Taxable amount of foreign pensions

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Taxable amount of foreign pensions


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Old 20th November 2013, 11:17 AM
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Question Taxable amount of foreign pensions

Foreign Goverment Pensions (i.e. Social Security)
From a earliuer post I read "a government pension (i.e. US social security). Government pensions are subject to taxation in the country they come from - usually".

If so, do I still have to list the amount on F1040 Line 20a and a "0" on 20b or just omit it altogether?

Foreign Private Pensions (i.e. Company Pensions)
I assume that foreign company pensions fall under "unqualified" and the taxable amount is determined by using the "General Rule" as outlined in Pub 575. Ive been with my Company for over 35yrs, a portion was paid by my employer and a portion from me. How can I be expected to supply the Information needed in the worksheet?

Is there an easier way or am I doing everything wrong?

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Old 20th November 2013, 12:30 PM
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OK, first of all, I take it that you're talking about your US tax forms here, not the German ones.

On the US forms, line 20 is for US Social Security benefits. And whether or not your US SS benefits are taxable by the US depends on a number of things, including your filing status, your total other income and the peculiarities of the Social Security treaty between the US and your country of residence. Publication 915 is your guide here.

For the foreign private pensions, you may have to check Publication 939 to see if the General Rule even applies to your pension at all. Although both you and your employer contributed to your pension, it depends whether you're talking about a defined benefit or a defined contribution scheme, and, well, see what Pub 939 has to say about this.

This stuff is a bear to figure out the first time through. But once you figure out the correct tax treatment, things should go quicker next time.
Cheers,
Bev

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Old 20th November 2013, 12:53 PM
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Ok, the foreign SSN does not get entered on line 20.
Where then? Line 16a and b for Pensions?
If so, does Form 8233 have to be filed to claim the treaty benefit?

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Old 20th November 2013, 03:48 PM
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It depends whether your foreign pension is actually a "pension" or a type of "annuity" - and that's where the other IRS publications kick in.

I think the way they normally expect you to handle the foreign pension is to use the foreign tax credit to offset the US tax you owe on the pension with the tax you pay in Germany on the pension. But hopefully there is someone here with more experience with foreign pensions than I have. (I.e. "not yet")
Cheers,
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Old 20th November 2013, 05:16 PM
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Thanks again Bev.

I think the goverment Pension qualifies as SSN. I'm not sure how to enter it though. I'll check with the consulate here in Frankfurt.

I started reading Pub 939. Impossible if you are not the one who is CIO of the insurance company. There is no way in h___ that a recipient can answer the questions there.

I think you are right, the FTC is the only safe way to go. But then you have to tax 100% of the payment even though the local goverment only taxes maybe 50%!

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Old 19th December 2014, 02:46 PM
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In researching foreign pensions I have come up with the following questions and could use your thoughts.

1- Foreign employer (company) pensions are treated as non-qualified employer trust which means that the employer contribution is to be included as "Other Income".
What is with the employee contribution?
Here I find different info.
2- If I understand correctly, gains/earnings to the pension are also to be included as "Other Income".
If so, why is the distribution taxed when distributed?
Isn't this double taxation?

I realize tax-treatys may play a role. I am talking about the general handling of the pension.

Can anyone share some insight?

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Old 19th December 2014, 04:25 PM
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I have only dealt with a couple of different countries on this (trying to help friends) and I can assure you that the precise provisions can vary quite a bit from one country to the next depending on the tax treaty.

Generally, in the savings-type private plans, the US does NOT treat them like IRAs or 401Ks. That is, you can't deduct your "contribution" and it's possible that you are supposed to include any employer contribution as income to yourself in the year the contribution is made.

But, there are also differences in how the various countries treat the distributions. In France, for instance, they are treated more or less like "assurance vie" payouts - which offers merely a "tax advantaged" rate on the distribution itself. Other countries may treat distributions like annuities (i.e. you pay tax on the part of each distribution that hasn't been taxed yet, meaning the portion representing your gains over the years).

And how the US looks at these plans is anybody's guess. I have heard tax advisors here in France advise just to "not bother" reporting them on your US return at all - though that doesn't sound right, either. (I suspect the US expects you to treat the distributions either as annuity payouts or something similar.)
Cheers,
Bev

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Old 19th December 2014, 04:45 PM
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Yeah, I think the best bet is to visit the local IRS that will be aware of the situation here in the host country.
I've had only bad luck with tax advisers. I've seen tax advisers list distribution payments from pension as foreign earned income and then excluded it with FEIE. Definately wrong.

Up until now I too have ignored employer contributions and gains, but with FACTA these accounts will be reported and must therefore be included on my FBAR and Form 8938. There is a good chance that your federal return will be flagged if taxable income from these accounts isn't included on your Form 1040.

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Old 20th December 2014, 12:36 AM
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But in general -- unless a tax treaty specifically says otherwise, in other words -- it's just another foreign account. The fact another government calls it a "retirement account" and offers tax advantages is immaterial to the IRS.

Thus, employee contributions are deemed from your after-tax income, not pre-tax. Employer contributions to that non-qualified account are considered part of your wages and salary, just like any other form of compensation. All dividends, interest, and capital gains on the account are U.S. taxable. If the account triggers PFIC rules then you'd likely make QEF elections each year.

It's pretty simple, actually (and perhaps unfortunately). You didn't ask, but one way around this problem is for your foreign employer to contribute to an IRS qualified account that you construct. It doesn't necessarily have to be a retirement or pension account. For example, if your employer contributes to a 529 plan, their contribution is taxable (as ordinary income) when you receive it, but qualified withdrawals from the 529 plan are U.S. tax free. (A 529 plan is aimed at college savings.)

As a reminder, there is no such thing as a globally tax-advantaged retirement account. If you're boosting a German tax-advantaged retirement account, that's great, but it's less great if you then retire in, say, Japan and Japan doesn't care that Germany doesn't/didn't tax that account. If there's no tax treaty that says otherwise, Japan would likely require you to pay income tax on the interest, dividends, and capital gains on that account. Japanese inheritance taxes would also likely apply. One recommended approach for U.S. citizens is that they diversify their retirement savings, though with a bias toward U.S. vehicles (mix of pre-tax and post-tax contributions) and non-PFIC vehicles.

Note that it might still be OK that your employer's contributions are deemed U.S. taxable. Germany's income tax rates are generally fairly high, so you (probably) ought to be taking the U.S. Foreign Tax Credit (IRS Form 1116) without taking the Foreign Earned Income Exclusion (Form 2555). In that case your net effective German income tax rate, even counting the employer contributions to that retirement account, may still be higher than the U.S. rate (on the "earned income" bucket). So other than not accumulating as many excess Foreign Tax Credits as otherwise, you might still owe zero U.S. income tax on those employer contributions. The proceeds, however, are/will be taxable -- probably via QEF elections. (Or take the FEIE, and assuming those employer contributions fall within the limit of the FEIE/FHE, as I understand it they wouldn't be U.S. taxable since they'd be considered part of your earned compensation.)

To avoid the QEF elections you need to be very careful how those funds are invested, assuming you have a choice. Direct holding of government and corporate bonds, stocks in banks, and stocks in insurance companies are three ways to avoid triggering PFIC rules, as I understand them.


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Old 20th December 2014, 06:41 AM
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On the other hand, one thing to remember is that on "retirement" or "savings" accounts of all types, if you pay the US taxes on a current basis (i.e. when making contributions and as interest and other gains are attributed to your account/fund) then withdrawals at retirement are simple withdrawals of capital and not taxable (nor declarable) at all on your US returns.
Cheers,
Bev

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