FATCA, NISA....losing touch with reality

You do a 1116 for each different category of income...so all the pensions will go on a single 1116. Being a US citizen often leads to certain parts of the treaty being ignored and that's true for how your pensions might be taxed. Assuming that you don't have any government pensions, and you are taxed on an arising basis in the UK you must pay UK tax on 90% of your foreign pensions and full UK tax on UK pensions. You then have to pay US tax on both the US and UK pensions, but you claim the foreign tax credits and apply any US tax withholding to you US taxes too, so you should get a big refund.

    Still....not enough beer......

You do a 1116 for each different category of income...so all the pensions will go on a single 1116. Being a US citizen often leads to certain parts of the treaty being ignored and that's true for how your pensions might be taxed. Assuming that you don't have any government pensions, and you are taxed on an arising basis in the UK you must pay UK tax on 90% of your foreign pensions and full UK tax on UK pensions. You then have to pay US tax on both the US and UK pensions, but you claim the foreign tax credits and apply any US tax withholding to you US taxes too, so you should get a big refund.

Perfect, thanks, that makes sense.

Would that also be true for tax on dividends and cap gains? A single 1116 for all the UK tax paid on dividends plus another 1116 for all the UK tax paid on cap gains.

Perfect, thanks, that makes sense.

Would that also be true for tax on dividends and cap gains? A single 1116 for all the UK tax paid on dividends plus another 1116 for all the UK tax paid on cap gains.

Categorizing income for foreign tax credits is a bit tricky...it can depend on the rate you pay on the money in the foreign country. Unfortunately the tutorial below doesn't have much to say about treaties and "resourced by treaty" obviously comes in to play in US/UK taxation. Pension income paid to a UK citizen living outside the US goes in the "resourced by treaty" category.

This might help

https://americansabroad.org/files/3913/3589/8026/foreigntaxcreditadams.pdf

http://apps.irs.gov/app/vita/content/24/24_01_005.jsp?level=international

I must admit that this has my head spinning.  Am I right that you have to file an IRS form 1116 for each tax credit you are claiming?

As nun has already explained, there are several 'baskets' on 1116 where certain types of foreign source income are allocated. For the average taxpayer, this would usually be a max of 2 or 3 baskets, and therefore 2 or 3 separate 1116's. Further proportioning may be required within a common source of income (basket) if certain sources are treated differently. But the number of 1116's will not increase.

If AMT enters the picture, the number of 1116's required doubles. For each of the baskets, you need one regular 1116, and one 1116AMT calculated under the unique AMT rules.

As a columnist recently stated in an article about Boris Johnson, if you reach the stage where you have to coordinate calculations for 1116, AMT, and Schedule D, your brains will slowly start flowing out your ears.  

[Nice house, F4 -- decent bungalows are not all that easy to find hereabouts]

I managed to get in 11 years at my US job before I retired and this qualified me for the retiree health benefits, medical and dental (for which I have to contribute) plus I have Medicare (taken out of my SS benefit).  As neither of these are of any use in the UK, I considered opting out but DH advised me to keep them on, with the idea that it is just possible I may end up back over there should anything "happen."  At the moment I feel that I would definitely stay here -- who wants to keep hopping back and forth with all the hassle involved?  But you never know.  Plus, it does give me health coverage whenever I'm over there visiting.  In fact, I have a dermatologist checkup scheduled for February (not standard with NHS even with a history of skin cancer)

You might have to spell it out for me. I was kind of leaning towards filing jointly in the years leading up to my wife getting her pensions.

A very reasonable question and I’ve had a rather restless night trying to figure a way to respond. These conversations force one to analyse their own opinions. I’ve decided to answer as follows:

Married filing separately versus married filing jointly


Choice:
Some will have no choice. Durham lad has no choice. Nun doesn’t have the problem. I on the other hand, do have the choice since I’m married to an NRA. You, F4m, may or may not have a choice. Does Mrs F4m have a Green Card? If so, will Mrs F4m jump through all the hoops required to no longer be subject to IRS filing? An individual, who has a Green Card, disposes of it properly with US Immigration and moves to the UK, but was an LTR in the US, may still have an IRS obligation if they have not filed the proper IRS form (8854 for the Exit Tax). If they still have an IRS obligation (and are therefore a US Person) married filing jointly may make sense.


Source of income:
Is the MAJOR proportion of your pension income and investments from the US, or from the UK/EU? Most on this site have the major proportion of their income from the UK; so generally, it makes sense to file ‘married-separately’ when married to an NRA. (The reasons will come later.) In your case, F4m, the major proportion of your family income will come from the US as it stands now (again, more on this later). Married filing jointly will be a consideration for you.

The major proportion of my pension income (90%) and investment income (100%) come from the UK/EU. It makes sense for me to file married-separate, allowing my NRA wife to invest normally. Mrs OAP can find no logical reason to hand over her private financial data to a foreign government, and she wouldn’t show the data to me anyway. I have tons of FTC’s, as long as I make sure most of my income sources fall under 1116.

There’s also the problem of one’s culture. A US-centric individual has a survival instinct based on all type of market based investments (and a need for market based investments); cash savings yield no tax benefits; available deductions, itemised deductions, thresholds for % brackets, AGI, and on and on as required for existence in the US tax environment. For the UK/EU-centric filer, market based investments are required much less and cash savings can yield substantial tax benefits. On a 1040 the filer has few advantageous deductions, there’s usually little logic to filing itemised deductions, and thresholds and % brackets mean nothing since they have ample FTC’s to offset most, if not all, tax due (unless they fall under NIIT).


What is lost by filing married-jointly:
First of all, a non-US Person (an NRA spouse), resident in the UK, can invest in any and every type of bank or investment account on offer. A US Person will be prohibited from acquiring a few of the accounts available. The situation may become more pronounced as FATCA slowly unwinds over the next 2 to 3 years.

Of the following list, a US Person can partake of all the sources of income, but the tax free status will be lost and the onerous form filing required for certain sources on a US return will become ‘The Journey from Hell’. If you employ an accountant, they will seek adequate compensation to accompany you on the Journey.

A non-US Person NRA spouse can: have a cash ISA, tax free; have a stocks and shares ISA, tax free: have an NS&I special high interest account for pensioners; invest in any unit trust offering; invest in any high interest bank account with split cash/unit trust offerings; invest in any PFIC type investment; have SIPPs; invest in a UK business; become a partner in a UK partnership; sell a primary residence for a profit, tax free; collect and resell a non-business automobile for a profit, tax free; receive any UK Government or local Council benefit (these are too numerous to list separately, and some are for every day needs) , often tax free; have a winter fuel payment, tax free; win the lottery, tax free; and on and on.


Moving the source of major income:
If you are to be resident in the UK for the rest of your life, do you still want the major source of your income from the US? This is a serious question. I’ll avoid going into the prognostications of economic growth and pitfalls of the US versus the UK/EU. The UK economy runs on the Pound Sterling. Exchange rates WILL vary. Over the long haul, they usually even out, but having a DEPENDABLE amount of funds from an income source within the UK is reassuring for your day to day financial comfort.


Renouncing US citizenship, with a majority of foreign sourced income:
I’m not going to go into this, other than to say will you still want, and be capable of, staying on top of US tax filing when you’re 85? Would your finances support professional assistance at 85? What is your goal, simplicity or complication? A number of individuals of our age are considering this option, seriously.


OTHER COMMENTS – It would be good if others who have been resident in the UK with an NRA spouse could comment if they feel filing married – joint is the better option.

Moving the source of major income:
If you are to be resident in the UK for the rest of your life, do you still want the major source of your income from the US? This is a serious question. I’ll avoid going into the prognostications of economic growth and pitfalls of the US versus the UK/EU. The UK economy runs on the Pound Sterling. Exchange rates WILL vary. Over the long haul, they usually even out, but having a DEPENDABLE amount of funds from an income source within the UK is reassuring for your day to day financial comfort.

For people who have spent most of their careers in the US moving the source of income might be difficult. IRAs, pensions and SS are not easy to move. If you plan long term you can move IRAs to ROTHs without major tax implications, but for those with large IRA balances good tax planning requires that most of the IRA balance stay in the US. Also there is the issue of PFIC and FATCA. As a US citizen I would never move my taxable investments from the US because it would greatly restrict my investment choices. The UK reporting funds rules are a little bit better than the US PFIC. Of course you could just move the money to the US and buy individual shares, but that has it's own complications, the Vanguard ETF solution is the best IMHO for a US citizen in the UK.

1116 income baskets are confusing to me.

US pensions (including IRAs etc) would go in the "income resourced by treaty" if you pay tax on them in the UK.......so into which bucket do US capital gains, dividends and interest go if you use the treaty? eg for the dividends you pay 15% to the US first under the treaty.

For people who have spent most of their careers in the US moving the source of income might be difficult. IRAs, pensions and SS are not easy to move.

Yes, I agree.

I almost put into the post the following disclaimer: I am pig-ignorant on US pensions and investing. If I open a thread on Bogleheads, the comments may as well have been written in Chinese.

This section, moving source of income, was, for me, the one contentious area in the post. It's not necessarily about tax implications. I understand that some sources are immoveable, like works pensions and SS/State pensions. 19% of my total yearly revenue source are EU, and I won't move them. 10% of the total yearly revenue source is US SS, and I can't move it. The contentious bit is the thought of moving general investments and cash.

I understand the value of a diversified portfolio. For the country diversification element, part Pounds Sterling, part US Dollars, and part Euros works for me. The point of that section has to do with mind set. Here's where, having read thousands of your posts from various sites, I suspected we might have a disagreement. There may be some who read this (if there are any left other than you and I) who are less enthused about having funds always subject to currency fluctuations. Others, like yourself, have other priorities. It's a subject for debate, and let the debate roll. It's always good to hear different perspectives. 

 

1116 income baskets are confusing to me.

US pensions (including IRAs etc) would go in the "income resourced by treaty" if you pay tax on them in the UK.......so into which bucket do US capital gains, dividends and interest go if you use the treaty? eg for the dividends you pay 15% to the US first under the treaty.

I have a question: if I have a US final salary company pension from the US; I have the total monthly proceeds sent to the UK where I am resident and pay tax on the arising basis; the funds are therefore taxed in the UK as well as possibly the US; are you saying that pension is subject to "income resourced by treaty"? Where's the treaty? I do understand the treaty considers a calculation for taking tax credits in the UK for taxes paid in the US to offset taxes paid in the US for credits in the UK. It can be done, but that way lies madness. Well, for my simplistic approach anyway.

I understand the value of a diversified portfolio. For the country diversification element, part Pounds Sterling, part US Dollars, and part Euros works for me. The point of that section has to do with mind set. Here's where, having read thousands of your posts from various sites, I suspected we might have a disagreement. There may be some who read this (if there are any left other than you and I) who are less enthused about having funds always subject to currency fluctuations. Others, like yourself, have other priorities. It's a subject for debate, and let the debate roll. It's always good to hear different perspectives.  

 

I don't think there's much disagreement that currency is important, but we might address it differently. If you want to invest in essentially pounds or euros, but have money in the US you just have to buy a UK reporting mutual fund that specializes in the UK or Europe or stocks in UK companies. So if I retire to the UK I will probably adjust the geographical balance of my investments. Also I intend to keep a few years of cash in a UK savings bond ladder to ride out any massive currency fluctuations.

If a US citizen wants to be in the stock market while living in the UK they can buy individual stocks, pay a company like MASECO to help them with investing and compliance, buy UK base mutual funds and deal with PFIC or buy US based mutual funds and deal with UK reporting rules.

I have a question: if I have a US final salary company pension from the US; I have the total monthly proceeds sent to the UK where I am resident and pay tax on the arising basis; the funds are therefore taxed in the UK as well as possibly the US; are you saying that pension is subject to "income resourced by treaty"? Where's the treaty? I do understand the treaty considers a calculation for taking tax credits in the UK for taxes paid in the US to offset taxes paid in the US for credits in the UK. It can be done, but that way lies madness. Well, for my simplistic approach anyway.

The ACA explanation of FTC says that:

3. A pension paid to a US citizen who is resident abroad generally goes into the
"income resourced by treaty" basket if you are taxable on your worldwide
income in that country.

If you remember there have been arguments before about whether pensions go in the passive bucket or not. The fact that you are a US citizen and taxed on an arising basis
removes a lot of the treaty's provisions so I'm confused too. All that is really in effect it seems to me is who gets first bite at the cherry.

What if you don't use the treaty?

If you remember there have been arguments before about whether pensions go in the passive bucket or not.

SSSSh   d..o.n.'t m.e.n.t.i.o.n t.h.e w.a.r

I know you did, but I think you got away with it.

You guys are killing me.....in a good way I think. I have to keep re-reading these posts and about 25% sinks in. I keep repeating to myself......"find the easiest way, and idiot like me should be able to understand it then."

The ACA explanation of FTC says that:

3. A pension paid to a US citizen who is resident abroad generally goes into the
"income resourced by treaty" basket if you are taxable on your worldwide
income in that country.
That statement was in Adams' first release of that paper, which was way back when there 9 (?) baskets. I could never find any other source that agreed with it.

<snip>. The fact that you are a US citizen and taxed on an arising basis
removes a lot of the treaty's provisions so I'm confused too. All that is really in effect it seems to me is who gets first bite at the cherry.

What if you don't use the treaty?
In effect, you do use the treaty. In spite of the fact that we both know the treaty is not written for US Persons, there is an astounding display of benevolence by the US which allows a US Person to take a credit against certain tax paid to HMRC. Pay the US, pay the UK, use 1116 for a credit against the US tax, get refund cheque in the post.

That's where my simplistic (and excessively UK vs. US taxed) approach ends.