Should UK State Pension be included in Gross Income?

Are you going to disclose the position on Form 8275?

Aha!  Thanks guya, I hadn't heard about that one.  I was intending to write notes on the 1040 to explain why I was putting the pensions down as non-US-taxable but this will work much better. 

If we were to ask the London Embassy IRS office (I believe its now closed) about all this they would probably say not to worry and tell you that the UK SS and UK LA pension are not US taxable........and they would be wrong. The thing is the Treaty cannot hope to cover all the possible combinations of circumstances so it might set out to make SS only taxable in the country of residence, but it fails as it isn't worded in a way to cover US citizens getting UK SS in the UK. However, the US/Belgium treaty is better worded and a US citizen living in Belgium and getting Belgium SS would not have to pay any US tax on it. If you were to move to Belgium would that make your UK SS non US taxable?

This all arises because of CBT. To make another Alice reference my situations is the "Looking Glass" opposite of iota's. I am a UK/US dual citizen living in the US and will be getting US and UK SS payments and a Massachusetts state pension. My US SS payments and MA state pensions are not UK taxable, not because of the treaty, but because the UK doesn't tax non-UK source income of non-resident UK citizens. My UK SS payments are not UK taxable because of the treaty. Unfortunately your US citizenship as an expatriate is the issue.....as you well know.

Filing the 8275 (nice to know about this form) and going over you reasons for filing as you intend would be a good idea. The case of the SS is particularly interesting to me as the facts that it is one of the few Articles that is excluded from the Saving Clause, the specific language in the Technical Explanation and that the taxation of US SS paid to a US citizen in the UK is limited to the UK all convince me that the intent of the Article is to make it so that  any SS payment is only taxable where you live......it just doesn't say that in Article 17.3.

Yes, I agree, it's all because of CBT.  Plus, I would say, the insistence on self-assessment.  Many of these impossible-to-be-sure-what-they-want rules -- certainly the ones that affect me -- could easily be settled with a relatively simple IT system, leaving self-assessment for the exceptional cases or those who prefer it.

As for the UK-Belgium treaty, it seems that has its own mysterious ambiguities.  In the course of trying to find out what I had best do in my own case, I stumbled across https://books.google.co.uk/books?id=cRHVlebhViUC&pg=PA382&lpg=PA382&dq=us-uk+tax+treaty+%22public+funds%22&source=bl&ots=peCNO24SMX&sig=pZn4tKckJP747vJPj__dqN_jcQU&hl=en&sa=X&ved=0CDYQ6AEwBGoVChMI-9WnuYPgyAIVQjcUCh20nADN#v=onepage&q=us-uk%20tax%20treaty%20%22public%20funds%22&f=false

It's not actually relevant for my own case, being about pay rather than pensions, but it shows that the vagueness and confusion aren't unique to the UK/US Treaty.

It all does rather raise the question of basic principles of equitable administration of the law.  Assuming the aim of the Double Taxation Treaty is the avoidance of double taxation, I would say the Treaty writers probably didn't set out to double-tax a UK citizen on two separate UK-public-funded pensions, which double-taxation (the said pensions representing virtually the entire income of said UK citizen) could only have the result that the UK citizen would be obliged to seek assistance from UK public funds...  Talk about capital flight   

The treaty (Article 24) and its interaction with domestic rules does stop double taxation. It doesn't mean that you won't be taxed, just that your tax will come out to be the greater of the amount that you'd pay in either the US or the UK.

FYI here is how the US/Belgium Treaty treats SS in Article 17.2

Notwithstanding the provisions of paragraph 1, payments made by a Contracting State
under provisions of the social security or similar legislation of that State to a resident of the
other Contracting State or to a citizen of the United States shall be taxable only in the first mentioned State.

As you can see this wording produces a very different outcome than the US/UK treaty.

But, I think we need to be careful in the use of Google.....a little knowledge and a lot of research and reading of obscure documents can be dangerous......I should know.

So your super safe approach is to put both UK SS and UK LA pension as fully taxable and use FTCs.......or use the documentary evidence (that we know is not "holy writ"), and the assumption that the IRS will agree with you, to argue what they are both non-US taxable.

The treaty (Article 24) and its interaction with domestic rules does stop double taxation. It doesn't mean that you won't be taxed, just that your tax will come out to be the greater of the amount that you'd pay in either the US or the UK.

Can you explain? 

Can you explain?

I wish I could..........ha ha. Basically Article 24 sets out the circumstances in which a country will give credit for taxes paid in the other. It's the whole "treaty resourcing" thing.

I wish I could..........ha ha. Basically Article 24 sets out the circumstances in which a country will give credit for taxes paid in the other. It's the whole "treaty resourcing" thing.

Unfortunately...

6. Where the United States taxes, in accordance with paragraph 4 of Article 1 (General Scope) of this Convention, a United States citizen, or a former United States citizen or long-term resident, who is a resident of the United Kingdom:
(a) the United Kingdom shall not be bound to give credit to such resident for United States tax on profits, income or chargeable gains from sources outside the United States as determined under the laws of the United Kingdom;

In other words (if I take the meaning correctly) the UK is not going to oblige by letting UK-resident taxpayers off UK tax on UK-source income, in order to enable them to pay US tax on it instead.  Maybe this is where CBT comes up against RBT.  But I could be misinterpreting it, of course.

You've given me an idea, though.  When I've got time I'll ring HMRC and see if I can have a conversation with someone about UK interpretation of the US-UK Tax Treaty.

You have to make sure you pay the right amount of tax to the correct country so you can take the appropriate FTC. The UK does not have to give you credit for taxes you should have paid to the UK if you have paid them to the US. It becomes a bit more complex with dividends. But as long as you pay the right folks first and claim the FTCs you won't be double taxed, you'll just end up paying the bigger or the tax bills of the US or UK.


Sent from my iPhone using Tapatalk

You have to make sure you pay the right amount of tax to the correct country so you can take the appropriate FTC.

The pensions are taxed in the UK by withholding, according to my Tax Code.  For a credit to do me any good I'd have to persuade the UK to change my Tax Code or send me a refund. 

The UK does not have to give you credit for taxes you should have paid to the UK if you have paid them to the US. It becomes a bit more complex with dividends. But as long as you pay the right folks first and claim the FTCs you won't be double taxed, you'll just end up paying the bigger or the tax bills of the US or UK.

OK, so I've done that - I've paid the tax owed to the UK on both pensions.  So how would I claim tax credits?

The pensions are taxed in the UK by withholding, according to my Tax Code.  For a credit to do me any good I'd have to persuade the UK to change my Tax Code or send me a refund. 
OK, so I've done that - I've paid the tax owed to the UK on both pensions.  So how would I claim tax credits?

HMRC does not take tax from your state pension, it is paid gross to you. Your LA pension provider will take the appropriate amount of tax off that pension taking into account your total pension payments, personal allowance and your tax code. So you need to know the amount of tax that goes into PAYE. That is foreign tax that you have paid on foreign source income. You can claim that as a FTC on your 1040 using form 1116. If you are liable to UK tax on any US source income you can also claim a FTC for that on your US taxes, but to do that you have to make the income appear as if it arose in the UK, hence the need for resourcing by treaty.

HMRC does not take tax from your state pension, it is paid gross to you. Your LA pension provider will take the appropriate amount of tax off that pension taking into account your total pension payments, personal allowance and your tax code.

Yes.  That's just a mechanism.  The effect is that tax on my UK state pension is paid via withholding.

So you need to know the amount of tax that goes into PAYE. That is foreign tax that you have paid on foreign source income. You can claim that as a FTC on your 1040 using form 1116.

Aha!  The instructions say:

Instead of claiming a credit for eligible foreign taxes, you can choose to deduct foreign income taxes. Form 1040 filers choosing to do so would deduct foreign income taxes on Schedule A (Form 1040), Itemized Deductions.

Excellent.  Thanks very much, nun, now I understand.  I still think the pensions are supposed to be non-US-taxable, so will stick with my plan, but I'm glad to know how the tax credits work when one has no US-source income.

Interesting discussion.

Hey, why not resource the UK SS to the US...if the IRS thinks the SS originates in the US then its tax free when paid to you in the UK.......just joking.

 

It would be no dafter than the current US fantasy that my pensions are foreign.

...I'm glad to know how the tax credits work when one has no US-source income.

Doesn't work for me, though, I found when I looked a little further.  One can only claim IRS tax credits or reductions for the UK tax actually paid.  Because of the UK tax allowance, I would end up paying far more US tax than UK tax on UK-source UK-public-funded pensions.  Which, in ethical terms and IMO, would be worse than double taxation.

(Just posting this in case it might be relevant for someone in circumstances similar to mine.)

Doesn't work for me, though, I found when I looked a little further.  One can only claim IRS tax credits or reductions for the UK tax actually paid.  Because of the UK tax allowance, I would end up paying far more US tax than UK tax on UK-source UK-public-funded pensions.  Which, in ethical terms and IMO, would be worse than double taxation.

(Just posting this in case it might be relevant for someone in circumstances similar to mine.)

If you have low income then the larger UK tax free allowance than you get in the US might mean that you have zero UK tax and have to pay tax in the US.

The tax treaty and US and UK domestic laws eliminate double taxation, but you will pay the larger of the tax in either country.