Forms F8833, F1116 and Stacking Rule

My wife and I are retired and reside in the UK. I am a USC and my wife is a UKC. She resided in the US for 26 years, worked, and has a SSAN. I am in the process of filing our MFJ US tax return, citing the US-UK Tax Treaty and had a couple of questions. We have no earned income. Our sources of income are:
1)   my USAF retirement payment pay (taxable in the US)
2)   my municipal government retirement pay (taxable in the US)
3)   my social security (taxable in the UK)
4)   my IRA distribution (taxable in the UK)
5)   my wife’s British government pensions (taxable in the UK)
6)   my wife’s social security (taxable in the UK)

I plan on declaring all of the above sources on the f1040 but only reporting 1) and 2) as taxable income in the US. I also plan on submitting Form f8833 to explain the remaining non-taxable sources.

I had a sizable IRA distribution with 20% withheld and reported to the IRA. I will be including this withholding on my F1040 along with the withholdings on my USAF and municipal government retirement pay.

Question 1: Since I am filing the f8833 and claiming the Tax Treaty do I need to file a f1116?

Question 2: I read something in another thread about the “stacking rule”. Could someone please tell me what this is and whether of not it is something I have to worry about?

Thank you,
John

All of your income is 'unearned'  - not from current employment. As I understand it, the stacking rule is not an issue for you.

http://www.irs.gov/irb/2007-08_IRB/ar06.html

I can't comment on the Form 1116 in your case; others will far more knowledge will offer opinions I'm sure.

I don't know the answer but am very interested in the responses as we'll be in a similar position in a few years, with almost the same sources of income while resident in the UK.

I've never filed Self Assessment taxes in the UK so I'm also interested in how easy or difficult those forms are to file.

I'll be filing my 1st SA this year, but it will be fairly simple - a bit of interest income (US & UK) plus my US Social Security. Once I have to start the IRA distributions, it will start to become fun....NOT....

I filled out DH's SA for 2011-2012 using the on-line forms, and it was pretty straightforward, but he only had UK state pension, US Social Security and some interest income. That's all he ever will have, so will continue to be a simple UK return.

It's the US returns that sill have me pulling out my hair.

Someone recommended that I use a program called TaxCalc to do my UK Self Assessment so I tried it. It works better than doing your SA directly through the HMRC and automatically does your calculations for me. I was able to report my full IRA distribution and it calculated the 90% taxable amount which is something I couldn't find on the HMRC website. The program does everything for you and allows you to file on line.

Doing your US taxes actually isn't that complicated if you have similar income sources as mine (assuming I'm doing it correctly). All my income is reported on:
     15a&b IRA distributions
     16a&b Pensions and annuities
     20a&b Social security benefits

In a) I report the totals for each item we received. Since I'm filing a joint return I report both mine and my wife's income.
In b) I report only that portion of a) that is taxable in the US according to the US-UK Tax Treaty. In the case of lines 15 and 20, all of these sources are taxable in the UK and not in the US. In the case of line 16 my Air Force and City retirement pays are taxable in the US, while my wife's UK pensions are taxable in the UK but not the US.

I have a very small amount of interest (£9 or $15) which I report to both the US and UK.

I also get some dividends and capital gains on a mutual fund. These are rolled back into the fund to buy more shares. I report these on my US return but not my UK SA. When I take distribution of the fund I'll report it in the UK.

Along with the 1040 I file form 8833 which explains the treaty based exemptions I take.

It really isn't that complicated assuming I'm doing it correctly. I'm not a professional tax preparer nor have I had any formal tax training so please don't take my word as gospel. 

John

Thanks guys, that's very reassuring.

You have an interesting view on not reporting US mutual fund distributions and capital gains distributions on your UK personal tax return. This is not one I have heard previously. I would expect these are reportable as foreign income on the foreign pages and one claims the notional credit plus possibly some DTR if there is any US tax payable.

It is possible though that you are claiming that you are non-UK domiciled. If you are not claiming this I would expect you to resource US bank interest as foreign source on your US return by filing a treaty resourced form 1116.

I also cannot follow on what basis you are filing jointly in the US, there are only three conditions that would permit this; she is a US citizen, a US green card holder or you have both jointly elected to file jointly under section 6013.

Your proposed treaty claims appear to overlook the saving clause - I am certainly confused why your wife's government pension and your IRA distribution are not taxable in the US; with the latter simply resourced as foreign?

Guya,

Thanks for the input, you've completely destroyed my 2012 tax return  . I was unaware of section 6013 and that you can not claim treaty based provisions. My wife and I have been married for 30 years but until we moved to the UK she was always a resident alien. We always filed a joint return. Now that we are no longer living in the US and she is no longer a resident alien I'll have to rethink my filing status since if we file jointly I won't be able to claim the treaty provisions.

As for my IRA distributions Article 17 - Pensions, Social Security, Annuities, Alimony, and Child Support, para 1.a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State. Since I'm a resident of the UK I understand this to mean my IRA distribution is taxable only in the UK and not the US.

Para 3 of the same article states: 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. Again, I understand this to mean my SS payments are taxable only in the UK and not the US.

I'm not familiar with saving clause, what exactly is it?

As for my US mutual fund distributions and capital gains distributions, Article 18 para 1 states Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).

Now I'm hoping you can answer a question for me. Since I will probably have to change my filing status to married filing separate can I claim my wife as an exemption/dependant? She has a SSAN and her only source of US income was $1,200 from social security, well below the amount necessary to file a US tax return for 2012.

Hope you can help me and thanks for alerting me to my errors in filing my return.

I'm not familiar with saving clause, what exactly is it?

Tax treaties define to which country, and under what conditions, a person will owe tax. All (I believe) US treaties contain a saving clause. The saving clause states that regardless of what benefits a treaty may offer, the US retains the right to tax 'US Persons' as if the treaty were not in place ('citizenship based taxation').

The saving clause in the UK/US Treaty is in Article 1, para 4. From the Technical Explanation:
Paragraph 4 contains the traditional saving clause found in U.S. tax treaties. The Contracting States reserve their rights, except as provided in paragraph 5, to tax their residents and citizens as provided in their internal laws,....

The saving clause is explained on page 4, and the exceptions are listed on page 5, of the following Technical Explanation (easier to read than the Treaty):
http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

As is mentioned, the US graciously allows, under certain situations, for double taxation to be avoided. These exceptions include, amongst others, Subparagraph 1(b) and paragraphs 3 and 5 of Article 17 (which includes US SSA), and Article 24 (Relief from Double Taxation) which allows for the use of FEIE and tax credits.

Another source of information is Publication 901. Scroll down to page 33, and you will find the US treatment of 'Wages and Pensions Paid by a Foreign Government' from the United Kingdom.
http://www.irs.gov/pub/irs-pdf/p901.pdf

My wife and I are retired and reside in the UK. I am a USC and my wife is a UKC. She resided in the US for 26 years, worked, and has a SSAN. I am in the process of filing our MFJ US tax return, citing the US-UK Tax Treaty and had a couple of questions. We have no earned income. Our sources of income are:
1)   my USAF retirement payment pay (taxable in the US)
2)   my municipal government retirement pay (taxable in the US)
3)   my social security (taxable in the UK)
4)   my IRA distribution (taxable in the UK)
5)   my wife’s British government pensions (taxable in the UK)
6)   my wife’s social security (taxable in the UK)

The Saving Clause is vital as it gives the US the right to tax it's citizens irrespective of what the treaty says. There are a few important exceptions in the areas of SS and pensions.

If you have elected to file married jointly your wife's income will be taxed by the US as is she was a US resident. Also what is your UK residency status? Those facts will affect how you are taxed. Items 4), 5) and 6) may well be liable to US tax.

This keeps getting more complicated by the minute but I think I understand it now. At least I hope I do.

My residency status is permanent (ILR).

1) If I file a JOINT return with my wife (who is UKC, UK resident) then we must report ALL of our income (both US and UK) and can NOT use the US-UK Treaty. ALL of our income will be taxable in the US.

2) If I file MARRIED FILING SEPARATELY then I only report MY income and exclude my wife's income. My Air Force and City retirement pay is fully taxed by the US. My Social Security benefits are taxed in the UK but NOT in the US. My IRA is taxed in both the UK and the US but I can claim a Foreign Tax Credit for the tax I paid in the UK.

Is this correct?

Am I correct in assuming my wife will NOT have to file a US tax return since she is a UKC and UK resident? Her only US income was $1,200 in Social Security benefits which is NOT taxable in the US and below the $3,800 threshold for filing a return. I assume that because she is neither a USC nor a US resident she can't be taxed on her UK pensions UNLESS we file a JOINT return.

One last question - If I file MARRIED FILING SEPARATELY can I claim my wife as an exemption/dependant on MY US tax return?

Thanks for any help.

John

Several years ago, a response to a question in the frequently asked questions at the back of publication 54 read “You can claim an exemption for your non-resident alien spouse… provided your spouse has no gross income for U.S. tax purposes."

In the latest editions of Publication 54 (page 35) it now reads "If you do not file a joint return, you can claim an exemption for your nonresident alien spouse only if your spouse has no income from sources within the United States and is not the dependent of another U.S. taxpayer." This echos the main instructions on page 24 under Exemptions. I've never found anywhere else in any IRS publications that offers any further explanation regarding this situation.

If you wish to claim your wife as an exemption (with her SS income, I don't think the amount matters), I would suggest you contact a qualified tax adviser for clarification before proceeding.

http://www.irs.gov/pub/irs-pdf/p54.pdf

I can afford to take the easy way out and not claim the exemption (sufficient tax credits), so I'm therefore not the person to comment.


 

2) If I file MARRIED FILING SEPARATELY then I only report MY income and exclude my wife's income. My Air Force and City retirement pay is fully taxed by the US. My Social Security benefits are taxed in the UK but NOT in the US. My IRA is taxed in both the UK and the US but I can claim a Foreign Tax Credit for the tax I paid in the UK.

Is this correct?

Thanks for any help.

John

I seem to have run into a problem with the above scenario.

Can I claim the Foreign Tax Credit for the UK taxes I paid on US IRA and if I can, how do I do so?

I tried filling out the f1116 but that limits the amount of the Foreign Tax Credit to the percentage of your foreign income to your total income. Since I have no foreign income it appears that I can NOT claim a Foreign Tax Credit.

Is there any other way to avoid paying double taxes (UK and US) on my US IRA distribution?

Thanks,
John

I seem to have run into a problem with the above scenario.

Can I claim the Foreign Tax Credit for the UK taxes I paid on US IRA and if I can, how do I do so?

I tried filling out the f1116 but that limits the amount of the Foreign Tax Credit to the percentage of your foreign income to your total income. Since I have no foreign income it appears that I can NOT claim a Foreign Tax Credit.

Is there any other way to avoid paying double taxes (UK and US) on my US IRA distribution?

Thanks,
John

This is where resourcing comes in. You will have had 10% of your IRA distribution withheld by your US administrator. The UK will now tax 90% of that distribution......you pay this tax in full. Now you can apply the UK tax you paid and the 10% US withholding against your US tax bill. Look at the tax treaty Article 24 and the explanatory memo for an example.

Nun:

Thanks for the information on Article 24 and Resourcing. Am I correct in assuming that when I do the F1116 I simply enter 90% of my US IRA distribution on Line 1a: Gross income from sources within country and reference Article 24 of the Tax Treaty?

I also assume I'll need to complete another F8833 addressing the Tax Treaty.

theOAP:

According to Publication 54 (2012)
Tax Guide for U.S. Citizens and Resident Aliens Abroad

Page 24
You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U.S. tax purposes and is not the dependent of another U.S. taxpayer.

Since my wife's social security and UK pensions are not subject to US taxes UNLESS we file a JOINT return it would appear that I can claim her as an exemption.

Thanks,
John