UK tax on US pension

Hello,

We are trying to get oriented to UK and US tax positions.

So far I understand that my partner should continue to file her US tax return each year, but won't owe anything. I should continue to complete my UK self assessment. I don't think we need to do joint US return?

She now has salary in UK on PAYE system and is eligible to claim a small pension of around $100 per month from her previous US job. She also has a 401K over there which we have just left where it is for now (she is 57). The small pension defaults to 50% survivor benefit (so that I would continue to get half of the pension if she died). It asks for my social security number which of course I don't have. We were planning to get the $100 a month paid into her US account to use when we visit. Would that then count as foreign income? And are we eligible for the 50% spouse amount given I am not from US? Presumably I would be taxed here on that anyway. 

We are so confused about what we are supposed to do, and they are such small amounts that it seems absurd to pay a UK US specialist accountant, and we also don't know how to find one. Finally there is a thing on the form where she has to select Federal tax withholding and state tax withholding, yes or no?
 What are the implications of this. Sorry for long question - just bit at sea with it.

Hi.  I'm drawing a US pension and live in the UK. It's fully taxable in the UK as foreign income, and would be regardless of the amount of the payment. The 401K is not taxable in either place until you take disbursements from it, I don't believe. Unless the pension plan states specifically that you are not eligible, if she has nominated you are her survivor, you should get the $50 a month when she passes away. Until then, I don't believe you are responsible for any tax on what she has disbursed to her.

Suggest you talk to the pension people to see how they want you to handle filling out the withholding form. (My assumption is that there will need to be a number of some sort assigned to you by the US govmt.)  There are a few very tax-smart people on this board so I'm hoping someone will chime in here for you.

Your partner could request zero withholding, assuming she is a US citizen. If she is not, I believe they have to withhold 30%. (Same would go for you, once you become the payee on the pension or 401K.) Assuming also that she paid enough UK tax to take as a tax credit on her USA taxes, she should get all her withholding back for the tax year as a refund. She will have to file to get it. (Same for you, when that time comes.) The forms are not terribly difficult to fill out. She'll have to file with the IRS even with that tiny amount of US income, as she'll have to report all her world-wide income if she has US citizenship.

If you are not married or in a registered domestic relationship recognized in the USA I think she will have to file as "single". It shouldn't make much difference to the tax, as she'll almost assuredly be paying more tax in the UK than in the USA and will end up with a credit to carry forward. (AKA, she should get any withholding on the pension payments back in full.)   

Again, hoping a tax wonk will chime in here to verify that. Good luck!

I'm not a "tax wonk" but I think I agree with Nan above.  I would add that if the US pension is a "government pension", either Federal or State, then it is not taxed in the UK.

As for the 401k it can be left where it is until she starts to take distributions at which point it becomes taxable in the UK. What we have done and what my son did last year was to roll the 401k directly into an IRA and that action has zero taxes in either country but does give the possibility of converting it to a Roth IRA in a lump sum transfer that will only be taxed in the USA, and then future withdrawals are tax free in both the US and UK. That decision is very much dependant on your tax situation in both countries. For myself, then at age 70.5 when I will have to start taking withdrawals I will also be drawing SS and the UK OAP and will then be in the 40% tax bracket so it was worth my while to do the conversion to a Roth. (I am age 63 so age 70.5 now doesn't look to be so far away)

I'm not a "tax wonk" but I think I agree with Nan above.  I would add that if the US pension is a "government pension", either Federal or State, then it is not taxed in the UK.

I thought there was a thread a couple of years ago that came to the conclusion that a state pension wasn't a "Govt" pension?

I thought there was a thread a couple of years ago that came to the conclusion that a state pension wasn't a "Govt" pension?

Did I remember wrongly? - quite possibly.

Did I remember wrongly? - quite possibly.

This is a thread asking if the California Teachers State pension is taxed in the UK and it depends on citizenship.

http://talk.uk-yankee.com/index.php?action=search2

from Nun:

This is a government pension and so Article 19 of the DTA applies. It will be taxable only in the US if paid to a US citizen living in the UK, taxable only in the UK if paid to a UK citizen living in the UK and will be taxable in both the US and the UK if paid to a UK/US dual citizen living in the UK. The withholding should depend on your citizenship, but as it's an annuity type income it should be zero for a UK citizen.

I thought there was a thread a couple of years ago that came to the conclusion that a state pension wasn't a "Govt" pension?

Correct. State pensions (Social Security for US) are covered by Article 17.3 in the UK/US Treaty. Government pensions are covered by Article 19.

Correct. State pensions (Social Security for US) are covered by Article 17.3 in the UK/US Treaty. Government pensions are covered by Article 19.

WOOOOHOOOO!!! We are just in the second month of the year and I have done one thing right already!! Wait until I tell my wife....she insists I'm never right

WOOOOHOOOO!!! We are just in the second month of the year and I have done one thing right already!! Wait until I tell my wife....she insists I'm never right

Which "state" are you talking about? A local jurisdiction pension ( like CA, for example) is a government pension.

Oh man.....you had to bring me down. 

Which "state" are you talking about? A local jurisdiction pension ( like CA, for example) is a government pension.

 

So Nun was right when I quoted him above. The US government just loves to complicate the tax code with every chance it gets.

So iffffff I read the comment from Nun above correctly......My US Fed Gov pension is taxed only in the US as it currently does. But....iif I were to take UK citizenship as well in a few years like I had been pondering.....it would get taxed in both places. If so.....it would definitely not be to my benefit to get UK citizenship. Jeez.....and here I am trying to quit drinking beer......

Thanks, I only looked away for a moment and now there's a whole thread! I am not sure I follow the rest of the thread, but your original responses seems to make sense. So it sounds like I would have to file a US tax return if my wife died before me and I was therefore directly receiving that income and potentially 401k income, but otherwise she needs to file there and me here (though as we are married does she have to file for us both there?). And she should consider rolling over the 401K (if that is still an option) which i have seen discussed on here before. I'm sure it will all begin to make sense once we do the first tax return there, but it's a bit mind boggling. Thanks so much for your help.

Thanks, I only looked away for a moment and now there's a whole thread! I am not sure I follow the rest of the thread, but your original responses seems to make sense. So it sounds like I would have to file a US tax return if my wife died before me and I was therefore directly receiving that income and potentially 401k income, but otherwise she needs to file there and me here (though as we are married does she have to file for us both there?). And she should consider rolling over the 401K (if that is still an option) which i have seen discussed on here before. I'm sure it will all begin to make sense once we do the first tax return there, but it's a bit mind boggling. Thanks so much for your help.

She can file “Married filing single” which will keep you out of the loop if that makes sense for your situation.

So iffffff I read the comment from Nun above correctly......My US Fed Gov pension is taxed only in the US as it currently does. But....iif I were to take UK citizenship as well in a few years like I had been pondering.....it would get taxed in both places. If so.....it would definitely not be to my benefit to get UK citizenship. Jeez.....and here I am trying to quit drinking beer......

And you thought it was all over! (Your planning)

Looks like plenty more to mull over.