Reporting UK pension contributions on a US tax return

I'm aware that you can choose to either include or exclude UK pension contributions on a US tax return. If you include the contributions, you can claim FTCs against the tax due and create a basis from which to withdraw from the pension free of US tax in the future.

How should this be reported on the US return? Do I report all of my wages + pension contributions on Form 1040 Line 1? Or do the pension contributions go on a different line?

Do I fill out Form 1116 with all the UK income tax paid on the total income (wages + pension contributions)? Do I have to file a statement or something explaining how much of my income consisted of pension contributions?

My personal and employer pension contributions are equal, so I don't need to worry about foreign trust reporting.

I see no one has responded to your question which is unfortunate since the relevant topics can be of importance to anyone with a foreign (non-US) pension, whether they use FTCs or FEIE.

The following is my understanding.

If you include the contributions, you can claim FTCs against the tax due and create a basis from which to withdraw from the pension free of US tax in the future.

Claiming both employee and employer contributions to the pension will not necessarily achieve a fully tax free pension. There is also the yearly growth in the investment to consider. Claiming employee and employer contributions normally achieves a partial basis.

I'll cover the General Method later, but once the accumulated yearly basis deductions taken equal the amount of the total basis originally calculated, there is no more basis left and yearly basis deductions are no longer allowed (both FTC and FEIE). This usually occurs after roughly 20 years of collecting benefits after retirement (YMMV).

How should this be reported on the US return? Do I report all of my wages + pension contributions on Form 1040 Line 1?

Yes, for the purpose of foreign employment you might treat it as a part of your income (opting out of the treaty). Some might feel comfortable claiming the pension contributions as other additional income on Schedule 1 (adhering to the treaty for 1040, line 1, but then claiming the contributions on Schedule 1). There are often several ways to complete a US tax return and foreign pensions create a very large grey area in the IRS instructions.

Do I fill out Form 1116 with all the UK income tax paid on the total income (wages + pension contributions)?

Yes. The majority of the first page of 1116 are calculations for allocating the standard (or itemised) deduction. With the standard deduction now being $12,000, you want to be sure the ratios representing foreign source income versus worldwide income accurately reflect the stand you are taking. Otherwise, you could get screwed on later calculations which use the results of the standard deduction allocation to determine the amount of FTCs you are allowed. 

Do I have to file a statement or something explaining how much of my income consisted of pension contributions?

No, it is not required to file a yearly report (you may if you wish!), BUT it is imperative that you keep an accurate record for the amounts claimed each year of the employee and employer amounts submitted in your return. When it comes time to claim the benefits of the pension, you will need these. Without them, you will have no basis in the pension. Also, if an audit were to occur, you'll need them!

It is highly unlikely a UK pension will meet the requirements for a US qualified pension. Nonqualified pensions must use the General Rule (Publication 939). After much consultation of the actuarial tables included and the use of your total contribution figures, the worksheet in 939 will give the amount of basis you use each year once the pension is in the drawdown phase. It sounds complicated but I found it relatively straightforward.

One final note: claiming only the employee contributions for each year still yields a valid partial basis and all the above still applies. And for all instances after drawdown begins, you'll need to keep accurate records of the amount of basis claimed each year to calculate the remaining funds available.

https://www.irs.gov/publications/p939

Hello,

This thread was highlighted here:

https://talk.uk-yankee.com/index.php?topic=100073.0

I found your description of the “basis” and option to record contributions with income very helpful.

Building on this would it be possible to achieve a fully tax free pension basis for a UK defined contribution pension by including the growth of the pension fund as income on the annual USA tax return?

If so, how should the growth be reported on the return?

If I understand it correctly it wouldn’t really be “tax free” but rather for US tax purposes the tax would have already been settled incrementally year by year?

I guess this might not normally be an advantage because the pension fund growth would be passive so couldn’t be excluded by Foreign Earned Income Exclusion and also due to bucketing you wouldn’t get any help from Foreign Tax Credits from income from employment.

FTC would also limit how the standard deduction is applied to that liability but if FEIE is used would the standard deduction cover the liability?

Also if there was some other tax credit in play like the non-refundable portion of the child tax credit, this could also make up the difference?

Apologies if I am off base with this. There is a lot to learn with this stuff.

Hello,

This thread was highlighted here:

https://talk.uk-yankee.com/index.php?topic=100073.0

I found your description of the “basis” and option to record contributions with income very helpful.

Building on this would it be possible to achieve a fully tax free pension basis for a UK defined contribution pension by including the growth of the pension fund as income on the annual USA tax return?

If so, how should the growth be reported on the return?

If I understand it correctly it wouldn’t really be “tax free” but rather for US tax purposes the tax would have already been settled incrementally year by year?

I guess this might not normally be an advantage because the pension fund growth would be passive so couldn’t be excluded by Foreign Earned Income Exclusion and also due to bucketing you wouldn’t get any help from Foreign Tax Credits from income from employment.

FTC would also limit how the standard deduction is applied to that liability but if FEIE is used would the standard deduction cover the liability?

Also if there was some other tax credit in play like the non-refundable portion of the child tax credit, this could also make up the difference?

Apologies if I am off base with this. There is a lot to learn with this stuff.

My take on this would be that the accounting would be have to be very detailed.

 If wages and contributions are excluded using FEIE then they have never been subject to US tax so I don’t see how the withdrawal on contributions in future can be considered tax free.

If wages and contributions are taxed then they can be reduced using FTCs so the pension pot contributions can be considered tax free but the growth tax deferred, similar to non deductible IRAs. Withdrawal would then have a similar calculation to the form 8606 where a portion would be tax free and the taxes paid on the rest offset by FTCs.

However, the whole of the pension withdrawals are going to be taxable in the UK and since UK tax rates are usually higher  than the US there is going to be no net win because the higher taxes will be paid anyway.

Why not allocate the profit portion of your pension income to the 25% tax free?

A

Why not allocate the profit portion of your pension income to the 25% tax free?

A

I expect the IRS wouldn’t allow this. For example if you have a deductible IRA where 75% of it is from after tax contributions and 25% of it is tax free you cannot choose to withdraw the portion that is profit. Any withdrawals are pro-rated among IRAs.

e.g. $100k in retirement accounts (IRAs) and $50k was from after tax contributions (the basis). If you withdraw $25k then $12.5k will be tax free and $12.5k would be taxable.  Of the remaining $75k then the basis would be $37.5k going forward.

Yes I understand your figures RE the basis - but 25% of any withdrawals are tax free. So when you withdraw, in your example 12.5K of the 25K is taxable. But 25% of that is tax free. Do you have to apply the 25% to the entire 25K, or could you elect to apply the 25% to the 12.5K which is taxable?

A

Yes I understand your figures RE the basis - but 25% of any withdrawals are tax free. So when you withdraw, in your example 12.5K of the 25K is taxable. But 25% of that is tax free. Do you have to apply the 25% to the entire 25K, or could you elect to apply the 25% to the 12.5K which is taxable?

A

I'm talking IRS here, not HMRC. Apologies for not making that clear.

And trying to answer the OP's question of declaring UK employer pension contributions as being taxable on his IRS returns so that he essentially builds a UK pension pot akin to the US nondeductible IRA. Normally a UK employer pension pot is the same as a US  traditional IRA or 401k where all the money is taxable on withdrawal.

I think the question of whether the 25% tax free portion of a UK pension pot is taxable in the USA is a different topic.

I'm aware that you can choose to either include or exclude UK pension contributions on a US tax return. If you include the contributions, you can claim FTCs against the tax due and create a basis from which to withdraw from the pension free of US tax in the future.

Yes clear. I did take a private UK pension withdrawal for a year (same amount every month) then stopped it as I started my US pension at 62 and didn't want to have the WEP argument about private pensions. I did claim 25% tax free in the US for that tax year and no argument from the IRS.

A

Yes clear. I did take a private UK pension withdrawal for a year (same amount every month) then stopped it as I started my US pension at 62 and didn't want to have the WEP argument about private pensions. I did claim 25% tax free in the US for that tax year and no argument from the IRS.

A

Interesting because I didn’t realize that WEP was applied against foreign pension savings like this. I only have “final salary” pensions in the UK so it’s not something I had to be concerned about. To clarify, if a person has a UK SIPP and decides to draw it down with regular monthly payments then WEP will be applied when they apply for SS? If they are not taking regular distributions from their SIPP when they apply for SS then no WEP?

There is no WEP on Personal Pensions. Only retirement pensions through work where you didn't pay SS tax. Also, OAP voluntary contributions and credits are WEP free. If you take your SS at 62 and U.K work pensions at 70 for example, then there is no WEP until you begin taking the U.K work pension.

Yet again, this is a difficult topic, methinks. I think your statement RE taking UK pension at 70 thereby saving WEP is not correct - my understanding is that WEP applies when you are eligible for the pension, whether you take it or not.

RE WEP on private pensions - that gets awkward when a SIPP is funded by an employer, no? Or maybe it was funded 60% employee and 40% employer.  I took the safe route and decided to take my private pension when I take my UK state pension (66) when I will be max WEPed anyway.

I've spent way to much time thinking about all this and how I would argue with the IRS.

A

Yet again, this is a difficult topic, methinks. I think your statement RE taking UK pension at 70 thereby saving WEP is not correct - my understanding is that WEP applies when you are eligible for the pension, whether you take it or not.

RE WEP on private pensions - that gets awkward when a SIPP is funded by an employer, no? Or maybe it was funded 60% employee and 40% employer.  I took the safe route and decided to take my private pension when I take my UK state pension (66) when I will be max WEPed anyway.

I've spent way to much time thinking about all this and how I would argue with the IRS.

A

I can't see where I stated that I was delaying my UK pension to age 70.  If I did say that, I apologize.  I am delaying taking my US SS until age 70 and I am still increasing my SS contribution years because I am paying FICA. When I apply for SS at age 70 I will have 28 years of contributions by then. The reason I am delaying is mainly as insurance because I am likely to die before my wife who has a very small SS and when I die she will get the higher of her SS or mine.

I don't know about when WEP is applied as regards to UK private pensions (when eligible or actually taking it).

As for WEP on SIPPs I also don't know from experience, and never will.  I don't see how it can be accurately policed since you can choose never to make withdrawals and pass it on, or only occasionally make withdrawals like I do from my US retirement account - some years I make a single withdrawal, other years I make no withdrawal. (Depends on 1-off large expenses such as buying a car or a house improvement).

I think maybe I'm not replying to the correct person - someone else said one could delay until 70 and wouldn't incur WEP...I int think that's correct.

Yet again, this is a difficult topic, methinks. I think your statement RE taking UK pension at 70 thereby saving WEP is not correct - my understanding is that WEP applies when you are eligible for the pension, whether you take it or not.

RE WEP on private pensions - that gets awkward when a SIPP is funded by an employer, no? Or maybe it was funded 60% employee and 40% employer.  I took the safe route and decided to take my private pension when I take my UK state pension (66) when I will be max WEPed anyway.

I've spent way to much time thinking about all this and how I would argue with the IRS.

A

I think maybe I'm not replying to the correct person - someone else said one could delay until 70 and wouldn't incur WEP...I int think that's correct.

Maybe someone who has dealt with the SSA or U.S. Embassy FBU London may want to chime in. I'm sure though that if you take SS at 62, (for example) and U.K pensions at any time after this, then there is no WEP until you take the U.K pension. So in my example of SS at 62 and U.K pension at 70 you have effectively 8 years of WEP free SS. WEP goes on the amount of foreign pension earned through employment, a figure that can't be forecast, especially in a DC scheme. If you have a full OAP and ONLY contributed via voluntary contributions and say a personal pension, SIPP if you like where you only paid in up to HMRC limits for an non employed person, then there would be no WEP at all. (assuming here that you never worked in the U.K)