Expat Forum For People Moving Overseas And Living Abroad banner

1 - 7 of 7 Posts

·
Registered
Joined
·
31 Posts
Discussion Starter · #1 ·
I am new to the forum and have been reading some of the very helpful advice posted by members. Would love it if anyone could offer their views to me.

i am a US citizen with a british husband living in the UK (since 1981).Now retired and receiving a pension from the Local Government Pension Scheme, which i gather comes under the heading of Government Service Pension.

Recently filed US taxes under the Streamlined Program; had conflicting advice about the pension- some said it was exempt income under the Treaty and did not need to be entered on the 1040 as it was taxable only in the UK, others said that because of the 'savings clause' it WAS taxable in the US and so should be entered as income. I am new to all of this but did attempt to read the treaty, which pretty much implies (I think) that pension income is taxable only in the country of residence. Am i missing something??

Foreign tax credit not much help as this income is under the UK tax allowance and so no tax is being paid on it in the UK.

It does seem peculiar that if i were still working, i could exclude my salary under the FEIE, but once retired the much reduced income paid by the same employer should be taxed.

So, what is the generally accepted view on the status of a UK government service pension paid to an american living in the UK?
 

·
Administrator
Joined
·
50,474 Posts
If the tax treaty says that the pension is taxable only by the state of residence, I'd go with that. There is a place on the 1040 form where you could (if you really wanted to) report the amount of the pension as "Other pension" on line a - and then in line b of the same line you report the "taxable amount of pension" as $0. But frankly, I don't see the point of doing so - unless it helps you sleep at night.
Cheers,
Bev
 

·
Registered
Joined
·
340 Posts
Welcome.

I am new to all of this but did attempt to read the treaty, which pretty much implies (I think) that pension income is taxable only in the country of residence. Am i missing something??
I'll start by saying that your reading of the treaty contradicts this very pretty and professional looking tax flowchart from a noted international tax expert and also the note at the end of page 69 of the treaty 'Technical Explanation'.

And yet... my reading of your situation agrees with yours. That is, your UK government pension is not taxable to the US under the
treaty. Hmm.

Government pensions are covered by Article 19 Paragraph 2(a), and are taxable only to the originating country (so in your case the UK). Crucially, Paragraph 2(b) should not apply here because although you are a US "national" you are not also resident in the US (but see below for weirdness).

Okay so far.

Now, reading a US tax treaty is tricky, because often all is not as it seems. The US uses its spiteful 'saving clause', in this case Article 1 Paragraph 4 to tax its citizens as if the treaty "had not come into effect." Unmodified, this eviscerates the treaty for US citizens.

But... Article 1 Paragraph 5 lists some exceptions to the 'saving clause', and Article 19 is one of them. On my reading then, you get Article 19 Paragraph 2(a) treatment.

So, either we are both missing the same thing, or the "expert" interpretation of the treaty is wrong.

The sticking point as I see it isn't the 'saving clause', but rather the conjunctive 'and' in Article 19 Paragraph 2(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." Under standard rules of logic -- and English! -- being a national or a resident would not suffice.

In contrast, the 'Technical Explanation' notes that Article 19 is outside the 'saving clause', but interprets Paragraph 2(b) as "taxable ... only in the United Kingdom unless the individual is a U.S. citizen or acquires a U.S. green card." This not only changes the conjunctive from 'and' to 'or', but also interprets 'resident' here to mean 'green card holder', something that the treaty itself doesn't appear to intend.

Quite a confusing mess, then.
 

·
Registered
Joined
·
340 Posts
But... Article 1 Paragraph 5 lists some exceptions to the 'saving clause', and Article 19 is one of them. On my reading then, you get Article 19 Paragraph 2(a) treatment. ... So, either we are both missing the same thing, or the "expert" interpretation of the treaty is wrong.
Oh, hang on...

Article 1 Paragraph 5(b) excepts Article 19 but is specifically limited to only cover "individuals who are neither citizens of, nor have been admitted for permanent residence in, that State."

So because you are a US citizen, this get-out clause fails to cover you. In which case Article 1 Paragraph 4 (the US's execrable 'saving clause') applies. And that article negates the Article 19 part that says your UK government pension is taxable only to the UK.

Sigh. Still a confusing mess, but at least an apparently consistent one.

Unfortunately then, it does indeed appear from this that the US may tax your UK government pension. If your income falls below the UK £11,500 tax free allowance then even though you cannot use a US foreign tax credit, there is at least some chance that it also falls within the US federal exemption and standard deduction combined, around $10,350.

Otherwise, you can get a larger standard deduction, but only if you file US tax jointly with your UK husband. This puts all his UK income in scope for US tax, so unless you are the major breadwinner and your husband earns next to nothing this is likely to be worse than better (plus of course, many non-US citizens understandable object violently to having their finances disclosed to the US IRS).

Finally, after all this, if you do not plan to return to live in the US at any point in the future you might want to give some thought to taking UK citizenship (if you don't already have it), and then renouncing your US citizenship. There is a $2,350 'processing fee' (yeah, right!) for renunciation, but it will pale into insignificance in comparison with the freedom you will gain from otherwise lifelong hassles with US tax.
 

·
Administrator
Joined
·
50,474 Posts
While I admit that all the legalese makes things pretty unclear, there is always the approach of taking a good faith stand, filing your forms that way and if and when the IRS has any questions, they'll get back to you. Unless there are zillions of $$$ involved, chances are they won't bother - at least not for those of us resident overseas.

Renunciation is always an option - but it's an expensive way to go, both in terms of money and time and effort. A friend of mine is in the process of renouncing so that she can take German citizenship. But she has considered all the various options (taxes, travel, etc.). I've certainly considered the option, however due to the differences in the tax treaties from one country to the next, have decided that it's simply too expensive for me and my situation. But as the old saying goes, "your mileage may vary."
Cheers,
Bev
 

·
Registered
Joined
·
340 Posts
While I admit that all the legalese makes things pretty unclear, there is always the approach of taking a good faith stand, ...
Tax treaties are certainly exceptionally painful to read and digest. Doubly so in this case. However, the 'Technical Explanation' is reasonably clear (emphasis here is mine):
Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for permanent residence there (i.e., in the United States, a "green card" holder). ... In addition, an individual who receives a pension paid by the Government of the United Kingdom in respect of services rendered to that Government is taxable on that pension only in the United Kingdom unless the individual is a U.S. citizen or acquires a U.S. green card.
In other words, a US citizen's UK government pension is taxable to both the US and the UK. Primary taxing rights to the UK. Normal US foreign tax credit applies, but no FEIE since this income is not 'earned'. Obscure? Certainly. Unfair? Of course. Par for the course with the US? Yes.

Renunciation is always an option - but it's an expensive way to go, both in terms of money and time and effort.
The initial effort probably isn't that great. A couple of intrusive forms, a visit (or at worst two) to the US consulate, and you're done. The larger workload will be final split-year US tax return, but even there you can always pay someone to have that done for you.

As for expense, the $2,350 will probably pay dividends over successive years in completely freedom to then use things such as ISAs and other UK tax-free accounts. It is also worth noting that renunciation has become vastly more expensive over the past decade or so, up from $0 to $450 in 2010 to $2,350 in 2014. Where next?

Added to that, the US introduced its appalling 'exit tax' in 2008, and if you hit the asset limits for 'covered expatriate' then that alone can push renunciation financially out of reach for some. In effect a financial 'Berlin Wall', with the US playing the part of East Germany.

All of which is to say that while renunciation might currently be somewhat difficult and expensive, it seems set to become even more so in time. That's an argument for renouncing now, and before things worsen further.
 

·
Administrator
Joined
·
50,474 Posts
I just don't want folks thinking that renunciation is an "easy" cure-all for the issues with US citizenship for those living abroad. There are still the laws on the books that allow the Attorney General to deny entry to the US to those who have renounced their citizenship. Haven't heard of this being invoked - other than for one or two extremely wealthy individuals who were seen to have renounced in order to avoid US taxation - but that is also a possibility in the future. There are also tax issues related to US persons who inherit from "foreigners" - so another thing to look into if any of your heirs-to-be are still US citizens. And, of course, for anyone with US source income (or the potential for US source income in the future) the tax consequences of that as a non-citizen could prove a rather unpleasant surprise.

Renunciation is an option - and probably a good option for some folks. But there are many aspects that have to be considered before you take the plunge.
Cheers,
Bev
 
1 - 7 of 7 Posts
Top