US/UK taxation of social security - REDUX

Other threads have made me realize that my understanding of how social security benefits are dealt with in the US/UK tax treaty was incomplete. This was because I was concentrating on the wording in the Explanatory Memorandum that goes along with the treaty and says

"Payments made by a Contracting State under its social security legislation are to be taxed only in the Contracting State of which the beneficial owner is a resident."

This turns out to be incorrect in certain circumstances. So here is a table that summarizes my current understanding. But remember I'm an interested amateur so please confirm this with your own research and/or advisor

UK Residents
US citizen -----------------Receiving US SS ----- UK taxable only
US citizen -----------------Receiving UK SS ----- UK taxable and US taxable
UK citizen -----------------Receiving US SS ----- UK taxable only
UK citizen -----------------Receiving UK SS ----- UK taxable only
UK/US dual citizen--------Receiving US SS ----- UK taxable only
UK/US dual citizen--------Receiving UK SS ----- UK taxable and US taxable

US Residents
US citizen -----------------Receiving US SS ----- US taxable only
US citizen -----------------Receiving UK SS ----- US taxable only
UK citizen -----------------Receiving US SS ----- US taxable only
UK citizen -----------------Receiving UK SS ----- US taxable only
UK/US dual citizen--------Receiving US SS ----- US taxable only
UK/US dual citizen--------Receiving UK SS ----- US taxable only
 

I certainly hope that this is not correct, as DH is a dual national receiving UK state pension and US SS (both very small). We are UK resident.

Seems to me that the concept of the tax treaty specifically says that benefits are not taxed in both countries.

I believe this is something that needs to be clarified by a tax professional.

That may be the concept, and that is certainly expressed in the explanatory memorandum, but, IMHO, the actual wording of the treaty leaves open the ability of the US to tax UK SS benefits that it's citizens receive if they live in the UK or the US.
I was under the same impression as you this morning, so I am anxious for a professional or tax nerd to give their opinion too.

In our specific situation, the 2011 tax return is complicated for other reasons. DH has US income (not much however) for the period he was still in the US (Jan 1 - June 17). His only income subsequent to returning to the UK is of course the UK State Pension and the US SS benefit (again, very small). My income in 2011 was all earned income from self-employment, and all earned prior to my arrival in July.

Obviously the treatment of DH's UK pension is an issue for the 2011 tax year, but we (I) will read, reread, and file a return, err on the side of caution for the US liability with the intent of filing an amended return later if we overpaid.

For 2012, DH will have only the UK and US benefits, and the total amount will be under the UK personal allowance amount.  expect to have about $4K in earned income from an upcoming consulting assignment in the US; I have also decided to start receiving US SS in 2012, and will apply in May. My US benefit is significantly higher, and will be greater than the UK personal allowance for the 2012-2013 tax year. We have some minor interest income, but not enough to worry about in the grand scheme of things.

I think that with pension and miniscule interest income only, beginning with the 2012-13 UK tax year, DH would pay no UK income tax, and I will pay a modest amount. If we continue to file a joint US return, given our ages, there may be little US tax due from 2012 onward until I start taking distributions from my retirement funds (IRA and SEP IRA). (That issue can be shelved for the time being unless we need the money.) FBAR filings are another bit of paper, but we've been doing those since the 90's, so no big deal.

Personally, I would rely on the Explanatory Memorandum language rather than get too bogged down with confusing verbiage in the treaty itself. Folk who write the  stuff that goes into the Federal Register or other documents aren't necessarily the most proficient in making the written word clear to all readers - and that opinion is based on years of experience working with various Fed agencies.

BUT - whether the UK pension is indeed taxable by both countries remains a question that needs a definitive answer. Hopefully that will come from a genuine tax professional rather than one of the types who seem to be trolling for business this time of year 

Personally, I would rely on the Explanatory Memorandum language rather than get too bogged down with confusing verbiage in the treaty itself. Folk who write the  stuff that goes into the Federal Register or other documents aren't necessarily the most proficient in making the written word clear to all readers - and that opinion is based on years of experience working with various Fed agencies.

I too relied on the Memo, but the Treaty is what matters and the logic of the language in there has lead me to my conclusions along with several comments form theOAP and Guya

the UK state pension is not exempted from US tax for a UK resident under the current UK/US treaty.

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.

You should be clear that this social security is retirement benefits, right?  Wouldn't some people receiving SSD (disability) find that their income is not taxable in the UK as it corresponds to non-taxable benefits? They would still need to fill out a return or self-assement, but should make sure that they contact a tax professional or HMRC to see if their income is tax exempt.

You should be clear that this social security is retirement benefits, right?  Wouldn't some people receiving SSD (disability) find that their income is not taxable in the UK as it corresponds to non-taxable benefits? They would still need to fill out a return or self-assement, but should make sure that they contact a tax professional or HMRC to see if their income is tax exempt.

I believe my table is right for how the treaty can be applied to state pension payments as they are definitely covered by Article 17, then you have to apply the laws of the US and or UK to see how much tax is actually due.

Certain UK SS benefits are non-taxable in the UK, like Attendance Allowance, but if the are received by a US citizen they are taxable in the US. I'm uncertain about the exact reasons as I don't know if they are covered by the treaty or not. Do the SS benefits mentioned in Article 17 include the full range of what the UK defines as SS benefits or just the state pension. I don't know. But the current way the IRS taxes it's UK resident citizens leads to a US citizen being taxed by the US on non-taxable UK Government SS benefits like heating allowance, attending allowance etc. This outrages me and is the reason I began to look into this and in doing that I realized that the UK state pension would be taxable by the US and the UK if paid to a US citizen resident in the UK.

This is from: Tax Bulletin 6 - Special Edition UK/US Double Taxation Agreement
1 April 2003

See:   http://webarchive.nationalarchives.gov.uk/20110620155444/http://hmrc.gov.uk/bulletins/tbse6.htm

Article 17

Article 17 is a fairly standard pensions article, which provides for the taxation of pensions and other similar remuneration only in the state of residence of the beneficial owner.

This seems pretty straightforward to me. Taxable in the 'state of residence' only.

This is from: Tax Bulletin 6 - Special Edition UK/US Double Taxation Agreement
1 April 2003

See:   http://webarchive.nationalarchives.gov.uk/20110620155444/http://hmrc.gov.uk/bulletins/tbse6.htm

Article 17

Article 17 is a fairly standard pensions article, which provides for the taxation of pensions and other similar remuneration only in the state of residence of the beneficial owner.

This seems pretty straightforward to me. Taxable in the 'state of residence' only.

Yep, and that sounds pretty straightforward to me.

If you are resident in the US, the UK State Pension is only taxable in the US.

If you are resident in the UK, the US SS is only taxable in the UK.

No problems there.

....But the current way the IRS taxes it's UK resident citizens leads to a US citizen being taxed by the US on non-taxable UK Government SS benefits like heating allowance, attending allowance etc.

Why stop there?

If the US wishes to increase tax revenues by increasing the tax rate on it's citizens, they have a civil war in Congress. If the UK wishes to increase it's tax revenues, they increase VAT, as do many European countries. UK VAT can not be considered for US tax calculations, and Form 1116 will not reflect the tax increase by way of additional credits against US tax.

Those USCs on lower incomes resident in the UK, including income from ISAs, may find the UK Personal Allowance determines they owe no tax in the UK. For the US, they may owe US federal income tax on the same income. For low income pensioners in the UK, the 2012/13 PA is £10,500 (under 75) or $16,170. The current US single exemption plus over 65 standard deduction is roughly $10,600 ($1,100 age allowance? I haven't checked). If they have £500 in interest on a cash ISA ($770), they have a total of $6,340 taxable income in the US and no foreign tax credits to offset it.

The simple, and uncontrollable, fact that exchange rates increase from 1.54 to 1.70 would increase that taxable amount even more.

Yep, and that sounds pretty straightforward to me.

If you are resident in the US, the UK State Pension is only taxable in the US.

If you are resident in the UK, the US SS is only taxable in the UK.

No problems there.

Not quite - Mr Pedantic here.

If you are resident in the UK, 90% of the US SS is only taxable in the UK.

But back to the other part of the equation - UK resident, UK/US dual national, with UK pension and US SS.

As I read it, the UK taxes the UK pension as well as the US SS. Nun thinks both countries tax the UK pension (but not the US SS) because of the wording of the treaty.

Other opinions?

Not quite - Mr Pedantic here.

If you are resident in the UK, 90% of the US SS is only taxable in the UK.

Mr. Pedantic is absolutely correct. My mistake.

Brother of Mr. Pedantic here:

That's only correct if you are filing on the arising basis? Of course if you're resident, you probably will be filing on the arising basis, but that's another issue. Correct me if I'm wrong, but I believe you have to be resident for tax purposes in the UK for Article 17(3) to work?

But back to the other part of the equation - UK resident, UK/US dual national, with UK pension and US SS.

As I read it, the UK taxes the UK pension as well as the US SS. Nun thinks both countries tax the UK pension (but not the US SS) because of the wording of the treaty.

Other opinions?

I'm glad you brought the thread back on track. I started it to outline how the treaty defines the ability of the US and the UK to tax SS, not to get into the various ways the UK and US domestic tax authorities then use that ability. My main concern was the false impression the explanatory memorandum gives to US citizens, resident in the UK receiving UK SS.

I would also like to know if the full range of UK SS benefits are covered by Article 17 paragraph 3 or just SS pension payments. A link to an official ruling or decision on this would be good.

Finally I wonder if HMRC actually realizes that the US is taxing UK SS payments made to UK residents and whether Article 17 para 3 was supposed to bring about the situation in the explanatory memorandum, but was incorrectly worded.....

Correct me if I'm wrong, but I believe you have to be resident for tax purposes in the UK for Article 17(3) to work?

Mr. Pedantic's other brother here

.......or resident in the US.