How to report UK workplace pension?

Well I spoke to an advisor at the IRS in London today.

He gave a quite clear and unequivocal answer that one should use the treaty provision and that:

• employer contributions do not need to be declared anywhere
• no 8833 form is required (until you are receiving money from the plan)
• since it is an employer plan rather than an individual investment account (ISA or SIPP) there is no need to "declare accrued benefits" on a yearly basis

Since this obviously simplifies things a lot I guess I will do this.

Well I spoke to an advisor at the IRS in London today.

He gave a quite clear and unequivocal answer that one should use the treaty provision and that:

• employer contributions do not need to be declared anywhere
• no 8833 form is required (until you are receiving money from the plan)
• since it is an employer plan rather than an individual investment account (ISA or SIPP) there is no need to "declare accrued benefits" on a yearly basis

Since this obviously simplifies things a lot I guess I will do this.

Well that must be a satisfying result. There is wording in IRS documents that the 8833 is not required for pensions, but most professional advisors would probably file one.

I imagine the embassy person did not mention deferral limits because (as I now realize) there are no limits for non-qualified plans.

I think this is the best solution for you. Highly compensated US expats who expect to retire to the US would probably do better by not using the Treaty and paying tax on the contributions as they go into the pension. Now I'm sure you'll start investigating expatriation.

Thanks nun.

I don't really want to expatriate at the moment... part of what made me aware of filing requirements was the fact I would like to work in the US for a few years in the mid term.

Anyway I thought I would finish this off today but I still cannot decide whether to take the treaty or declare the contributions. Taking the treaty seems a really crappy option since effectively you lose the main tax advantage of the pension (tax-free lump sum). I guess I want to declare employer contributions to maximize tax-free basis in the pension from a US point of view, but use the treaty to not have to declare the "gains" in the pension every year. Also if I do work in the US then obviously will be paying more tax and so I would have to pay for the gains in my pension every year.

I could declare the accrued benefits every year - but I am not sure how. I understand they should go on a Schedule D, but that seems geared towards transactions (long term or short term) and I do not know how to include the pension benefits. Does anyone have any advice on where on schedule D to put the accrued benefit (I know how to calculate this as value at end of year - value at start of year - all contributions)?

Or alternatively can I do the treaty, not declare the benefits but declare the employer contributions to increase my tax-free basis for the future (at no cost as present)?

If you stay a US citizen you will have to pay US tax on your UK tax free lump sum, but the amount of that tax will be determined by your tax free basis in the pension. So you need to weight the simplicity of using the treaty to exclude contributions against using foreign tax credits to pay the tax on the contributions as they go in to the pension. To make this decision you should do your taxes both ways to see how much better off you are and then factor in your future plans.

Thanks. I get that part. But can I declare and pay tax on the employers contributions without having to declare and pay tax on the "accrued benefits" each year.

Ie I want to use the treaty to have it treated as a pension (gains not taxed until distribution), but I don't want to use the part that allows me to deduct the contributions (since there seems to be no point in doing that).

And also - how is the calculation done at retirement? I guess after 35 years of inflation that actual sums I'm contributing in these years are going to be very small in relation to the final inflation adjusted value of the pension so perhaps it doesn't make so much difference now (since in any case the taxed basis in the pension will be extremely low).

I guess I am struggling to understand the point of a pension. If everything is taxed as income on distribution how is it any advantage over investing after-tax income and paying capital gains each year (capital gains is supposed to be less than income tax?). The UK one has the tax-free lump sum, but without that it seems to be worse than just a private non-tax sheltered investment account? But I must be missing something...

Well the idea is that your income tax will be less in retirement than when working and also your money accumulates tax deferred.

You'd calculate the US tax free portion of any pension by doing the standard IRS annuity calculation.

FYI as I have paid for all of my UK SS with after tax money and it is treated as an an annuity on my 1040 I'll be calculating the tax free portion of my payment and only paying tax on amounts above that.

Well I spoke to an advisor at the IRS in London today.

He gave a quite clear and unequivocal answer that one should use the treaty provision and that:

• employer contributions do not need to be declared anywhere
• no 8833 form is required (until you are receiving money from the plan)
• since it is an employer plan rather than an individual investment account (ISA or SIPP) there is no need to "declare accrued benefits" on a yearly basis

Since this obviously simplifies things a lot I guess I will do this.

Hi everyone,

I know this post is over a year old, but I found it when trying to work out how to file my taxes this year, so I hope you don't me resurrecting it.

I have lived in the UK for 9 years and file my US taxes each year, like clockwork. They have been very simple; forms 1040 and 2555-EZ and all income falling well below the FEIE and standard deduction.

In October I started a job at a University and joined their defined benefit pension scheme (USS).

The quote above from thropere implies that there is a simple solution to "use the treaty provision". I would like to use the most simple option and I do not mind deferring any US tax until I draw from the pension in 30 years time. 

Can anyone please help me out by letting me know what additional form I need to "use the treaty provision" here? If there is no additional form, do I need to put any information on the 1040?

Thanks all!

Cheryl

The only additional US tax form you might need is an informational 8938 when your accrued benefit exceed the FATCA threshold.

Election of the treaty is the default in the case of pensions, so there's no need to file forms to exempt your contributions and gains from US tax. Your tax deferral should put you even further below the FEIE and there is no need to change anything else on your 1040.

The treaty is elective so the default position under US domestic law is that it does not apply unless its benefits are claimed. There is nothing in Treasury Regulations (found here: http://www.law.cornell.edu/cfr/text/26/301.6114-1) that waives  the requirement to annually file IRS Form 8833 when claiming relief under Article 18, paragraphs 1 and 5 of the US/UK tax treaty.

I would suggest annually filing an 8833 and including the value of the plan in deciding if your foreign financial assets exceed the threshold for filing of Form 8938.

The IRS will start accepting returns for 2014 from 20 January - don't forget to include new Form 8965 this year too as it is unavoidable.

Thropere, I sympathise with your desperation - I've been there!  I'm a UK citizen married to a (now former) US citizen, for whom I did US tax returns for over 40 years.

For what it's worth, I dealt with his pension payments (also a university scheme) on the income tax by returning his gross annual salary i.e. I just didn't claim any deduction for his contribution.  Like you, his salary was always covered by the Foreign Earned Income Exclusion.  I didn't gross up to try to account for the employer contribution.

By the time they brought in the 8938 FATCA form, he'd retired and was drawing down.  But for you, have a look at the 8938 Instructions:

Value of an interest in a foreign estate, foreign pension plan, and foreign deferred compensation plan.
If you received no distributions during the tax year and do not know or have reason to know based on readily accessible information the fair market value of your interest, use a value of zero for the interest.

I am by no means an expert and I don't know if my way of dealing with the pension contributions was 100% correct but it made sense to me.

I have to say that our US tax life became more complicated when he retired and had only unearned income - as pensions are classified.  The combination of that plus the 8938 and the FBAR made him decide to renounce.  And so this year, we have only one tax return to complete!

Good luck.

I would suggest annually filing an 8833 and including the value of the plan in deciding if your foreign financial assets exceed the threshold for filing of Form 8938.

The IRS will start accepting returns for 2014 from 20 January - don't forget to include new Form 8965 this year too as it is unavoidable.

I would do this too. The IRS office at the US Embassy doesn't think an 8833 is required for pension contributions and gains, but to be on the safe side file one and claim exemption form current US tax on contributions (Article 17) and on gains (Article 18).

Don't worry too much about all this. You are thinking and doing far more than many people and the stories of dire consequences and complications are over blown.

This long thread about one common issue (workplace pension) serves to make the point that it is nigh impossible for an ordinary person, perhaps even a highly intelligent university academic, to correctly complete a U.S. tax return if residing abroad. How are we supposed to know how and what to quote from the UK/US Tax Treaty? The advice you obtain from a forum like this can be helpful, but it is sometimes difficult to know whether the contributors are knowledgeable or not. The advice one obtains by phoning the IRS helpline in London is not always correct. How we envy those in the U.S. who need no more than a $29.99 TurboTax Deluxe program.

Readers may like to contribute to the following survey, perhaps as a way of letting off some steam. Dr. von Koppenfels is at the University of Kent Brussels School in International Studies and is the author of academic research about Americans abroad (American immigrants to other countries). She has written a book: Migrants or Expatriates? Americans in Europe. She is now doing research for a new book and is asking for people to participate. There is an opportunity in the survey to tell her about tax preparation problems with which expats are burdened.  https://www.surveymonkey.com/s/the_US_and_you

This long thread about one common issue (workplace pension) serves to make the point that it is nigh impossible for an ordinary person, perhaps even a highly intelligent university academic, to correctly complete a U.S. tax return if residing abroad. How are we supposed to know how and what to quote from the UK/US Tax Treaty? The advice you obtain from a forum like this can be helpful, but it is sometimes difficult to know whether the contributors are knowledgeable or not. The advice one obtains by phoning the IRS helpline in London is not always correct. How we envy those in the U.S. who need no more than a $29.99 TurboTax Deluxe program.

In an area as complex of US tax the idea of "correct" is a difficult one; there are many paths and possible end points that result in compliance with US tax. As far as UK workplace pensions is concerned you can treat them in several ways of varying complexity. The IRS office at the Embassy says to do nothing on current tax filings, it's probably advisable to file an 8833 though. The chance of audit is very low. Here is a useful thread.

http://talk.uk-yankee.com/index.php?topic=81730

For what it's worth, I dealt with his pension payments (also a university scheme) on the income tax by returning his gross annual salary i.e. I just didn't claim any deduction for his contribution.  Like you, his salary was always covered by the Foreign Earned Income Exclusion.  I didn't gross up to try to account for the employer contribution.

Since he has renounced already and no longer files a US return, the following is no longer relevant; but for anyone still in the system, the following may be of value.

By virtue of your reporting his own contributions to the pension scheme (gross salary reported on FEIE), IMHO, he now has a 'basis' in the pension. If funds were deducted from his salary for the scheme, then he has declared those funds for tax purposes and should not be taxed on those funds contributed when they are withdrawn as part of the draw down benefits. He should be able to proportionally reduce the amount of his yearly benefit for tax reporting on 1040 (line 16b) by those pre-taxed contributions. Where foreign pensions are involved, the method of achieving the correct amount (determining the proportion of his basis) is by use of Publication 939, general rule for pensions and annuities. There are worksheets in 939 to make the calculations. 939 can not be of any benefit until one knows the exact final yearly or monthly amount which they are entitled to, as well as other final yearly income amounts. But you need very accurate records for each year you made contributions that were declared for US tax purposes, and the exact yearly amounts.

For US Qualified pensions, you are allowed to use the simplified method on line 16b to calculate your basis (the amount to reduce). Since foreign pensions are not qualified, they must use the general rule to find the reduction.

This is my amateur opinion, and others may disagree with this.

I have to say that our US tax life became more complicated when he retired and had only unearned income - as pensions are classified.

I agree with this comment, 100%.