US/UK taxation of social security - REDUX

This may help:

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

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."

I would say that Article 17 only provides for the exclusive country of residence taxation of cross-border SS payments. Therefore, I think your professional has come to a slightly wrong conclusion; your US SS is indeed only taxable in the UK, but as the UK SS is not a cross border payment, and you are a US citizen, it is taxable in both the US and the UK.

The wording in the treaty is quite specific

"3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State."

Thus Article 17(3) only deals with SS payments made to residents of the other contracting state ie cross-border payments. The Technical Explanation is not accurate in this case.

Call the IRS in London and ask if UK SS is taxable.

Internal Revenue Service
American Embassy
24 Grosvenor Square
London W1A 1AE

Phone:  [44] (0)20 7894-0477
Fax:      [44] (0)20 7495-4224

I would say that Article 17 only provides for the exclusive country of residence taxation of cross-border SS payments. Therefore, I think your professional has come to a slightly wrong conclusion; your US SS is indeed only taxable in the UK, but as the UK SS is not a cross border payment, and you are a US citizen, it is taxable in both the US and the UK.

The wording in the treaty is quite specific

"3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State."

Thus Article 17(3) only deals with SS payments made to residents of the other contracting state ie cross-border payments. The Technical Explanation is not accurate in this case.

I concur.  Any other position would be unlikly to have substantial authority so would be super aggressive. Is the adviser someone in the UK or the US? Does s/he see this every day or this is the result of research?

I wrote to the IRS to ask them if UK SS paid to a US citizen resident in the UK could be excluded from US taxation under the Treaty.  I also pointed out the confusion that might occur when reading the Treaty and the Notes. Here's the answer. The IRS person points out that Article 17(3) deals with cross-border payments, but then draws an incorrect (IMHO) conclusion. I'm coming to the conclusion that the intent of the Treaty is to make SS payments only taxable in the country of residence, but that the wording does not achieve that goal.

"
The Answer To Your Question Is:
Thank you for your inquiry dated February 13, 2012. We apologize for any delay in responding to your inquiry concerning the clarification of Article 17 paragraph 3, (Pensions, Social Security, Annuities, Alimony, and Child Support) of the income tax treaty between the United States and the United Kingdom.
Please accept our apologies in behalf of the writers of this convention if they used a poor choice of words to convey their intentions.
Generally, discrepancies in taxation arise when individuals are receiving income from one country and are resident in the other. Article 17, paragraph 3 is addressing this type of situation. If this type of income is paid by either contracting state it will be taxed in the recipient s state of resident. As a result of the exception to the savings clause, the treaty allows for United States (U.S.) citizens who are resident in the UK to exempt UK social security equivalent payments from their tax return.

Based on the information you have provided, I have attempted to answer your question(s); but you should know that my answer does not constitute an official ruling by the Internal Revenue Service (IRS), and it should not be used as such. If you want an official ruling from the IRS, you should follow the instructions provided in Revenue Procedure 2012-1, which is available at most IRS offices and some libraries. You will be charged a fee. However, Revenue Procedure 2012-7 states that the IRS will not, in most cases, issue advance rulings concerning the interpretation of tax treaties. Taxpayers who disagree with the IRS interpretation of a treaty may file a claim with the U.S. Competent Authority according to the instructions set forth in Revenue Procedure 2006-54, which are available at most IRS offices and libraries. There is no fee for requests for Competent Authority claims. Your request for Competent Authority consideration should be addressed to:

Deputy Commissioner (International)    
Large and Mid-Size Business Division    
Attn: Office of Tax Treaty    
Internal Revenue Service    
1111 Constitution Avenue, NW    
Routing MA3-322A    
Washington, DC 20224.  "

As an academic exercise it's interesting to look at how the US/Belgium 2006 Tax Treaty treats SS. It is different from the UK/US tax treaty as it provides for SS payments to be only taxable by the State paying the SS.

Article 17(2).
Notwithstanding the provisions of paragraph 1, payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the other Contracting State or to a citizen of the United States shall be taxable only in the first-mentioned State.

Thank You for pursuing the social security problem , I have been searching forever to resolve or at least get interpretation of the ambiguous treaty.

The IRS response was one of the better ones I have seen. I noticed the response still stated at the end that it is not necessarily IRS policy.

Is the letter you posted shown in it's entirety?

Thank You for pursuing the social security problem , I have been searching forever to resolve or at least get interpretation of the ambiguous treaty.

The IRS response was one of the better ones I have seen. I noticed the response still stated at the end that it is not necessarily IRS policy.

Is the letter you posted shown in it's entirety?

Yes it's the whole email response I received.

The IRS email correctly states that Article 17(3) deals with a situation "when individuals are receiving income from one country and are resident in the other. Article 17, paragraph 3 is addressing this type of situation."

So Article17(3) does not deal with SS payments made by a country to someone resident in that country.

So the following conclusion that "As a result of the exception to the savings clause, the treaty allows for United States (U.S.) citizens who are resident in the UK to exempt UK social security equivalent payments from their tax return." is incorrect. I believe the IRS are stating the intention of the Article and not what it actually says.

If we want to get this resolved I think it will be necessary to follow the formal procedures described in the email.

Food for your thoughts with links:


newcomer link: http://www.irs.gov/publications/p17/ch11.html [nonactive]


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



Paragraph 4 provides that any annuity is to be taxed only in the Contracting
State of which the beneficial owner is a resident. The paragraph also defines “annuity” for this purpose.


newcomer link: http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf [nonactive]


The term “annuity” as
used in this paragraph means a stated sum paid periodically at stated times during the life of the annuitant,
or during a specified or ascertainable period of time, under an obligation to make the payments
in return for adequate and full consideration (other than in return for services rendered).

newcomer link: http://www.hmrc.gov.uk/manuals/eimanual/EIM76100.htm [nonactive]



EIM76100 - Social security benefits: list of non-taxable social security benefits  Part 10 ITEPA 2003
UK social security benefits specified at Table B Parts 1 and 2 at Section 677(1) ITEPA 2003 are wholly exempt from tax.
The following benefits are not taxable. The benefits are described at the paragraphs mentioned below:

•   Attendance Allowance
•   Back to Work Bonus (see EIM76223)
•   Bereavement Payment (see EIM76171), replaced Widow's Payment from 9 April 2001
•   Child Benefit
•   Child's Special Allowance
•   Child Tax Credit
•   Cold Weather Payments, see also Winter Fuel payment
•   Council Tax Benefit, administered by local authorities
•   Constant Attendance Allowance, see industrial disablement benefit below
•   Disability Living Allowance

So you're arguing that that UK SS paid to a UK resident is treated as an annuity under the treaty. As Article 17(4) is subject to the savings clause a US citizen will be taxed in the US and the UK on that annuity.

As far as UK SS paid to a US citizen living in the UK I'd take theOAP's stance and not bother with the treaty at all and just enter it as a foreign pension on Line 20 of 1040.

I'm not sure why you list the UK tax exempt benefit payments. Those are definitely taxable in the US.......are you saying they are treated as annuities under the treaty too.

I'd be interested to hear from a US citizen living in the UK who has actually excluded UK SS from US taxation and how the IRS dealt with it.

I had been interested in how the treaty deals with UK social security "benefits" not just social security pensions.

ie Attendance and disability allowances.

Using line 20 would mean you will pay US tax on untaxed UK benefits

I had been interested in how the treaty deals with UK social security "benefits" not just social security pensions.

ie Attendance and disability allowances.

Using line 20 would mean you will pay US tax on untaxed UK benefits

Unfortunately you are correct. I phoned the UK Embassy IRS office and asked about UK SS benefits like attendance allowance and was told that they were US taxable when paid to a US citizen. It also means that things like heating allowance are US taxable. This is outrageous IMHO and the same goes for UK SS pensions because of the wording of the treaty.

Don't forget the £10 Christmas bonus on your UK State Pension. That's taxed by the US as well.

Did you mean the UK embassy or the US embassy?

I tried calling the US embassy and they indicated on the answering system that you had to either write or walk in, on a first come first serve basis to get an answer.

I agree it is outrageous.

Did you mean the UK embassy or the US embassy?

I tried calling the US embassy and they indicated on the answering system that you had to either write or walk in, on a first come first serve basis to get an answer.

I agree it is outrageous.

I meant the US embassy in London. The IRS office there will answer questions over the phone.

I wonder if the value of free bus passes is US taxable?