Should UK State Pension be included in Gross Income?

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.

It's beyond my brain, I have to admit.  The UK Guidance and the US Technical Explanation both say that (in the words of the UK Guidance)

Article 17(3) now specifically provides for exclusive residence-country taxation of social security benefits.

Yet, as you've pointed out, 17.3 actually only refers to cross-border social security benefits. 

I give up.  I will put it down as non-taxable, making clear what it is, and leave it to the IRS to decide.

For the UK LA pension you need to see if Article 19 even applies in your case.
[..]
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.

However, as you and the OAP point out in IRS 901 is says
So no US tax is due because of the way the IRS chooses to treat UK Government pensions, not because of the treaty.

Also agreed.  As with the UK State pension, I will list it as non-taxable, explaining what it is, and leave it to the IRS to decide.

I'm still baffled by the US approach to taxation, not to mention logic and the English language, but there we are, it is what it is.  Thanks for your comments.

I removed this to think about it a bit more

 

How many times, and on how many different forums, have you, myself, and others struggled to make sense of this.

It's beyond my brain, I have to admit.  The UK Guidance and the US Technical Explanation both say that (in the words of the UK Guidance)......
Yet, as you've pointed out, 17.3 actually only refers to cross-border social security benefits. 

I give up.  I will put it down as non-taxable, making clear what it is, and leave it to the IRS to decide.

Welcome to our world. You're now a fully paid up member of the "IRS instructions are not always clear, accurate guidance does not always exist, and interpretations often rule" club. The common advice given for exempt and excluded income is always the same: no credit (exclusion, exemption) can be claimed unless it is declared on 1040 to begin with. If all income is declared, somewhere, then the key base is covered. The filing may not be correct, and if the IRS disagree, at least you have proven you have not wilfully attempted to hide income.

It's probably worth remembering that when filing streamlined, scrutiny of the return may be heightened.

Also agreed.  As with the UK State pension, I will list it as non-taxable, explaining what it is, and leave it to the IRS to decide.

I'm still baffled by the US approach to taxation, not to mention logic and the English language, but there we are, it is what it is.  Thanks for your comments.

Now that you're really getting into all this "smoke and mirrors" of trying to comply with US tax filing, and especially where pensions are concerned, won't you miss all this fun?

By and by, I agree with your conclusions for filing, although undoubtedly some will have a different opinion. You can only do what you think is correct.

Welcome to our world. You're now a fully paid up member of the "IRS instructions are not always clear, accurate guidance does not always exist, and interpretations often rule" club. The common advice given for exempt and excluded income is always the same: no credit (exclusion, exemption) can be claimed unless it is declared on 1040 to begin with. If all income is declared, somewhere, then the key base is covered. The filing may not be correct, and if the IRS disagree, at least you have proven you have not wilfully attempted to hide income.

That was my reasoning.

It's probably worth remembering that when filing streamlined, scrutiny of the return may be heightened.

Particularly if the streamlining SS number has recently renounced.      

I'm bearing that in mind, but I don't see that there's anything I can do about it.  At least I'll be out of the system, once the final forms are filed next spring.

Now that you're really getting into all this "smoke and mirrors" of trying to comply with US tax filing, and especially where pensions are concerned, won't you miss all this fun?

I did get caught up in the challenge of trying to figure out what on earth they could possibly have been trying to say, but I've recovered.   

It's been reassuring to find that I'm not alone in my mystification. And learning how to renounce, and doing it, was actually a lot of fun.     

And seriously, I very much appreciate all the good advice that you and nun and others have given me. 

By and by, I agree with your conclusions for filing, although undoubtedly some will have a different opinion. You can only do what you think is correct.

That's especially reassuring.  Many thanks.

As far as Article 17.3 goes the Technical Guidance is NOT the Treaty. Professional tax people far more worth listening to than me have pointed out the inconsistency between the actual wording of the Treaty, the Technical Explanation and what IRS agents say. The intent of Article 17.3 is to provide "for exclusive residence-country taxation of social security benefits". Unfortunately it does not do that and, as it is specifically exempted from the Saving Clause, the IRS and HMRC do not get to tax SS pensions just as they like. IMHO the Treaty is being mis-applied.....probably to the benefit of the person getting the SS as it makes filing simpler.......

The following is not advice, but what I would probably do.

For the UK SS I'd make a Treaty claim under 17.3 and exclude it from US taxation. The intent and application of the law is obviously to limit the taxation of SS to the country of residence only.

For the UK LA pension I would not make a Treaty claim as it is not covered by the Treaty in your case. Article 19 is for temporary residents and non citizens. However, you have the language in IRS 901 (worryingly its all about treaties) to explain why its not taxable. Maybe write a note in the margin. I would enter both the UK SS and the LA pension on line 16a and enter 0 on line 16b.

As far as Article 17.3 goes the Technical Guidance is NOT the Treaty. Professional tax people far more worth listening to than me have pointed out the inconsistency between the actual wording of the Treaty, the Technical Explanation and what IRS agents say. The intent of Article 17.3 is to provide "for exclusive residence-country taxation of social security benefits". Unfortunately it does not do that and, as it is specifically exempted from the Saving Clause, the IRS and HMRC do not get to tax SS pensions just as they like. IMHO the Treaty is being mis-applied.....probably to the benefit of the person getting the SS as it makes filing simpler.......

. I don't know what the intention was, or whether the treaty's being misapplied, but given the contradictions between the wording of the treaty and the interpretations provided by both governments, it does seem very likely that the treaty's being applied inconsistently, when it comes to Article 17.3. 

But perhaps not too much damage is being done, given that most US citizens residing in the UK and receiving a UK State pension can probably make use of the foreign tax credits; and of the ones like me who can't use the credits, some, perhaps most, will probably be happy to take the Technical Explanation at its word and just put the pension down as non-taxable, with or without an 8833.  I suspect very few will just list their pension as US-taxable with no attempt to avoid, or mitigate the effects of, double taxation. 

A happy-ish outcome, despite bureaucratic incompetence.  Two cheers.   

The following is not advice, but what I would probably do.

For the UK SS I'd make a Treaty claim under 17.3 and exclude it from US taxation. The intent and application of the law is obviously to limit the taxation of SS to the country of residence only.

For the UK LA pension I would not make a Treaty claim as it is not covered by the Treaty in your case. Article 19 is for temporary residents and non citizens. However, you have the language in IRS 901 (worryingly its all about treaties) to explain why its not taxable. Maybe write a note in the margin. I would enter both the UK SS and the LA pension on line 16a and enter 0 on line 16b.

That's almost exactly what I mean to do, except that I'm not going to file an 8833 to make a specific treaty claim for either pension.

For each pension I'll say exactly what it is, and mention the relevant guidance/publication, not as something I'm relying on, but simply to explain why I think it's not taxable.  And then put 0 on line 16b, and leave it to the IRS to get in touch if they think I've done it all incorrectly.

That should be fine as you are not required to file an 8833 for pensions or SS as stated on page 2 of IRS 901 and also here.

https://www.law.cornell.edu/cfr/text/26/301.6114-1

(c) Reporting requirement waived.
(1) Pursuant to the authority contained in section 6114 (b), reporting is waived under this section with respect to any of the following return positions taken by the taxpayer:

......................

(iv) 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;

That should be fine as you are not required to file an 8833 for pensions or SS as stated on page 2 of IRS 901 and also here.

https://www.law.cornell.edu/cfr/text/26/301.6114-1

Yes, that's what seemed to me to be the case (http://talk.uk-yankee.com/index.php?topic=86271.msg1129703#msg1129703) after I followed the 8833 instructions to 301.6114-1.  Very reassuring that you agree.  Thanks.

Musing:

Now that I've got it straight in my head (with the benefit of much extremely helpful forum advice) exactly what I'm going to put on these 1040s (once I stop procrastinating and get down to it), I'm still puzzled by the seemingly contradictory language about not just one of my pensions but both of them.

UK State Pension: Article 17.3 is excepted from the Saving Clause but doesn't seem to cover UK State Pensions paid to a US citizen who is a UK resident.  Yet the Treasury Technical Explanation couldn't be clearer:

Paragraph 3 [of Article 17] provides for exclusive residence-country taxation of social security benefits.

UK Local Authority pension: Article 19.2 makes this exempt from US tax for a US citizen who is also a UK resident, but Article 1.5 seems to except 19.2 from the Saving Clause only for those who are not US citizens. Yet IRS Publication 901, "U.S Tax Treaties", says very clearly:

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.

(my emphasis)

It strikes me that:
(a) both these income items are pensions; and
(b) both are pensions funded by UK public funds; and
(c) the troublesome language in the Treaty, in both cases, concerns cross-border payments.

With the UK State Pension, only cross-border payments seem to be exempt.  With the UK LA Pension, only cross-border payments seem to be excepted from the Saving Clause.  Yet the guidance, for both pensions, says non-cross-border payments (payments by the UK to a US citizen who is UK resident) are taxable only by the UK.

I'm led to theorize that the Treaty provisions and exceptions on pensions start from the assumption that pensions funded by each Government's own coffers are to be taxable only in the state that funds them unless otherwise stated.  And that's why only cross-border payments are mentioned: they're the exception that proves the rule.

Perhaps.

It strikes me that:
(a) both these income items are pensions; and
(b) both are pensions funded by UK public funds; and
(c) the troublesome language in the Treaty, in both cases, concerns cross-border payments.

With the UK State Pension, only cross-border payments seem to be exempt.  With the UK LA Pension, only cross-border payments seem to be excepted from the Saving Clause.  Yet the guidance, for both pensions, says non-cross-border payments (payments by the UK to a US citizen who is UK resident) are taxable only by the UK.

I'm led to theorize that the Treaty provisions and exceptions on pensions start from the assumption that pensions funded by each Government's own coffers are to be taxable only in the state that funds them unless otherwise stated.  And that's why only cross-border payments are mentioned: they're the exception that proves the rule.

Perhaps.

The UK state pension is NOT a pension......it's a social security scheme. This is why it has it's own special paragraph separate from pensions. Your LA pension is probably a final salary Government pension and covered under Article 19. But that Article is only applicable to non-residents and non-citizens....its for people who are working temporarily in the other country.

So IMHO your UK state pension is taxable by the US because it is not a cross border SS payment and I have seen people deal with it by declaring it and taking a FTC. There are others who will have used the language in the technical Explanation to justify it being non-taxable by the US. This thread might be interesting to you.

http://talk.uk-yankee.com/index.php?topic=73998.45

Absent the language in IRS 901 I would say that the LA pension is also taxable by the US. I have no idea where the IRS 901 language comes from....it doesn't seem to be justified by the treaty and so it's either another mis-interpretation or it's from US domestic law. Still the treaty doesn't apply in your case as you are a US/UK dual citizen resident in the UK, but you have language in an IRS publication that your UK LA pension is not US taxable.

Article 19(2) (Government Service) is not excepted from the Saving Clause. Consequently after any basis is calculated under the general rule (and subject to foreign tax credits), pensions paid by UK government are fully US taxable to a US citizen.

IRS publications are not substantial authority.

Article 19(2) (Government Service) is not excepted from the Saving Clause. Consequently after any basis is calculated under the general rule (and subject to foreign tax credits), pensions paid by UK government are fully US taxable to a US citizen.

IRS publications are not substantial authority.

There you go iota.......you can't even believe what the IRS puts in writing. Welcome to the "Rabbit Hole".

Thanks for your replies, nun and guya.  I was really just thinking out loud about possible explanations as to why both pensions should be afflicted by a situation in which the language/apparent intentions of the tax treaty, and the language found in IRS/HMRC interpretations/guidance/documents, etc, seem inconsistent.  Not still trying to resolve it - I'm happy with the course of action I've outlined.  I guess we'll just have to agree to disagree.   

I'll report back if the IRS disallows either or both.

Thanks for your replies, nun and guya.  I was really just thinking out loud about possible explanations as to why both pensions should be afflicted by a situation in which the language/apparent intentions of the tax treaty, and the language found in IRS/HMRC interpretations/guidance/documents, etc, seem inconsistent.  Not still trying to resolve it - I'm happy with the course of action I've outlined.  I guess we'll just have to agree to disagree.   

I'll report back if the IRS disallows either or both.

Are you going to disclose the position on Form 8275?

Do bear in mind that taking an undisclosed position that does not have substantial authority could expose a taxpayer to greater penalties, mean that under the HIRE Act the statute of limitations never closes (leaving problems for an Executor after a taxpayer's death) and make a taxpayer a covered expatriate (leaving problems for a beneficiary after a taxpayer's death). It would be prudent to get a legal opinion on the position before a return is filed.