# UK forces pension



## Paul762 (Jul 2, 2008)

Hi,
I moved here to Idaho almost 6 years ago.

For the first 3 years I used a local CPA to do my tax returns, she wasn't sure about my UK pension which I get paid monthly into a local bank over here and she didn't put it down on my tax return.

For the last couple of years I have been doing my own tax return on turbo tax and not highlighting my forces pension. For the past 2 years the pension I receive is under the UK tax earnings so I don't pay tax on it over there.

I have been trying to read a lot of information on this matter and I just keep coming to a dead end with conflicting information on do I pay tax over here and how or do I need to declare it.

I also read which I do not know if it is correct if I am here on a green card I don't pay taxes on the pension but if I took up citizenship then I would have to pay taxes on the pension.

This year I thought I cant keep putting my head in the sand and I need to get it sorted. Well after being in touch with quite a few CPA/Law firms I can't find anybody in Boise who can help me or know how I should move forward.

At present I have been referred to a specialist in Salt Lake City who deals with international tax issues.
This person said he can work with a partner in Idaho, after talking to him he still can't give me a answer to is my pension taxable should I declare it on this years tax, do I need to do an amended tax return for the years I have missed or what.

I don't know if I am being sceptical or not, but surely if this is his area of expertise should he be able to answer my question relatively easily or should I be paying up to $400 an hour for him to research this for me?

I wonder if any other ex forces people have gone through this issue or anyone who has dealt with this could give me some advice on what they did or know.

Many thanks Paul


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## BBCWatcher (Dec 28, 2012)

Nearly always the income must be _reported_, so not reporting the income on your U.S. tax return was likely a mistake. Whether that income is U.S. _taxable_ or not is a separate question. If the U.S.-U.K. tax treaty says it's not (and not subject to the savings clause), then it isn't. (In that case you'd take what's called a treaty position on your U.S. tax return, although you are not _required_ to take a treaty position if you prefer the normal rules.) If it is, then you would still be allowed a Foreign Tax Credit to account for U.K. income tax paid on that income.

If the U.K. income tax is higher than the U.S. income tax for that particular income then you may have done yourself a bit of financial harm not reporting the income and not taking the Foreign Tax Credit. So any way you look at it, it's worth investigating and spending some time to fix, both in the past and going forward.


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## Davis1 (Feb 20, 2009)

Tax services for British Expats in the United States


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## Paul762 (Jul 2, 2008)

Thank you both for the links and info.

The more I about it and the more I read I realize perhaps I should of declared it whenI first moved here.

I have possibly 4 choices to choose from, firstly put my head back in the sand and hope it will go away. Which I will give a miss.

Second try and find a CPA who has expieience in this and can help me, which is what I am trying to do.

Thirdly work out how much pension I received on the the four years 9 months I filed and add it to my 2015 return.

Or lastly go to the tax office in Boise and talk to somebody down there.

I am contacting local CPAs and checking out the links you sent.

Thanks again Paul


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## Bellthorpe (Jun 23, 2013)

I don't know how these things play out in the US, but in every other country in which I've lived, going to talk to the tax office would generally be the best move.

Tax offices can be surprisingly helpful if you ask them to help. It's when you, the taxpayer, don't communicate with them that things go bad.


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## BBCWatcher (Dec 28, 2012)

I don't recommend Option 3. That could put you in a higher tax bracket on the U.S. side and isn't kosher anyway.

If you paid U.K. income tax on that income then chances are rather good that straightening this out properly with amended tax returns will be financially beneficial. So how about spending a little time to learn how this works on your own, then see if you (and tax preparation software) can handle this on your own. We can answer questions here. This probably isn't a complicated issue, actually.

Let's start with this basic compound question: how much pension are we talking about, over what period of time, and did you pay U.K. income tax on it?


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## Paul762 (Jul 2, 2008)

Thanks for your information.

Not counting 2015 it spans from March 2010 to 2014, the 2010 approx $7,700
2011 and 2012 $9,800 2013 $11,800 and 2014 $15,200. In total $54,300.

In 2010 and 2011 I paid only about $300 in tax on those years, then the tax allowance on what you earn over there changed and I was just on the border of the minimum tax you are allowed to earn before you are taxed so in 2013 and 2014 I paid no tax in the UK, the return for this year on the p60 said I had paid approx $140 tax.

When I moved out here in 2010 my last tax return on the pension while I was in the UK was about 25% tax.

Thanks again for your help.
Paul


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## BBCWatcher (Dec 28, 2012)

Jumping ahead here, I did some more research. As I suspected, the news is all good.

1. The IRS attempts to summarize the most common tax treaty situations in IRS Publication 901. Here's what Publication 901 says: "Pensions paid by, or funds created by, the United Kingdom, its political subdivisions, or local authorities for services performed for the United Kingdom are exempt from U.S. income tax unless the recipient is both a resident and citizen of the United States." You are a resident of the United States, but since you are not a citizen of the United States, your U.K. government military pension is only U.K. taxable. (Were you to become a U.S. citizen my understanding is that the taxability then flips: the U.S. would tax it but not the U.K.)

2. Unless the instructions say otherwise, you still have to report the income on your U.S. tax return even if it isn't taxed. So let's look at the instructions to IRS Form 1040. Unfortunately they're a bit confusing. They say: "You must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty." But then they also say, just below: "Report distributions from foreign pension plans on lines 16a and 16b." If you want to be particularly cautious, you could report your U.K. military pension on line 16a but, since it's not taxable, you would exclude it from line 16b. Or you could just leave it out from both lines. Both approaches are defensible, in my view. I prefer and recommend the first option since disclosure starts the statute of limitations clock.

3. You do not have to file IRS Form 8833. IRC 301.6114-1(c)(1)(iv) waives the typical requirement to file that form if you take a treaty position since this is foreign pension income, and the instructions to Form 8833 back that up.

....So, to net it out: (a) keep personal financial records on hand, as always, in case the IRS has questions; (b) in my view it'd be prudent to report that U.K. military pension income on line 16a (but not 16b) on IRS Form 1040 at least going forward, for statute of limitation reasons; (c) you could file amended (1040X) tax returns to change line 16a if you wish, although I think that's quite optional; (d) if/when your U.S. citizenship status changes then you'll need to shift the tax treatment of this income.

All that said, my understanding is that you have the option to waive your tax treaty privilege. Why might you do that? Well, as I mentioned, if the U.K. income tax on your military pension is higher than your hypothetical U.S. income tax would be, then waiving your treaty right means you could claim a Foreign Tax Credit (IRS Form 1116) with your U.S. income tax return. That credit might be able to offset some of your U.S. income tax bill. There are restrictions on flipping back and forth between taking advantage of the tax treaty and not -- you have to be consistent in your choice -- but it is a choice. So if you feel like chasing a few dollars more to keep in your wallet, you might be able to do that. That's what I was referring to upthread. (On edit: I see you've paid very little U.K. tax on that income since you moved to the U.S. Assuming you have at least some modest U.S. income or better, chances are your hypothetical U.S. tax rate on those additional dollars of income would be higher than your U.K. rate which is hovering around zero. So chances are you're better off taking the tax treaty benefit. But feel free to check me on that, too.)

Anyway, net net, it's all good. I'm less concerned than I was that you didn't report the income somewhere in your U.S. tax returns in previous years since the IRS's instructions don't seem to require doing so, but I still recommend you do that (via line 16a). Just to explain what the statute of limitations means, when you report income but claim it isn't taxable, the IRS then cannot go back and dispute your tax free claim after a certain period of time (the statute of limitations). But if you don't report the income, there's no deadline. If the IRS thinks that income should not be tax free, the IRS has no time limit to dispute your tax free claim. Consequently I think it's a better idea to report the income (on 16a), but the instructions seem to let you omit this income from line 16a if you wish.

All that make sense?

On edit: One more thing I should mention. If you have foreign financial accounts you have the usual reporting requirements on the U.S. side: FinCEN Form 114, IRS Form 8938, and/or IRS Form 3520, as applicable. If you're already familiar with those, no problem. The tax treaty does not waive the requirement to file whichever of those forms (if any) you must file.


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## Paul762 (Jul 2, 2008)

Thank you so much BBC for taking the time to post such a detailed response.

I had read some of the US tax treaty publication 901 page 33 which covers some of the information that I wasn't sure of.

After reading more today I think this week I will make sure I have all my UK tax returns, P60s in order, how much I was paid and how much UK tax I did pay. Then when I complete the 2015 tax return put the pension down on the line 16a and then submit it and see what happens.
I think I read on another forum someone put the pension down on 16a and wrote UK armed forces pension in the box next to it.
Although if I can find a local CPA who deals with overseas pensions I will go though this with them.
I had read about the form 8833 recently but I hadn't heard of that form before.

When I first moved out here I remember reading if you receive a UK Forces pension if you are on a green card you are not liable to pay US tax on it unless you become a citizen. 
However recently I wasn't sure if you were a resident on a green card it had changed now and you had to pay tax.
Both my wife and I work full time so it would be financially better to only pay the small amount of tax the UK charges us on it.
I do want to change my status from Green card to dual nationality, but I am not sure when I will do this, I still have 4 years 3 months on my green card but could take the citizenship sooner if I went down that road, or renew my green card.
Thanks again BBC. 
Paul


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## BBCWatcher (Dec 28, 2012)

Paul762 said:


> After reading more today I think this week I will make sure I have all my UK tax returns, P60s in order, how much I was paid and how much UK tax I did pay. Then when I complete the 2015 tax return put the pension down on the line 16a and then submit it and see what happens.


I like that idea. Bear in mind you should use the gross pension amount on Line 16a, before any U.K. tax withholding. Convert to U.S. dollars using any reasonable exchange rate. The annual exchange rate the IRS publishes is fine.



> I think I read on another forum someone put the pension down on 16a and wrote UK armed forces pension in the box next to it.


Well, you could do that, but I don't recommend it. I recommend not putting text in boxes reserved for numbers unless the IRS says otherwise.

There's barely enough space _to the left_ of the 16b numeric box to put "See Stmt. 1" if you want to do that, then attach a piece of paper labeled "Statement 1" with the comment you want to include. (This is the approach I've seen major accounting firms take.) Alternatively, although you're not required to file it, you could file IRS Form 8833 to explain what you did. But honestly I don't think you have to do either.



> Both my wife and I work full time so it would be financially better to only pay the small amount of tax the UK charges us on it.


Yes, that makes sense.

By the way, in current editions of the tax forms, if you're filing IRS Form 1040A instead of 1040 then lines 16a and 16b (1040) are lines 12a and 12b (1040A). Form 1040EZ doesn't have those lines at all. As I read the instructions, your U.K. military pension disqualifies you from using 1040EZ (if you were otherwise eligible). But 1040A is OK if you're otherwise eligible to use that form and prefer to use it. (You're not required to -- 1040 is OK if you prefer it.)


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## Bevdeforges (Nov 16, 2007)

Just one caveat on your proposed method of reporting your pension. Remember that the US tax forms require you to choose among various options. If you want to claim the tax you've paid to the UK on the pension, then you'll need to file a form 1116 to claim the Foreign Tax Credit against whatever tax liability the pension would otherwise create on your return. (Basic rule is that the IRS won't make these kinds of decisions for you - you have to work them into the calculations yourself to "prove" that you're entitled to the refund.)

You may want to check the websites of some of the large, international accounting firms to see what guidance they have on the international tax front. A local CPA may or may not be familiar with the treatment of foreign pensions, and at least you could same a bit on the research involved if you come in with some reliable source material to ask your questions.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

I don't recommend trying to claim the Foreign Tax Credit here, as mentioned upthread. Paul762 pays very low U.K. tax rates (hovering near zero) on his military pension income while being in a higher U.S. income tax bracket, so it makes no sense to waive his tax treaty protection (which is what claiming the FTC would entail).


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## Paul762 (Jul 2, 2008)

Thanks again both of you have given me a great insight on what I should do, I am so grateful for the helpful advice you have given and taking the time to reply.

Hi Bev you gave me some good advice just over 6 years ago when I was trying to move out here. I hope you are doing well.
Thanks again Paul


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