US/UK taxation of social security - REDUX

DH is resident for 2011; we both will be UK resident for 2012. Only DH has UK pension, so my concern of course is how to treat that income.

I still believe that both are only taxable in the country of residence under the treaty, but again am waiting for a tax professional to jump in with an opinion. Since this thread started, I've done a lot more 'googling', and the opinions written at the time the treaty came into effect were in agreement that the treaty eliminates double taxation.

Whether other benefits are similarly exempt (carer's allowance etc) is yet another question.

I'm glad you brought the thread back on track.

Sorry, Sir.

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.....

I would imagine somewhere in HMRC, someone is aware of the ins and outs of US taxation. I would also imagine that HMRC may be envious, but not concerned, about how the US taxes it's citizens. Why should they be?

Since this thread started, I've done a lot more 'googling', and the opinions written at the time the treaty came into effect were in agreement that the treaty eliminates double taxation.

Is it possible to share the results of your efforts with some links? We would all be most interested, and thankful.

I'll do that tomorrow. I didn't bookmark, but I think I can find the relevant stuff again.

Bedtime for Bonzo now...can't stay awake very late. Must have something to do with getting up at 5 am...

I would imagine somewhere in HMRC, someone is aware of the ins and outs of US taxation. I would also imagine that HMRC may be envious, but not concerned, about how the US taxes it's citizens. Why should they be?

Agreed, but if I was in HMRC and knew about the inaccurate statements in the Explanatory Memo, I'd want to either correct it or the treaty. This situation becomes more of a political issue in the case of UK non taxable SS benefits. HMRC might not care, but the Department of Work and Pensions and UK politicians might. The UK makes those benefits non-taxable domestically presumably to help out people who are of reduced means or disabled and then the treaty and US tax law thwarts that. I've written to the MP in my old constituency to see what he thinks about it.

DH is resident for 2011; we both will be UK resident for 2012. Only DH has UK pension, so my concern of course is how to treat that income.

I still believe that both are only taxable in the country of residence under the treaty, but again am waiting for a tax professional to jump in with an opinion. Since this thread started, I've done a lot more 'googling', and the opinions written at the time the treaty came into effect were in agreement that the treaty eliminates double taxation.

Whether other benefits are similarly exempt (carer's allowance etc) is yet another question.

So here's how I see it for a US citizen resident in the UK
Carers allowance is a UK taxable SS benefit. Article 17, p3, only deals with cross-border payments, so carers allowance isn't covered by the treaty and is taxable as part of your worldwide income, and it goes on on line 21 of your 1040.

Ahhh, click! Now I see why Article 17,p3, applies just to SS pensions, they can be paid across borders, and not to benefits like attendance allowance as they aren't cross-border payments.

As I said before, I think this is correct because of my own research, previous comments from Guya and theOAP, and also because Guya hasn't shot me down yet. but I'm holding my breath.

Some of the stuff I read last night:

http://www.decosimo.com/downloads/TaxTreaty_detail110.pdf
http://www.innertemplelibrary.org.uk/news/FAQtreaties/treatiesfaq.pdf
http://www.uscib.org/index.asp?documentID=1940
http://us.kpmg.com/microsite/tax/ies/tea/summer2004/stories/article01.htm
http://www.aca.ch/acan131.htm#item6

The next one is specific to Canada, but also mentions the UK pension being taxed only in the country of residence:

http://www.taxalmanac.org/index.php/Canadian_&_Foreign_Treaties_%282004_IRS_FAQ%29

It seems to me that you have to rely on the purpose of a tax treaty - establishing an agreement such that double taxation is eliminated on most things, or reduced via credits etc. As much as I distrust the motives of the IRS, I see no reason to believe that the intent of the Treaty is to play 'gotcha' with respect to social security or social security-type benefits (the UK state pension in this case) by taxing income that is subject to UK tax.

Still waiting for a tax professional to jump in here, but like US lawyers, no one wants to be the one to throw out a definitive answer I guess. An opinion would be welcome however.

I must preface all this by IMHO and until a professional corrects me, but this form you kpmg link

Social security and other similar payments are taxable only in the country where the individual receiving such payments resides. This provision is exempt from the Saving Clause; thus, for example, U.S. citizens and residents who have become U.K. residents will not be subject to U.S. tax on social security or other similar payments from the United States, but will be taxable in the United Kingdom.

The situation of a US citizen, resident in the UK and receiving UK SS is not covered by the treaty and statements like "Social security and other similar payments are taxable only in the country where the individual receiving such payments resides." are misleading as they are incorrect in this particular circumstance. You have to go to the treaty and actually apply what it says to your situation rather than trusting these executive summaries.

You also have to be careful as we are talking about social security benefits, not pensions etc. and often the Savings Clause swoops in an over rides the treaty.

As a practical matter having the US and the UK tax your UK SS might actually be beneficial to you financially, depending on the relative tax rates, and you could build up excess FTC on your US taxes. This is what theOAP does.

Some of the stuff I read last night:

Thanks for the links, vadio. It's appreciated.

I'm not particularly bothered if the US taxes my UK state pension when I move to the UK (I'm a US/US dual citizen), as from a financial POV I may well end up being a bit better off. The problem I have is that the Explanatory Memo actually gives incorrect information and a US citizen could easily come to the wrong conclusion.

I don't expect the professionals to give a definitive answer to all this, but is there a mechanism for individuals to bring up questions about the Treaty with IRS and HMRC. The status of SS payments probably doesn't have much of a lobby and it's only us small time individual taxpayers who try to do our own taxes that would worry about all this. I'd just like to get the Memo to agree with the Treaty to avoid future confusion.

So to summarize this thread,  I believe that the table in my first post gives accurate information of where US and UK social security payments are taxable depending on your residency and citizenship. Cross border social security payments are exclusively taxable in the residence county of the beneficial owner, but that isn't necessarily the case for domestic SS payments.

If you are a US citizen, resident in the UK and receiving UK SS benefits of any kind they are not covered by the treaty and are taxable by the US. This is well known for benefits like Carer's Allowance and Attendance Allowance, but it is also true for UK state pension payments.

I respect your opinion, but I will defer to a tax professional on this w/r/t the UK state pension, which is the equivalent of the US SS.

The explanatory memorandum has been around for a good few years now, and if there were a glaring error, it would have long since been corrected IMHO.

I respect your opinion, but I will defer to a tax professional on this w/r/t the UK state pension, which is the equivalent of the US SS.

The explanatory memorandum has been around for a good few years now, and if there were a glaring error, it would have long since been corrected IMHO.

Thats what you must do. This forum is just a place to learn and discuss and hopefully arm you with knowledge and questions to ask a professional. Please tell us what your professional says and the reasons for their conclusions.

I respect your opinion, but I will defer to a tax professional on this w/r/t the UK state pension, which is the equivalent of the US SS.

The explanatory memorandum has been around for a good few years now, and if there were a glaring error, it would have long since been corrected IMHO.

Any opinions from your professional?

I'm a Us citizen, UK resident, receive US social security and a UK state pension. I tried to figure all this out myself also but gave up and got a tax professional.  If you opt to take the treaty position, you have to file form 8833 "treaty-based return Position Disclosure'. On my 2010 US tax return, on that form,  here's what he wrote: "Social Security Pensions: the taxpayer is resident in the UK and taxed on a worldwide basis. Article 17 provides that the country of residence … is given the sole right of taxation. This provision is not subject to the saving clause in article 1. Therefore the US SS pension of $xxx and the UK SS pension of $... are taxed in the UK and not in the US."
As I understand it also (and could be woring) for US social security you don't have to take a treaty position. You could just, eg, declare your US social security on your US return, pay the tax, and then take a tax credit on your UK return. And vice versa (thus avoiding double taxation).  Given that the tax years are different and overlapping, this is incredibly complicated. HMRC told me just to prorate it. IRS told me something incomprehensible.
Also, HMRC does know about the treaty and the US taxation. When you call the general HMRC number you ask to speak to an International Treaty specialist and they call you back. I would say that they are as helpful as the IRS people in Philadelphia. When you ask a question that they can't answer they tell you to write it up and send it to your tax office and you'll receive an answer. Or they tell you that you can just leave it on your return and they'll figure out how much tax you owe.
Bear in mind also that as a UK resident you won't have any witholding taken from your US social security so you will have to pay estimated UK tax.
It's all of course outrageous beyond words.