINAL NOTE: The Yank in the Cotswolds has original recorded direct information from the IRS. You may not.

FINAL FINAL NOTE: I'm going to be in deep sh*t if there is a member here who uses the name 'Yank in the Cotswolds'. I haven't checked. If there is, this wasn't them. 

The Yank in the Cotswolds has multiple foreign pensions, including the UK State pension. They do not exempt the UK State pension from US tax. According to very specific instructions from IRS agents, they DO NOT enter these on line 16a, regardless of instructions in Publications stating otherwise. Instead, after deducting their allowable costs towards the pensions by use of Publication 939, they enter the total net amount on line 21, and label them 'foreign pensions'.

See what I mean about the US citizen living in the UK having a far more complicate job dealing with taxes........and the "Y in the C" hasn't even started to tell us about the UK self assessment.

I'm intrigued as to why you don't exempt the UK state pension from US tax. Is it because the UK tax you pay on it is greater than the US tax and you then take a tax credit? Also do you use zero as the your cost in the plan for the UK state pension?

...and the "Y in the C" hasn't even started to tell us about the UK self assessment.

I'm told the Yank in the Cotswolds has restricted the types of income they receive to pensions (both foreign and domestic), interest from UK bank accounts (mainly fixed rate accounts and cash ISA accounts), the Christmas bonus, and the winter fuel allowance. They also have minimum interest from US bank accounts. Whenever income arrives, they record it twice according to the US tax year and the UK tax year on individual spreadsheets. Being an out of date oldie, they still file a paper UK return.

When it comes time to do UK taxes, they allocate 120 minutes to the task. For 60 minutes, they double check all recorded figures. For 30 minutes, they reread the instructions for SA 106, looking for any changes year on year. For 20 minutes, they fill in all the boxes required for SA 106. First is the basic information pages. Then, on combined pages F2 and F3, they first fill in the information for 'interest and other income from overseas savings'. Under 'overseas pensions, SS benefits, etc.' they fill in the amount in the box for the US (US SS) and on a separate line, the total of other European pensions (all from 1 country). They then total up the taxable amount boxes.

From the spreadsheets, they fill in the net amount in the box for total taxed UK interest, the box for the gross UK State pension, the box for other UK pensions, and the box for tax taken off the other UK pensions. They then complete the information required for box 19, and sign the return. For the last 10 minutes, they double check the return, then send it.

If life insurance gains, stock dividends, lump sums, tax reliefs, etc. were received, they would fill in the boxes on the 4 'Additional information' pages. If they had income from rentals, capital gains, etc., they would have filled in more boxes on the SA 106.
    

I'm intrigued as to why you don't exempt the UK state pension from US tax. Is it because the UK tax you pay on it is greater than the US tax and you then take a tax credit?

As I read the treaty, I've never been 100% sure that it is exempt. But, that doesn't matter as it creates more credits to have it taxed. I've never comtemplated exempting it.
 

Also do you use zero as the your cost in the plan for the UK state pension?

I don't think there is any way to determine how much of your NI contribution went to your State pension. I could be wrong. Using zero is safe.

     As I read the treaty, I've never been 100% sure that it is exempt. But, that doesn't matter as it creates more credits to have it taxed. I've never comtemplated exempting it.

Your "Y in the C"'s UK social security is definitely free from US tax under the treaty because he is UK resident and the specific paragraph is exempt from the savings clause. But it's a situation where not invoking the treaty is better: he must pay UK tax anyway as he lives in the UK and he can use the UK tax paid as a tax credit on his US return to cover tax on passive income in the USA.

Where to include UK SS on the 1040 is intriguing me. What did the IRS say to the "Y in the C" about it? I hope you overheard the conversation. I don't think there'll be a difference in the final tax bill whichever you choose, but I have read on IRS publications that it's taxed like an annuity unless it is exempted under the treaty.

Where to include UK SS on the 1040 is intriguing me. What did the IRS say to the "Y in the C" about it? I hope you overheard the conversation. I don't think there'll be a difference in the final tax bill whichever you choose, but I have read on IRS publications that it's taxed like an annuity unless it is exempted under the treaty.

Does the inclusion of the UK State pension on line 16 verses line 21 change any calculation that may occur later in your tax return or other forms or schedules? If so, it's an important distinction for your return. I've not explored this scenario. I have an inkling where this conversation might lead (a specific type of pension could be classed as an annuity). I won't bite. I'll save that for another thread. 

You, I, and Barcrest understand the following, but I need to make it clear for anyone else who might read this thread. The method of completing the US and UK returns of the Yank in the Cotswolds is unique to the Yank in the Cotswolds. Everyone has a situation unique to them. Because the Yank completes the returns as explained does not mean that anyone else should assume their returns could be completed in a similar way. 

You, I, and Barcrest understand the following, but I need to make it clear for anyone else who might read this thread. The method of completing the US and UK returns of the Yank in the Cotswolds is unique to the Yank in the Cotswolds. Everyone has a situation unique to them. Because the Yank completes the returns as explained does not mean that anyone else should assume their returns could be completed in a similar way. 

Agreed, taxes are very individual things, so the reasons for taking a particular stance are interesting. I think I'd put UK SS on line 16 now because of the wording in this:

http://www.irs.gov/businesses/article/0,,id=187083,00.html

I'm interested in the reasons why "Y in the C" uses line 21 as that was my initial inclination.

This is an interesting thread, with real life experiences of how we, as individuals might make subtle differences in the way of filing. I'm hoping someone might start a thread on IRA and U.K personal/company pension reporting for the 1040, which lines etc. Saying that I expect if I sift through old posts the information would be there!

Wow that's tempting........FYI I need to get out more!

I'm interested in the reasons why "Y in the C" uses line 21 as that was my initial inclination.

Surprisingly, the 'YC's' initial inclination was to include all foreign pensions, including the UK State pension, on line 16. During a conversation with one Agent, the YC expressed this intention. The Agent replied "...no, don't put the foreign pensions on line 16, put all of them on line 21". The YC asked if they had understood the direction clearly, and was assured it was line 21, not line 16. Being a trusting soul, and knowing that the IRS would never give inaccurate information or that they may later change their mind, they followed that advice. But then, they did have the Agents name, badge, etc.

I'll ask the question again, does the inclusion of the UK State pension on line 16 verses line 21 change any calculation that may occur later in your tax return or other forms or schedules? If so, it's critical. If it makes no difference to your return after line 22, anywhere, and has no effect on tax due or credits on 1116, is it worth IRS time to respond if it's felt (by another Agent) to be incorrect? It would be nice to file a perfect return. Professional tax preparers are required to file accurate returns. Until there are explicit directions explained in obvious locations, and not bits of info here and there that must be painstakingly searched out and then interpretted, self preparers are flying by the seat of their pants. The IRS Email Tax Law Assistance site is available. The joys of having pensions...   

Wow that's tempting........FYI I need to get out more!

I was just out. But I rushed back to see if I had a comment from you!

I'll ask the question again, does the inclusion of the UK State pension on line 16 verses line 21 change any calculation that may occur later in your tax return or other forms or schedules? If so, it's critical. If it makes no difference to your return after line 22, anywhere, and has no effect on tax due or credits on 1116, is it worth IRS time to respond if it's felt (by another Agent) to be incorrect?

In my case I'm US/UK dual and US resident so if that status is the same when I get UK SS I will use the treaty to exempt it from UK tax to avoid the hassle of dealing with HMRC at any level beyond filing the US-Individual-2002 form.

If I use the same rules to calculate the taxable amount of the UK SS (ie treating it as an annuity) whether it goes on line 21 or line 16 won't make a difference in the final numbers after line 22. As my "cost in the plan at the annuity start date" is zero it will all be taxable and I will have no foreign tax credits so no form 1116. But as I will have used the treaty I think it's correct to include it on line 16 in my case.

I can see that if you don't invoke the treaty and have foreign tax credits associated with the UK SS it might get confusing to lump them in with US pensions and annuities and putting them on line 21 might make things clearer and actually be the most correct position to take.

OAP
Here's a really "fun" tool that will take you down the rabbit hole of how the SSA determines the withholding of tax from SS payments. If you are a US citizen there is no tax withheld unless you request it on W-4V, if you are a NRA things get complicated quickly.

Answer the question on the SSA website and explore the various scenarios. It's interesting to see the special status of some countries and see that tax can be a very political topic, the most obvious example being what actually constitutes the state of Israel.