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Discussion Starter · #1 ·
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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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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Discussion Starter · #3 ·
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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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,
Bev
 

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Discussion Starter · #5 ·
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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Discussion Starter · #6 ·
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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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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Discussion Starter · #8 ·
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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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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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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Discussion Starter · #11 ·
Thanks BBCWatcher & Bev.
I've also have read that foreign pensions (mostly personal plans) are to be treated as regular financial accounts. With employer pensions I have read mixed interpretations.

However, if this is the case, I would add my employers contributions and earnings to my Foreign Earned Income (FEI) and as Bev said, distributions are nothing more than withdrawls and are tax free. This would mean, that the pensions are to be entered into Part I (Deposit and Custodial Accounts) of Form 8938 and not Part II (Other Accounts) and that the actual value is to be entered. Not zero.

As far as FEI goes, the IRS specifically states that "Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract" are note FEI.
Foreign Earned Income Exclusion - What is Foreign Earned Income

I guess it all boils down to is a pension (both employer and personal) a pension or a deposit account?
 

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Be careful in using the term "Foreign Earned Income" - because for US tax purposes, "earned income" is your salary or "salary-like" earnings from a personal business. Period.

Interest and other income "earned" on a bank or savings account is considered to be "unearned income" or (more properly, I think) "passive income." They make this distinction to distinguish income eligible for the Foreign Earned Income Exclusion - and interest or other "earnings" on financial accounts definitely cannot be included for FEIE purposes.

And also unfortunately, for a retirement fund, you have to decide how you want to characterize the plan in order to determine how to treat it. (This is where the tax advisors come in handy, as they have experience with these things.)

The easy one is a pension paid by or through the local government system. That's a government pension and that's normally what is referred to in the pensions section of any tax treaty. Very often it is only taxable by the country paying the pension (but not always!). For US citizens, US SS is the only "government pension."

Past that, you have to look at how the fund or plan operates. It's possible to characterize a given plan as a number of things: an annuity, an investment or even a sort of insurance. But it depends on the specifics of the plan and how it pays out. Generally this sort of plan is not recognized for any tax advantages granted by the local government.
Cheers,
Bev
 

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Discussion Starter · #13 · (Edited)
You're right SS equivalents are pretty straight forward.

I think BBCWatcher is correct in that pensions ie. retirement accounts should be treated as normal depository accounts. This would mean that contributions and earnings are taxable and distributions are only withdrawls. But I believe this only applies to private or personal contracts.

Company pensions, I believe, fall under §402(b) which would mean that contributions are taxable, earnings are not taxed and distributions are taxed when distributed. Also Form 3520 is probably required.

And I agree with you. Contributions (FTC-General Income) and earnings (FTC-Passive Income) are not Earned Income. Also distributions are not earned(FTC-General Income?).
 

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On company pensions, it kind of depends on a number of factors, including whether the company pension is "defined benefit" or "defined contribution" (assuming there are any defined benefit company pensions still out there).
Cheers,
Bev
 

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Discussion Starter · #15 ·
Well I just got off the telephone with the IRS in Philadelphia.

It seems, the IRS now considers most foreign employer retirement plans to be "employee-pensions" and not "grantor trust". The main consideration is that your employer set up the plan and that you have no access to the account before retirement or disability.

Most tax treaties have an Article covering Pensions but the agreement is revoked by the Savings Clause which allows the IRS to tax it's citizens wherever thy reside. However, several treaties are amended to revoke the Savings Clause concerning pensions. Check the treaty Protocols .
ie. The US-Germany treaty amends the original treaty to:
--allow employer contributions to be tax free,
--account gains are tax free and
--the employee can deduct his contributions to the account.
This ruling lowers non-excludable income and prevents double taxation on the pension.

The amendment does not revoke the Savings Clause concerning "where the distribution is taxed". The IRS reserves the right to additionally tax the distribution in the U.S.
 

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Just as an "aide" to what FFMRalph has posted, here is access to all the available US Tax Treaties with various countries: United States Income Tax Treaties - A to Z

One word of advice here - if they have a "Technical Explanation" listed among the documents, go for that first. The Technical Explanations are, despite the title, usually much easier to read and make sense of than the treaty or protocol itself.
Cheers,
Bev
 

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The IRS has a specific form, Form 8833, that's used when you take any treaty-based position on your tax return. That is, if the U.S.-Country X tax treaty says to do something different than what the U.S. tax code regularly requires, or at least if you think the treaty says something different, you'd describe the treaty provision you're using on Form 8833 and attach that form to your tax return.

It's a very good idea to use that form. Once you've told the IRS about the treaty provision you're using if the IRS doesn't raise an objection the issue is settled after some years. Even if the treaty argument you've made is later deemed "incorrect," it doesn't matter. You notified the IRS, and the statute of limitations started then.
 
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