UK Resident - US Citizen - UK Pension/Annuity

Hello,

I'm a US citizen, UK resident, and receive a UK pension.  According to article 17 of the UK/US Tax Treaty:

Article 17
PENSIONS, SOCIAL SECURITY, ANNUITIES,
ALIMONY, AND CHILD SUPPORT
1. a) Pensions and other similar remuneration beneficially owned by a
resident of a Contracting State shall be taxable only in that State

Does this mean if I pay UK tax I don't have to report my pension or annuity to the IRS?  If I have to report, what form do I use.

Alf

It would be nice if it was that easy.

You are quoting the applicable bit of the treaty for qualifying UK pensions. However, at the beginning of the treaty there is what's called a Saving Clause. This basically states that the US can tax it's residents and citizens as if the treaty had not come into force. There are certain bits of the treaty that are exempted from the Saving Clause, but Article 17.1a is not one of them.

So as a US citizen you have to include your UK pension income on your 1040 along with the rest of your worldwide income. It would go on line 16.

You won't pay double tax though as you can use the UK tax that you pay as foreign tax credits (Form 1116) to offset your US tax.

Depending on the type and value of your pensions FBAR and FATCA forms might be required.

Thanks.

I file form 2555 and I understand I can't also file the 1116.  So, unfortunately I do get double taxed.

But if you think you are doubly taxed you can exercise your democratic right to vote to get US law changed.

Otherwise you'll have to live within the law. You are correct; you are doubly taxed but on most foreign source income you get to claim foreign tax credits. This would include foreign pensions and any US source pensions that you qualify to resource as foreign under Article 24.

If you declared your employer's pension contributions on your US tax then you will have established a basis in your UK pension, ie, only a percentage of your uk pension will be taxable in the US. I didn't do this, and when I went to an accountant he had me amend as many of my previous US returns as possible (3?) to do this because it was beneficial for me. (experts - pls correct me if/where I'm wrong, fuzzy, etc)

Code section 402(b) says you have to include these - it is not optional. Amending all previous returns will not be possible if the statute of limitations has closed for that year - which is less likely since March 2010 when the HIRE Act was signed; but only if you are required to file Form 8938.

You figure basis under the general rule - code section 72.

But...you might still elect into the treaty under Article 18(5).

Thanks.

I file form 2555 and I understand I can't also file the 1116.  So, unfortunately I do get double taxed.

Not quite correct. You won't be doubly taxed!

2555 is for foreign earned income. Once you choose the FEIE you cannot apply foreign tax credits for tax paid on that earned income. However, you can still use form 1116 to claim tax credits for income not included on form 2555...ie your pension or any amounts of earned income over the earned income threshold

It might be useful for you to do your taxes using the FEIE and then just using foreign tax credits to see which one works out best. Using just foreign tax credits is often better as the generally higher tax rates in the UK than in the US allow you to build up excess foreign tax credits. These become useful in the situation that Marty and Guya are talking about where you can use them to pay the tax on UK employer contributions to pension plans that have to be declared as income on your US taxes and build up a US tax free basis in your UK pension plan rather than exempting the contributions from tax under the treaty.

FYI people who have UK state pensions paid for with voluntary contributions from income that was taxed in the US should enter it on line 16 of the 1040 and calculate the US tax free basis.