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Topic: Pension income - Line 4 & 5 of 1040?  (Read 312 times)

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Pension income - Line 4 & 5 of 1040?
« on: April 18, 2019, 02:35:15 PM »
Retirement pensions and the method in which to report draws much debate. Looking at planning for now

Background:

UK/US citizen UK resident, taking periodic payments, NO lump sum

U.S. Retirement:

Social Security
401(k)
IRA

U.K. Retirement

State Pension
Personal Pension

My understanding is that Social Security is excluded from U.S. taxes due to the Double Taxation agreement, taxable by HMRC only. So, would you show on line 5a/b of 1040 the gross SS received, but in () parenthesis a minus number, a little like Foreign income exclusion income is shown on the 1040?
The remaining retirement income I believe is taxable by both the IRS and HMRC, so I would I need to appropriate the tax element of these paid to HMRC and then file a 1116 to take the FTC? I believe the total income of the other retirement income would then go line 4 of the 1040 as ‘fully taxable’?
I’d be interested to learn how other report too, as my circumstances must be common.
Thanks


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #1 on: April 18, 2019, 03:26:49 PM »
 This is how to report your SS, I used Turbo Tax which I purchased,  This is the correct way to do it, confirmed by an IRS Agent which I had a meeting with in the States.  Go to Income Summary, then Less Common Income, then Misc Income,
then Other Reportable Income, in description I put US/UK tax Treaty on Social Security, then I entered minus amount of SS. This will generate a Schedule 1 and put the amounts on 1040 line 5a and 0 in 5b. I don't know how to explain w/o using TT.


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #2 on: April 18, 2019, 06:18:40 PM »
The pen and paper solution: [As I do it, which could be wrong, but I've never heard otherwise from the IRS.]

Social Security:
Yes, it is only taxed in the UK. For 1040,
On line 5a: Enter the gross amount received as declared on your 1099 from the SSA.
On line 5b (taxable amount): Enter 0 (just "0", no elaboration)

Form 1116
US SS is ignored totally on 1116, but nonetheless some pre-calculations need to be undertaken. I would guess you'll be using 2 separate baskets at minimum, General category income (for UK State pension and UK personal pension), and certain income re-sourced by treaty (401K and IRA). Yes, apportionment will be necessary. You'll need to determine what percentage of your total income the amount of US SS comprises, and reduce the amount of tax paid in PART II of 1116 accordingly by that percentage. If the US SS is exempt, the UK tax paid on US SS is also not included.

I'm curious as to how TurboTax calculates this, or does it depend on the taxpayer to provide accurate 'tax paid' figures?.

The simplified method and the general method for determining 'Basis in the pension'.
The 401K and IRA may use the 'simplified method' if  US tax was paid on the contributions (they are US qualified pensions), but basis in the UK personal pension will have to be determined by using Publication 939, the 'general rule'. The UK personal pension is a 'non-qualified' pension for the US. The UK State pension will have no basis since the funds are used for other social programmes in addition to the Old Age Pension.

Form 1040 for pensions other than US SS
Enter to gross amount received from all the pensions (other than US SS) on line 4a. For line 4b, deduct the amount of basis allowed, and enter the result as taxable income.

Form 8938
Only the UK personal pension would be included on the 8938.

I await corrections from those far wiser.



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Re: Pension income - Line 4 & 5 of 1040?
« Reply #3 on: April 18, 2019, 09:24:27 PM »

Form 1116
US SS is ignored totally on 1116, but nonetheless some pre-calculations need to be undertaken. I would guess you'll be using 2 separate baskets at minimum, General category income (for UK State pension and UK personal pension), and certain income re-sourced by treaty (401K and IRA). Yes, apportionment will be necessary. You'll need to determine what percentage of your total income the amount of US SS comprises, and reduce the amount of tax paid in PART II of 1116 accordingly by that percentage. If the US SS is exempt, the UK tax paid on US SS is also not included.

I'm curious as to how TurboTax calculates this, or does it depend on the taxpayer to provide accurate 'tax paid' figures?.





I have not used Form 1116,  :o did I screw up?


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #4 on: April 18, 2019, 10:04:10 PM »
I have not used Form 1116,  :o did I screw up?
Did you have any pension income (US or UK) in addition to US SS? If so, was that pension income taxed by HMRC?


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #5 on: April 18, 2019, 11:57:15 PM »
Did you have any pension income (US or UK) in addition to US SS? If so, was that pension income taxed by HMRC?

I take minimum distribution on my IRA, interest on my savings also taxed in UK, military pension only taxed in US.


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #6 on: April 19, 2019, 01:53:28 PM »
I take minimum distribution on my IRA, interest on my savings also taxed in UK, military pension only taxed in US.
I know nothing concerning IRAs, other than RMDs are mandatory at age 70.5 and the amount of distribution, at the start, is roughly 4%. Are they subject to tax in the UK? Possibly, if the distributions are subject to tax in the US.
https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876a

If there will be no tax due to the UK after the preparation of a UK self-assessment form (after personal allowance, pension taxed only in the US, tax free amounts of taxable interest, tax free interest, lesser amounts of distributions, etc.), there is no need for form 1116 on the US 1040 return.

If tax is due and paid on the unearned income to the UK, how does TurboTax offset double taxation for the US return?


« Last Edit: April 19, 2019, 01:57:27 PM by theOAP »


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #7 on: April 19, 2019, 02:13:33 PM »

If tax is due and paid on the unearned income to the UK, how does TurboTax offset double taxation for the US return?
I don't know if TT does this, I am thinking it does not. Makes my head hurt  ??? ::)


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #8 on: April 19, 2019, 02:17:23 PM »

Form 1116
US SS is ignored totally on 1116, but nonetheless some pre-calculations need to be undertaken. I would guess you'll be using 2 separate baskets at minimum, General category income (for UK State pension and UK personal pension), and certain income re-sourced by treaty (401K and IRA). Yes, apportionment will be necessary. You'll need to determine what percentage of your total income the amount of US SS comprises, and reduce the amount of tax paid in PART II of 1116 accordingly by that percentage. If the US SS is exempt, the UK tax paid on US SS is also not included.


Yes there would be 2 or 3 baskets, depending on if interest is fully covered by PSA.
Would the UK state & UK personal pension go into the passive category though? as I thought the General category is only for earned income?
Yes, I would need to use a 1116, but just passive income category? income re-sourced by treaty, would I need that for the IRA and 401(k), as the DTA doesn't give me any breaks on that, I simply get a credit against tax paid on SA100? As the U.S. SS is fully excluded income on 1040, yes, I'd need to apportion the tax element, as of course I can't get a credit for an item that is excluded. Thanks for your help -)


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #9 on: April 19, 2019, 02:47:58 PM »
Yes there would be 2 or 3 baskets, depending on if interest is fully covered by PSA.
Would the UK state & UK personal pension go into the passive category though? as I thought the General category is only for earned income?
Yes, I would need to use a 1116, but just passive income category? income re-sourced by treaty, would I need that for the IRA and 401(k), as the DTA doesn't give me any breaks on that, I simply get a credit against tax paid on SA100? As the U.S. SS is fully excluded income on 1040, yes, I'd need to apportion the tax element, as of course I can't get a credit for an item that is excluded. Thanks for your help -)
Ask theOAP,  my head hurts  :o  ::)


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #10 on: April 19, 2019, 02:53:07 PM »
I don't know if TT does this, I am thinking it does not. Makes my head hurt  ??? ::)
Generally, it should if foreign tax was paid on 'unearned' pension income which is subject to US taxation, through 1116. Although, there are other options where it may avoid 1116 for foreign tax paid, but those are for very small amounts.

It can not use FEIE (form 2555) since it is for 'earned' income, and pension income is always unearned.


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Re: Pension income - Line 4 & 5 of 1040?
« Reply #11 on: April 19, 2019, 03:27:17 PM »
Yes there would be 2 or 3 baskets, depending on if interest is fully covered by PSA.
Would the UK state & UK personal pension go into the passive category though? as I thought the General category is only for earned income? Yes, I would need to use a 1116, but just passive income category?
Ah....the $64,000 question!

It depends on who you ask. The best US/UK tax advisors will say, definitely, it is General category income, and if you follow their reasoning, they are correct. At the same time, if you ask the IRS, you may well have the response the pensions go in the Passive basket. (I have - 3 times - and was told on all 3 occasions it was passive, but the IRS agents probably know less of the Code details than the US/UK advisors and the IRS "warns" IRS agents may give incorrect answers.) Fun, isn't it. Each year, since I have a spreadsheet set up for this, I do the calculations both ways - all in passive versus pensions in the general basket - and always have excess credits no matter which way the calculation is done. Given my sources of pension income (other than US SS all is foreign sourced) there is very little difference in excess credits between them. Now throw in HTKO (which I also calculate - still no difference since the foreign tax paid migrates with the HTKO amount).

income re-sourced by treaty, would I need that for the IRA and 401(k), as the DTA doesn't give me any breaks on that, I simply get a credit against tax paid on SA100?
If HMRC are happy to give a credit, but (IMO) according to the HMRC link in the reply to Cmoh above, that is only for the amount which would be non-taxed in the US. Again, this is an area I really do know nothing about. Perhaps those with more knowledge will comment.

What is common knowledge is ROTHs are tax free in both countries. Have you considered rolling over your IRA into a ROTH? By the information in the HMRC link above, since the rollovers themselves are not taxed in the US they aren't taxed in the UK.


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