Should UK State Pension be included in Gross Income?

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.

I see it differently.

The purpose of the treaty is to avoid both double taxation and tax evasion.  If a particular interpretation of a provision in the treaty appears to result in double taxation for an individual, it's probably just a misinterpretation.  Rarely, it might be due to infelicitous wording in the treaty language, or might be an anomalous case.  (I say rarely, because it seems likely these treaty-writing legal professionals do know what they're saying, and also seems likely (to me) that any ambiguities and infelicities would have been corrected long ago, probably in proofreading.  And anomalies, by definition, are rare.)

If it's an anomalous case or due to ambiguous wording, Article 26 (Mutual Agreement Procedure) applies:

1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of this Convention or, if later, within six years from the end of the taxable year or chargeable period in respect of which that taxation is imposed or proposed.
2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with this Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States, except such limitations as apply for the purposes of giving effect to such an agreement.
3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. In particular the competent authorities of the Contracting States may agree:
(a) to the same attribution of income, deductions, credits, or allowances of an enterprise of a Contracting State to its permanent establishment situated in the other Contracting State;
(b) to the same allocation of income, deductions, credits, or allowances between persons;
(c) to the same characterization of particular items of income, including the same characterization of income that is assimilated to income from shares by the taxation law of one of the Contracting States and that is treated as a different class of income in the other Contracting State;
(d) to the same characterization of persons;
e) to the same application of source rules with respect to particular items of income;
(f) to a common meaning of a term;
(g) that the conditions for the application of the second sentence of paragraph 5 of Article 7 (Business Profits), paragraph 9 of Article 10 (Dividends), paragraph 7 of Article 11 (Interest), paragraph 5 of Article 12 (Royalties), or paragraph 4 of Article 22 (Other Income) of this Convention are met; and
(h) to the application of the provisions of domestic law regarding penalties, fines, and interest in a manner consistent with the purposes of this Convention.
They may also consult together for the elimination of double taxation in cases not provided for in this Convention.
4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.

It seems likely (to me) that apparent inconsistencies between:

- the language of the treaty, on the one hand, and

-the interpretations offered by the Technical Explanation and various IRS publications (not to mention a common-sense understanding of the intended purpose of the treaty), on the other hand,

are largely due to the situations described in Article 26(3) and its sub-clauses.  There is no need for a UK-resident US citizen to resort to claiming IRC tax credits/reductions on exempt income such as a UK government pension, unless it's useful to them to do so - for instance if by doing so they're able to reduce US tax due on other, non-exempt UK income.

Of course it goes without saying that these comments are merely my personal interpretation.

A double tax treaty, between two jurisdictions who both subscribe to RBT, the UK and France:

ARTICLE 18
PENSIONS
Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration paid in consideration of past employment to a resident of a Contracting State shall be taxable only in that State.

ARTICLE 19
GOVERNMENT SERVICE
2. Pensions and other similar remuneration paid by, or out of funds created by, a Contracting State or a local authority thereof, or, in the case of France, a statutory body, to an individual in respect of services rendered to that State, authority or statutory body shall be taxable only in that State. However, such pension shall be taxable only in the other Contracting State if the individual is a resident and a national of that State without being also a national of the first-mentioned State.

That's it. That's all the UK/France Treaty says concerning pensions.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/411884/france.pdf

When the treaty is between a jurisdiction with RBT and a jurisdiction with CBT, those taxpayers subject to the CBT jurisdiction; a treaty saving clause; and a definition of what is taxable income (and therefore anything not deemed excludable, exempt, or a deduction specifically within the tax code or treaty is taxable); are always going to fall into some areas where the taxpayer may feel double taxation exists. To the CBT jurisdiction, there is no double taxation since income not taxable in the other contracting state is not being taxed twice. Someone who is not taxed in the UK due to a tax free basis or the personal allowance is not being taxed twice by the US, they are only being taxed once,..... by the US. If income is being taxed in the UK, the tax is paid, and the US also deems it taxable, then a credit is available on a US tax return and therefore it is only being taxed once (sort of).

The problem with the UK State Pension for a UK resident subject to US jurisdiction is simply no precise explanation of taxation. Why should this be surprising? It's not a UK issue (the UK will tax it if resident). The UK team have no concern for a UK citizen taxpayer resident in the US receiving US SS due to RBT. The same freedom does not apply for the US team of negotiators. For the record, I declare the UK State Pension on my US return. I do not declare a basis in this pension in spite of £35,000 paid in class 1 NICs, but do include UK tax paid as credits on 1116.

I partially agree with nun, the tax treaty and US and UK domestic laws (generally, but not always) eliminate double taxation, but you will pay the larger of the tax in either country. There are areas, such as NIIT, where double taxation does exist. There are also areas, such as 988 transactions, which can be pure fantasy. For the CBT jurisdiction that equates to cake, and the right to eat it also.


     

When the treaty is between a jurisdiction with RBT and a jurisdiction with CBT, those taxpayers subject to the CBT jurisdiction; a treaty saving clause; and a definition of what is taxable income (and therefore anything not deemed excludable, exempt, or a deduction specifically within the tax code or treaty is taxable); are always going to fall into some areas where the taxpayer may feel double taxation exists.

Hence, no doubt, the need for Article 26, giving the taxpayer the right to take his/her case to the appropriate Competent Authority. 

The problem with the UK State Pension for a UK resident subject to US jurisdiction is simply no precise explanation of taxation. Why should this be surprising? It's not a UK issue (the UK will tax it if resident). The UK team have no concern for a UK citizen taxpayer resident in the US receiving US SS due to RBT.

The UK Competent Authority, however, is obliged to have a concern for a UK-resident taxpayer who brings a case objecting that the IRS is trying to tax her UK pension when it's supposed to be taxable only by the UK. 

The UK State Pension (like US Social Security and most other pensions) is taxable only in the state of residence.  Have a look at the table at the back of IRS Publication 901, p.37

I don't expect the IRS to disallow either of my pension claims.  If it does, I'll definitely be bringing my case before the UK Competent Authority.   

Iota, if you were having a professional do your taxes I'd hope that they would include your UK SS and LA pension as taxable income on your 1040 and file the 1116. That is the most conservative CYA approach.
But as you are doing this yourself you can be a bit more adventurous.

As long as you include the UK SS and LA pension in line 16a you are not hiding income from the IRS and if you then enter "0" as the taxable amount you can make your arguments on the document that Guya told us about. There's no need for any 8833 and you can point the IRS to Article 17.3 and quote the Explanatory Memo and for the LA pension quote IRS 901. I predict the IRS will agree with you even though you don't have "substantial authority" you have done everything that a self preparer could be expected to do, and have come to a conclusion that is backed up by documentation. If the IRS disagree it will be interesting to see their reasoning, it'll be just as interesting if they agree with you. There's not much at stake here financially as at worst you be assessed interest on any tax due.

For the UK SS you have no defense under the treaty. The way it is worded allows the IRS to tax it. However, that's not to say that they will. The intent of the treaty is to restrict SS taxation to the country of residence and IRS policy might well be to do that. Saying that I've  had IRS agents tell me and email me that the treaty limits taxation of SS to the residence country. I have no idea whether it is a misinterpretation if the treaty of IRS policy, but I would bet a great deal of money that the IRS will not tax your UK SS.


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As long as you include the UK SS and LA pension in line 16a you are not hiding income from the IRS and if you then enter "0" as the taxable amount you can make your arguments on the document that Guya told us about.

A poster on another forum put the view that it would be better to use 8833, if one wants to argue a treaty position case, as that's what it's for - even though for pensions it's not required.^*  I think that's probably right.  However, I've reconsidered and decided neither form is necessary.  I'll state clearly what the pensions are, and the IRS will thereby have all the information necessary for a decision to allow or disallow.

I predict the IRS will agree with you even though you don't have "competent authority".

Thanks nun.  I'm pleased to know that you take that view.   

^* I hazard a guess that the reason 8833s aren't required in the case of pensions is because pensions are generally taxable only in the state of residence, and the exceptions are well known and not arguable.

If the IRS disagree it will be interesting to see their reasoning, it'll be just as interesting if they agree with you. There's not much at stake here financially as at worst you be assessed interest on any tax due.

I shouldn't think any interest will be payable, even if the IRS disallow one or both of my claims and the Competent Authority upholds the IRS view.

For the UK SS you have no defense under the treaty. The way it is worded allows the IRS to tax it. However, that's not to say that they will. The intent of the treaty is to restrict SS taxation to the country of residence and IRS policy might well be to do that. Saying that I've  had IRS agents tell me and email me that the treaty limits taxation of SS to the residence country. I have no idea whether it is a misinterpretation if the treaty of IRS policy, but I would bet a great deal of money that the IRS will not tax your UK SS.

Great   

I'll report here if I get any IRS communication on the subject of either claim. 

The word capricious has become my new favourite word concerning US taxation.

Let's hope you never hear anything from the IRS. That will confirm acceptance of your return, but unfortunately will not confirm what is or isn't correct.    It's only if you hear something......

Good luck, iota, and I hope it turns out well. You're quite a fighter! 

If the IRS decide that you own tax they will charge you interest and it might take them a few years to get back to you. So acceptance of the 1040 does not necessarily mean all is well and you might hear still hear from the IRS a few years later.

I would include the 8275 if only to describe the origin of the money you enter on line 16a.

The word capricious has become my new favourite word concerning US taxation.

That's one of the reasons I'm pleased I finally had a look at Article 26.  I feel pretty confident caprice won't determine the UK Competent Authority's ruling.  Consequently, should the UKCA rule against me, as a law-abiding UK citizen I'll accept the ruling and pay the tax.  I don't expect that to happen though.

Let's hope you never hear anything from the IRS. That will confirm acceptance of your return, but unfortunately will not confirm what is or isn't correct.    It's only if you hear something......

It's not something I'll be worrying about.  I suspect unreasonable delay would simply strengthen my case.

Good luck, iota, and I hope it turns out well. You're quite a fighter!

    Thanks

If the IRS decide that you own tax they will charge you interest and it might take them a few years to get back to you.

I don't expect that would wash with the UKCA. 

So acceptance of the 1040 does not necessarily mean all is well and you might hear still hear from the IRS a few years later

As I mentioned in my reply to TheOAP, I suspect unreasonable delay would simply strengthen my case, and unreasonable delay accompanied by a demand for interest covering the period of delay can be practically guaranteed to raise a British eyebrow or two.   

I would include the 8275 if only to describe the origin of the money you enter on line 16a.

I'm describing them on the 1040 as "UK Government pension (LA)", and "UK State Pension".  If they want to know anymore I'm sure they'll write and ask me.

I don't expect that would wash with the UKCA.

The IRS won't give a fig for what HMRC says and HMRC won't say anything as you will have paid tax to them first due to you living in the UK. If the US want's to tax you further as a US citizen HMRC won't get involved, IMHO. Also unless you want to spend a lot on tax lawyers you'll be in no position to contest the matter.

The IRS won't give a fig for what HMRC says and HMRC won't say anything as you will have paid tax to them first due to you living in the UK. If the US want's to tax you further as a US citizen HMRC won't get involved, IMHO. Also unless you want to spend a lot on tax lawyers you'll be in no position to contest the matter.

No, I don't envisage a legal battle, and don't have a need for one. As I said before, if the IRC disallow one or both of my claims I'll seek a ruling from the UKCA, and if it goes in my favour I'll be happy and if it goes against me I'll abide by it.  Easy-peasy.   

No, I don't envisage a legal battle, and don't have a need for one. As I said before, if the IRC disallow one or both of my claims I'll seek a ruling from the UKCA, and if it goes in my favour I'll be happy and if it goes against me I'll abide by it.  Easy-peasy.   

As neither of your pensions are covered by the treaty it's entirely an IRS domestic tax matter. UKCA will get it's tax and allow the IRS to tax you exactly as they want.

Such cynicism, in one so young.   

2. Notwithstanding the provisions of paragraphs 1 and 2 of Article 17 (Pensions, Social
Security, Annuities, Alimony, and Child Support) of this Convention:
a) any pension paid by, or out of funds created by, a Contracting State or a
political subdivision or a local authority thereof to an individual in respect of services
rendered to that State or subdivision or authority shall, subject to the provisions of subparagraph
b) of this paragraph, be taxable only in that State;
b) such pension, however, shall be taxable only in the other Contracting State if
the individual is a resident of, and a national of, that State

iota, if Article 19.2 was applicable to your situation and UK Local Authority pension you'd end up with it only being taxable in the UK and it could well be the origin of the language in IRS 901

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.

It seems that IRS 901 ignores the Article 1.5.b that says the Saving Clause does not apply

upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.