Should UK State Pension be included in Gross Income?

The 1040 instructions say:

**Gross income means all income you received in the form of money, goods, property, and services that is not  exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2014 or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the instructions for lines 20a and 20b to figure the taxable part of social security benefits you must include in gross income. Gross income includes gains, but not losses, reported on Form 8949 or Schedule D. Gross income from a business means, for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C, line 7, or Schedule F, line 9

Two questions:

1. If pension income is non-US-taxable because of a Tax Treaty provision (and the Tax Treaty provision is exempt from the saving clause), is the pension income "exempt from tax", or does it have to be included in Gross Income and then excluded citing the Treaty?

2. Does the term "social security benefits" include UK social security benefits. (Neither (a) nor (b) applies.)

Opinions sought.  I've seen different views about both points, in forums, but can't find any definitive statement in IRS documentation.  If anyone knows of any such IRS statement, could you please point me to it?  Thanks.

The 1040 instructions say:

Two questions:

1. If pension income is non-US-taxable because of a Tax Treaty provision (and the Tax Treaty provision is exempt from the saving clause), is the pension income "exempt from tax", or does it have to be included in Gross Income and then excluded citing the Treaty?

2. Does the term "social security benefits" include UK social security benefits. (Neither (a) nor (b) applies.)

Opinions sought.  I've seen different views about both points, in forums, but can't find any definitive statement in IRS documentation.  If anyone knows of any such IRS statement, could you please point me to it?  Thanks.

RE: UK State pension

Social Security pensions are covered in Article 17 of the Treaty. With that in mind, the following chart has gained popularity recently.

http://intltax.typepad.com/894_pension_taxation_uk.pdf

As for your question re: social security benefits, please define what you mean by social security benefits.

RE: UK State pension

Social Security pensions are covered in Article 17 of the Treaty. With that in mind, the following chart has gained popularity recently.

http://intltax.typepad.com/894_pension_taxation_uk.pdf

Thanks for the link, that's interesting.  I don't understand it though.  According to the flowchart my UK local authority pension is taxable by the US because I am or rather was a citizen, even though Article 19 says it's not US-taxable and Article 19 is protected from the Saving Clause.  Why does the writer of the flowchart think it's US-taxable, do you know?

As for your question re: social security benefits, please define what you mean by social security benefits.

The UK State pension.

Thanks for the link, that's interesting.  I don't understand it though.  According to the flowchart my UK local authority pension is taxable by the US because I am or rather was a citizen, even though Article 19 says it's not US-taxable and Article 19 is protected from the Saving Clause.  Why does the writer of the flowchart think it's US-taxable, do you know?

I don't know. Here's the IRS take on UK local authority pensions under the Treaty.

https://www.irs.gov/pub/irs-pdf/p901.pdf

Page 33, 2nd half of explanation on pensions.

Remember (and I'm sure you do) any filing on 1040's will be for the time (and conditions) when you were a US citizen. Treaties are not applicable to 8854.

I don't know. Here's the IRS take on UK local authority pensions under the Treaty.

https://www.irs.gov/pub/irs-pdf/p901.pdf

Page 33, 2nd half of explanation on pensions.

That's just what I was looking for!  Thank you so  much 

Pensions paid by, or funds created by, the United Kingdom, its political subdivisions, or local authorities for services performed for the United Kingdom are exempt from U.S. income tax unless the recipient is both a resident and citizen of the United States.

I was at the time a citizen but not a resident, so that pension, at least, is indeed exempt.

Remember (and I'm sure you do) any filing on 1040's will be for the time (and conditions) when you were a US citizen. Treaties are not applicable to 8854.

Yes, thanks, this is for the 5 prior years.  Phil Hodgen says the 1040NR for the non-citizen part of the dual status year only needs US-source income to be included, which seems logical.

Found this:

Gross Income
This includes all income you receive in the form of money, goods, property, and services that is not exempt from tax. In determining whether you must file a return, you must consider as gross income any income that you exclude as foreign earned income or as a foreign housing amount. If you are self-employed, your gross income includes the amount on the Gross Income line of Schedule C (Form 1040), Profit or Loss from Business, or the Gross Receipts line of Schedule C-EZ (Form 1040), Net Profit from Business.

https://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad---Filing-Requirements

and this:

Foreign Social Security Pensions
Most income tax treaties have special rules for social security payments.  In many cases, foreign social security payments are taxable by the country making the payments.  Unless specified otherwise in an income tax treaty, foreign social security pensions are generally taxed as if they were foreign pensions or foreign annuities. Unless a tax treaty allows it (see, e.g., the USA-Canada treaty), they are not eligible for exclusion from taxable income the way a U.S. social security pension might be.

https://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions

and this:

Disclosure of a treaty-based position that reduces your tax. If you take the position that any U.S. tax is overruled or otherwise reduced by a U.S. treaty (a treaty-based position), you generally must disclose that position on Form 8833 and attach it to your return. If you are not required to file a return because of your treaty-based position, you must file a return anyway to report your position.

from "Publication 901: US Tax Treaties" previously cited by TheOAP.

Putting these three together, I sadly conclude that I should include both the UK State Pension and the LA Pension as Gross Income, and file 8833 for the LA Pension.  Which is what I thought before, until I confused myself.  I seem to be going round in circles.  Overthinking.  I shall stop.

Your residency, citizenship and the source of the "pension" are vital. I'll assume you are filing as a US citizen resident in the UK.

US SS is only taxable in the UK (Article 17.3) it should not be entered on the 1040.

UK state pension is taxable in the UK and in the US because it is not a cross border payment (Article 17.3) You will have to include it on the 1040 and and take the FTC.

UK Government (includes local authorities) pension will be taxable by the US and the UK, no need to resource to claim a FTC on the 1040.

US Government pension (includes state pensions) will be taxable in both the UK and the US, resource by treaty to claim FTC on 1040.

UK private pensions are taxable in the US and the UK, no need to resource to claim FTC on 1040

US private pensions are taxable in US and UK, need to resource by treaty to claim FTC.

If you are getting payments other than lump sums the tax free status of the payment in one country is honored in the other country....so ROTHs are tax free in the US and the UK.

Hi Nun, thanks for your help.  Born in the US long ago (1940), UK resident since 1965, UK citizen since 2001, recently made aware of the existence of CBT, now renounced (Oct 7), and keen to finish up the "tax citizen" side of things as quickly and quietly as possible with the bare minimum of filing/reporting.

The tax credits aren't relevant in my case, as I have no US income.  I have the UK state pension and a local authority pension which when added together put me over the 1040 threshold.  If I could omit the state pension from gross income there would be no requirement to file 1040s and as I've done the six prior years of FBARs I would be all set to kiss America bye-bye forever next January.  But alas, it seems the State pension can't be omitted from gross income so I'll just have to fill in the 1040s.

My other pension is covered by Article 19, as confirmed by the publication TheOAP kindly pointed me to.  Apparently I'll also have to add Form 8833 to the pile to support this position. 

And then print out multiple copies of these pointless papers, trundle them to the P.O., pay out for overseas tracked delivery to the various IRS hideaways, etc etc...

Never mind.  At least there's no tax "due" - that would be seriously annoying      I'm happy to be getting out relatively lightly.  And am very very grateful for the help I've received in this and other forums.

Hi Nun, thanks for your help.  Born in the US long ago (1940), UK resident since 1965, UK citizen since 2001, recently made aware of the existence of CBT, now renounced (Oct 7), and keen to finish up the "tax citizen" side of things as quickly and quietly as possible with the bare minimum of filing/reporting.

The tax credits aren't relevant in my case, as I have no US income.  I have the UK state pension and a local authority pension which when added together put me over the 1040 threshold.  If I could omit the state pension from gross income there would be no requirement to file 1040s and as I've done the six prior years of FBARs I would be all set to kiss America bye-bye forever next January.  But alas, it seems the State pension can't be omitted from gross income so I'll just have to fill in the 1040s.

My other pension is covered by Article 19, as confirmed by the publication TheOAP kindly pointed me to.  Apparently I'll also have to add Form 8833 to the pile to support this position. 

And then print out multiple copies of these pointless papers, trundle them to the P.O., pay out for overseas tracked delivery to the various IRS hideaways, etc etc...

Never mind.  At least there's no tax "due" - that would be seriously annoying      I'm happy to be getting out relatively lightly.  And am very very grateful for the help I've received in this and other forums.

FTCs are relevant to you on your 1040 because you have UK income. Any tax you pay on your pensions in the UK can be claimed as a FTC on your US taxes. You might be below the UK personal allowance in which case there would be no UK tax and nothing to claim back.

Your UK local authority pension is definitely taxable in both the US and the UK given your dual citizenship and residency. If you read Article 19 carefully you should come to that conclusion.

The UK state pension is a bit more tricky though. The spirit of Article 17.3 is to make social security payments from either country only taxable in the country of residence....I believe that because Article 17.3 is excluded from the Saving Clause. However, the wording of Article 17.3 only excludes cross border SS payments from taxation by the country paying the SS. A UK state pension paid to a US citizen living in the UK is not a cross border payment and so strictly speaking the US can tax it. However, I'm not sure how the IRS interprets Article 17.3 in practice.

FTCs are relevant to you on your 1040 because you have UK income. Any tax you pay on your pensions in the UK can be claimed as a FTC on your US taxes.

Happily, no US taxes seem to be due, so the tax credits wouldn't be useful in my case.

Your UK local authority pension is definitely taxable in both the US and the UK given your dual citizenship and residency. If you read Article 19 carefully you should come to that conclusion.

IRS Publication 901, p33 (kindly brought to my attention earlier in this thread by TheOAP) says this:

Pensions paid by, or funds created by, the United Kingdom, its political subdivisions, or local authorities for services performed for the United Kingdom are exempt from U.S. income tax unless the recipient is both a resident and citizen of the United States.

I'm not a resident of the US, so I shall take Publication 901 at its word and claim the treaty position and leave the IRS to decide if it accepts the claim or not.

The UK state pension is a bit more tricky though. The spirit of Article 17.3 is to make social security payments from either country only taxable in the country of residence....I believe that because Article 17.3 is excluded from the Saving Clause. However, the wording of Article 17.3 only excludes cross border SS payments from taxation by the country paying the SS. A UK state pension paid to a US citizen living in the UK is not a cross border payment and so strictly speaking the US can tax it. However, I'm not sure how the IRS interprets Article 17.3 in practice.

Yes, I've scratched my head on that one and decided that since it was unclear, I would put it down as taxable, which would still leave me with no tax to pay.  I'm thinking now that perhaps the sensible thing to do is claim the respective treaty positions for both pensions, and file 8833s for both, given that I genuinely cannot figure out what the devil the Tax Code requires or the IRS expects. 

With regard to Article 19, the Technical Explanation says (in part):

Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of services rendered to that State or a subdivision or authority are in the form of social security benefits, however, those payments are covered by paragraph 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support). The result will differ depending upon whether Article 17 or 19 applies, since social security benefits are generally taxable exclusively by the residence country while government pensions are generally taxable exclusively by the source country. The result will be the same only when the payment is made to a resident and national of the other Contracting State. In such a case, government pensions, like social security payments, are taxable only in the residence country.

To me, this seems to confirm that Article 19 applies in the case of the LA pension, as it is indubitably a pension paid to a retired employee of [a subdivision of] the government of a Contracting State (the UK), and the UK is both the source country and my country of residence and I'm also a UK national.  Article 17 doesn't apply to my LA pension, as it's not paid in the form of social security.  I note however the parenthetical reference to social security payments as taxable only in the residence country.  I'll tuck that away to call on in support of claiming Article 17 for my State Pension.

Be interested to hear contrasting interpretations of the above lest I may be reading it wrong.

I removed this to think about it a bit more

Since last posting, I've been reading "INTM504030 - Double taxation treaties: Beneficial ownership: What beneficial ownership means " (http://www.hmrc.gov.uk/manuals/intmanual/intm504030.htm)

and am now considering relying on Article 17.1(a), as I can see no reason why I would not be seen as the beneficial owner of my UK State Pension.  17.1 is exempt from the saving clause.  Interested in any opinions on this.

I've also been reading an Inland Revenue article from 2003 which comments on the revisions to the Treaty.  (http://webarchive.nationalarchives.gov.uk/20110202175952/http://www.hmrc.gov.uk/bulletins/tbse6.pdf)

The section on Article 17 starts:

Article 17 is a fairly standard pensions article, which provides for the taxation of pensions and other similar remuneration only in the state of residence of the beneficial owner.

Since last posting, I've been reading "INTM504030 - Double taxation treaties: Beneficial ownership: What beneficial ownership means " (http://www.hmrc.gov.uk/manuals/intmanual/intm504030.htm)

and am now considering relying on Article 17.1(a), as I can see no reason why I would not be seen as the beneficial owner of my UK State Pension.  17.1 is exempt from the saving clause.  Interested in any opinions on this.

I've also been reading an Inland Revenue article from 2003 which comments on the revisions to the Treaty.  (http://webarchive.nationalarchives.gov.uk/20110202175952/http://www.hmrc.gov.uk/bulletins/tbse6.pdf)

The section on Article 17 starts:

UK state pension is covered by the SS paragraph. So don't get too involved just accept that you should use Article 17.3. How you interpret 17.3 is the question.

For the UK LA pension you need to see if Article 19 even applies in your case. So, from Article 1, we have:

5. The provisions of paragraph 4 of this Article shall not affect:
............
b) the benefits conferred by a Contracting State under paragraph 2 of Article 18
(Pension Schemes) and Articles 19 (Government Service), 20 (Students), and 28
(Diplomatic Agents and Consular Officers) of this Convention, upon individuals who
are neither citizens of, nor have been admitted for permanent residence in, that State.

As you are a US/UK citizen resident in the UK it seems to me that the Saving Clause applies and Article 19 can be ignored and both the US and the UK can tax you according to their domestic laws. If you read the Technical notes this becomes more clear.

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving
clause. The benefits referred to are all intended to be granted to temporary residents of a
Contracting State (for example, in the case of the United States, holders of non-immigrant visas),but not to citizens or to persons who have acquired permanent residence in that State. If beneficiaries of these provisions travel from one of the Contracting States to the other, and remain in the other long enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in the U.S. context, they do not become "green card" holders) and are not citizens of that State, the host State will continue to grant these benefits even if they conflict with statutory rules. The benefits preserved by this paragraph are: the host country exemptions for the following items: government service salaries and pensions under Article 19 (Government Service); certain income of visiting students, trainees, teachers, professors, and researchers under Articles 20 (Students) and 20A (Teachers); the income of diplomatic agents and consular officers under Article 28 (Diplomatic Agents and Consular Officers); and the beneficial tax treatment of pension fund contributions under paragraph 2 of Article 18 (Pension Schemes).

However, as you and the OAP point out in IRS 901 is says

Pensions paid by, or funds created by, the United Kingdom, its political subdivisions, or local
authorities for services performed for the United Kingdom are exempt from U.S. income
tax unless the recipient is both a resident and citizen of the United States.

So no US tax is due because of the way the IRS chooses to treat UK Government pensions, not because of the treaty.

Thanks, nun.  I'm pondering your comments, and will come back to them tomorrow.  Meanwhile, in examining Form 8833 and its instructions (https://www.irs.gov/pub/irs-pdf/f8833.pdf), I've encountered another question.

The instructions say:

Exceptions from reporting. See Regulations section 301.6114-1(c) for examples of treaty-based return positions taken by taxpayers for which they are not required to make disclosure.

The section referred to (https://www.law.cornell.edu/cfr/text/26/301.6114-1) says in paragraph (c) that 8833 reporting is waived for (sub-paragraph 1-iv) a treaty return position

That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;

So now I'm wondering if I needn't fret about which paragraph of the DTT I should cite, but just pencil in on the 1040 what the pensions actually are, list them as non-taxable, and leave it to the IRS to override that if they see fit.

What do you think?

Your help is much appreciated.