How to report UK workplace pension?

And further, I somehow need to keep a record myself of how much contributions I have paid tax on and how much have been exlcuded and some how use that to calculate how much I owe on the gains in my pension.

It just seems impossible...

There is a simple solution to your problems - do nothing. You are a UK citizen with a non-US birthplace so you are not marked. Do not admit to being a US citizen and avoid visiting the USA.

There is a simple solution to your problems - do nothing. You are a UK citizen with a non-US birthplace so you are not marked. Do not admit to being a US citizen and avoid visiting the USA.

I am seriously considering it. But I have a parent in the US who is not getting any younger so forgoing the right to visit at the moment is not an option. Actually I was hoping to move there for work in the next few years which is what prompted me to start trying to sort out compliance - but I had no idea that as an individual with not that high income and fairly standard situation it would be so complicated.

So what should I put as the employers contribution (and where should I put this) ?

Guya is suggesting that you declare the benefit you accrue each year. So that might be 1/80th of your salary each year. You will also get a UK tax free lump sum at retirement that is 3x your final pension amount. I'm not sure how you deal with that on current taxes.

I don't really understand this. Where should enter the vested accrued benefit and how can I determine this?

I'd probably put it in "other income". Under USS Career Revalued option you accrue 1/80th of your salary towards your pension every year.

What does "reduces your effective tax basis" mean? Does it mean I have more tax to pay when the pension pays out (than if I had included my pension contributions as taxable income and offset them with foreign tax credit?)

Because you pay tax on the money going into your pension you don't have to pay tax when you take money out, so you build up a base of tax free money. Usually there is some gain in an annuity contract and you would have to pay tax on the gain, but the USS pension just seems to be a multiple of your salary and you are paying tax on all of that each year, and if that's the case there would be no US tax to pay on it.

I don't understand this again but I think its because I don't know really what "vested accrued benefit" means. Vested means when it is paid out to me? or when it is in the plan?

Vested is how much of the benefit you own. I think you are 100% vested in the pension from the start.

I'm sorry - I am trying to keep positive but this is the third full day I've spent on this now (and much more time over the last two weeks). It just seems obscene to put people through this - I have never earned more than $48000 in a year. Now it seems that the 1 year of pension I was so happy to finally have at the age of 32 is more trouble than it is worth! Effectively I need to funnel several times more than my personal pensioin contributions directly to a tax advisor each month in order to deal with the employer contributions - and I should certainly forget about having any sort of savings!

Yours in desperation,

Yours is a familiar frustration.

What I'd do would be to use the treaty to exclude your 6.5% and 1/80 of your salary each year as your annual accrued pension value.

Alternatively you could include the 6.5% and the 1/80 of your salary as US taxable income and use foreign tax credits to pay the US tax. That might be the better option if you have excess FTCs because you'd end up with US tax free income when you take the pension, but that's only really useful if you plan to retire to the US; if you stay in the UK you'll still have to pay UK tax on the pension

Thanks nun, I think I understand that!

I'd probably put it in "other income". Under USS Career Revalued option you accrue 1/80th of your salary towards your pension every year.

But my understanding that that 1/80th of salary was the amoung I got paid every year, not a lump sum. So the amount accrued is acutally 1/80th * number of years I will be withdrawing pension?

Because you pay tax on the money going into your pension you don't have to pay tax when you take money out, so you build up a base of tax free money. Usually there is some gain in an annuity contract and you would have to pay tax on the gain, but the USS pension just seems to be a multiple of your salary and you are paying tax on all of that each year, and if that's the case there would be no US tax to pay on it.

OK - this I understand. But since I will be paying UK income tax on the paid out money anyway (assuming I am retiring in the UK which is most likely) can't I just do the standard foreign tax credit and I will not have to pay double taxation?

What I'd do would be to exclude your 6.5% under the treaty and 1/80 of your salary each year as your annual accrued pension value.

And the employers 16%?

I guess I am confused because if I understand, if I you do the treaty you do not have to pay tax on gains, but pay income tax on distribution (which you have to pay in the UK anyway which would offset any US tax). So this seems better to me. If I pay the US tax on the input, then I have to also pay US tax on the accrued gains - then I can withdraw tax free but I still have to pay UK income tax so what is the gain really?

But probably I am still misunderstanding something.

Including the accrued pension benefit replaces the 16% employer contribution.

But my understanding that that 1/80th of salary was the amoung I got paid every year, not a lump sum. So the amount accrued is acutally 1/80th * number of years I will be withdrawing pension?

You get a UK tax free 3 x pension amount lump sum payout when you retire under USS in addition to your annual pension.

If you exclude your 6.5% and the employer's 1/80 of salary using the treaty you will be liable to US tax on the entire amount of your pension when you retire.

If you include yours and your employer's contributions in your income and pay tax on them (hopefully using excess FTC)  I think what you'll have to do when you retire is to use annuity tables to calculate how much of your pension is from contributions that are already taxed and then pay tax on any excess.

Including the accrued pension benefit replaces the 16% employer contribution.

Got it - and that fits in with Goya said about the 16% being variable - the accrued benefit is more properly defined -  thanks again so much!

So I am thinking that for 2012 I will declare and pay tax on the income because I only had the pension for 4 months and the accrued benefit or employers contributions are less than the standard deduction so I think I can still use the simpler foreign earned income exemption for all my gross income (including my employee contributions) and cover the employers contributions with the standard deduction and still have nothing to pay. I thought I would do this since I saw it suggested that invoking the treaty can increase your risk factor for the streamlined program.

Then for 2013 which will be a normal timely return I can invoke the treaty as you suggest with accrued benefit and my contribution (I will by then have a full year of accrued benefit to put on).  Although I didn't realise the lump sum was tax free in the UK so maybe it is better to go the US taxed route throughout.

I still don't know what to do but I think I am less confused than I was this morning so really thanks a lot for your help!

Regarding US taxation of the lump sum:

From http://www.mrcaptax.com/article/foreign-pension-plan/

As to the distribution, the accepted rule under the Treaty is that a benefit received as pension by a resident of one country can only be taxed by the country where the employee resides. In case of lump sum payments, the accepted rule is that the distribution may be taxed only by the country where the plan was created. But, like in other treaties, the US maintains the privilege or right to impose tax on its nationals on both lumps sum and periodic distributions. By applying the foreign tax credit regulation, double taxation is precluded.

So the lump sum distribution should be taxed in the country the plan was created (UK), but the US maintains the right to impose tax... so if I was living in the UK would I definitely have to pay US tax on the lump sum?

yes, as the law stands now, you would definitely have to pay US tax on the pension lump sum, even if resident in the UK  There are IRS rulings on this. The reasoning is that the treaty saves you from being taxed twice (UK and US), not getting out the tax altogether.
Be aware - the same reasoning holds to other things the UK doesn't tax, eg, capital gain on the sale of your primary residence - that's reportable to the US and there you most likely won't have foreign tax credits (because they go in categories). Even remortgaging triggers reporting gain to the US. I assume there's more.

you'll never understand it all in a few days - most people here seem to have taken years. And pensions are admittedly a parallel universe. What a lot of people do is use a tax advisor for a while until they get it sorted, and then figure out how to do it themselves, with the help of tax programs it is do-able. So while there's an initial cost (unfairly to be sure), it needn't go on forever.

If you do decide to use a tax advisor to understand all the ramifications (eg, if considering expatriating) it's essential to follow Guya's advice and make sure they're qualified on US and UK tax. Some tax advisors work in pairs - one for US and one for UK. I have no knowledge of how that works out.

Sorry I have another question for nun...

I don't understand how the accrued pension benefit for one year can be claimed to be 1/80 of my salary.

If I understand the USS scheme the 1/80 of salary is the amount that will be paid out every year - and they say this needs to be multiplied by 20 to obtain the capital value of the pension. So I guess to declare the capital value of accrued benefits I would need to put I think 23/80 of my salary each year (to include the 20x multiplier plus 3x lump sum). Either way this is quite a bit more than the 16% employer contribution (but I guess this way it also includes the gains which means I am not taxed on the pay out, even the lump sum).

Is this right? Should it be 20/80 or 23/80? The 20x multiplier comes from the USS Guide but will the IRS accept that? (or wil they use some other multiplier)

EDIT: But then it doesn't really make any difference does it? Either way I am paying US income tax on the lump sum and payments, I am either paying it every year, or paying it when its paid out, so isn't it simpler just to use the treaty and pay at the end and reduce the administrative load filing every year?

EDIT2: Sorry I see that it could be better to do it year by year and stay in a lower rate rather than have it all in one go and have to pay at a higher rate. But another question arises... if I put the full accrued benefit (23/80) as taxable income then actually my 6% is being taxed twice (once as full income, and once as the accrued benefit I am declaring). So after a brief moment of clarity I am again confused....

this is one for the expert -
why does 402(b) govern and not 403(b). Is it certain that IRS wouldn't accept the USS plan as qualified - similar to a 403(b)

this is one for the expert -
why does 402(b) govern and not 403(b). Is it certain that IRS wouldn't accept the USS plan as qualified - similar to a 403(b)

The very week that Leona Helmsley was sent to jail for tax evasion back in 1993 I was sent to a Helmsley Hotel in Cleveland, Ohio to attend an Ernst & Young 2 day long class on learning about qualified benefit plans; gosh it was boring! But a qualified plan by definition has to meet all of the tests under ERISA and no UK plan would bother or indeed be permitted to under UK law (as UK and US benefit plan laws are different in many many ways).

this is one for the expert -
why does 402(b) govern and not 403(b). Is it certain that IRS wouldn't accept the USS plan as qualified - similar to a 403(b)

Because a 403b is a qualified tax sheltered annuity plan for employees of US non-profit organizations and universities. By definition no UK plan comes under 403b

402b covers employer sponsored non-qualified deferred compensation plans.

OK, I am reading through everything again this morning and I think I understand things, so I would like to thank everyone again for their patience and help.

I understand the difference between invoking the treaty and just paying tax on employer + employee contributions, and I would like to take the route where I pay tax on them. I know that for some reason the employer contributions do not count as "earned income" (although I am pretty sure if I stopped work my employer would stop paying them  )

So I will put "See attached" on line 21 of my 1040 and include a seperate page where I add up the value of the employer contributions, (labelled "Employer contributions to UK pension, University Superannuation Scheme") and the negative 2555ez foreign earned income exclusion (my gross salary including the 6%). This will leave me with some taxable income but it will be under the limit. In future years I will use the tax credits rather than 2555ez. It is my responsibility to keep records of this to prove at retirement how much of the pension is US-tax paid.

Is there a better  / more official way to include multiple items inline 21?

What I am still unclear on is the issue of accrued benefits... For example:

You are required under code section 402(b) to enter the vested accrued benefit of the plan each year. This is a legal obligation and is not optional.

Where and how do I need to report this (form 3520?)? Is the value of 23/80 x salary (captial value as indicated in the USS prospectus) acceptable or do I need to find and use an IRS multiplier?
If its possible to declare and pay (offset with tax credits) tax on the full accrued benefit so the entire pension is US tax free that seems like a good idea. But how to do that in practise? I would need to somehow exclude the employer + employee contributions and put the acrued benefit (to avoid being taxed twice on both contributions and accrued benefit)? Or do the employer + employee contributions as above and add further income of [23/80*salary - (employer+employee contributions)]?

Or is this a mistake and the best one can do is taxing the contributions and the gains must be calculated at the start of retirement?