# "pension" tax grand cayman



## Islandgrl65

:angel::angel:Hello
I am a us expat living and working for the cayman islands government
The island has a " pension" that is required for every employee
It is a plan that i have no control over and has some risk.
No money has ever been made according to a fellow co worker. One year te money had a small loss. It is more like a savings plan

Ive had 5 different cpa's give me 4 different recommendations on how to report this income Most of my co workers who are us citizens have never reported it.
There are no taxes in Grand cayman. Ive had recommendations of reporting the govts contribution as earned income to reporting the income as taxable and (my contribution to the "pension" which is income taken out of my check ) paying 35% + tax on this pension income. Some have said do not include the income at all, since my print out from the government does not show it as income
I am aware there is no tax treaty and it is a non approved irs "pension"

1. Is this income reported as earned income?
2. If not, and it is taxable, since i pay not tax and have no tax to off set it with, i owe tax on the entire amount? The entire amount being the governments contribution and my contribution ( the deducted amount from my paycheck)
3. Report only my net income now and report the income when i take the distribution
4. Report my salary and the pension contribution as gross income

Please if anyone can help and give me a source would be much appreciated

Sunny and 80


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## Bevdeforges

Have moved you over here to the Expat Tax section, since this is a question that applies to more than just the Caymans.

In theory, you should be reporting your income "gross" (i.e. before any deductions from your paycheck for benefits, such as this pension scheme) to the IRS and applying the FEIE to this total. I would not bother declaring the government contribution on your income tax returns for the US, as you may never see this money (at least not until and unless you actually draw a pension at retirement).

When you retire and start to withdraw funds from the account or fund, you then need to consult the IRS publication on retirement pensions and annuities. Normally, your withdrawals will be taxed based on how much of the funds you have contributed vs. how much has been added to the total fund based on interest and other contributions.
Cheers,
Bev


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## Islandgrl65

Hi Bev,
Thanks for the info. Add another recommendation on what i should report. Im so confused. I like your idea best since it will decrease my tax. Are you for hire? &#55357;&#56836;&#55357;&#56835;
Is there a way to change my us expat flag to the cayman islands?
Blessings 

K


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## Bevdeforges

To change your expat flag, go to the "User CP" item on the menu bar at the top of the page. Click on "Edit your details" on the left side of that page and you should get a section that allows you to modify the countries whose flags you display.

As far as information on what to report - download Publication 54 from the IRS website. There are also a number of other publications there on pensions, annuities and other subjects that should be of interest, but Pub 54 is the basic one for those filing from overseas.
Cheers,
Bev


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## Islandgrl65

Hi Bev
I tried to edit....i get a page that says i don't have access to that area. Thanks for your help, ill check out the publication. The "expat expert" accountant i am working with wants me to use all my income plus my contribution as income and other income so i owe the most tax. Also saying i need to file a 3520 for unrealized income. I may need to find someone else. Like i mentioned very confused and frustrated. Doing so much research on my own. Thanks again


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## Bevdeforges

Oh, you may need to make a few more posts before you can monkey around with your user CP.

Take a look at publication 54. You do need to declare all your "worldwide income" to the IRS each year. However, it depends exactly how the retirement fund is set up as to just how you report that. The accountant is right in that you have to report all your salary income including your contribution to the retirement plan, plus any and all interest income on bank accounts and investments.

The 3520 depends on how the retirement fund is structured.

But you should be able to "exclude" (via form 2555) all earned income (i.e. your salary including your contribution to the retirement plan) from US taxation. This is all explained in Publication 54.
Cheers,
Bev


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## Islandgrl65

Bev, 
The problem is i am over the 95,100 allowed with my feie and my housing deduction once i convert my income to us. I Will owe 28% tax on remaining, which if the pemsion is included can make a difference btwn 7000.00 and 200.00 if not included. 

Thats a lot of coin for me.

Ill read more but so far that seems to be where i am at

Thanks again


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## GrandT

The question is a very difficult tax question which covers unique areas of tax law: compensation benefits and foreign earned income. Tax practitioners that do Comp/Ben usually don't do expat taxes. And people that do expat tax, usually run away from the detailed Comp/Ben rules. Also, part of the answer involves knowledge of the CI and the type of plan that you have. When non-US countries have pension plans, these plans generally never have the same meaning as a US qualified plan for tax purposes. Therefore, don't rely upon the terms used by a non-US plan.

Here is what the US tax law says:

Under Sec 402(b)(1), Contributions to an employees’ trust made by an employer during a taxable year of the employer which ends with or within a taxable year of the trust for which the trust is not exempt from tax under section 501 (a) shall be included in the gross income of the employee in accordance with section 83.

[Note - Sec 402(d) does make an exceptions to Sec 402(b)(1), but the exception still treats it as included in the taxpayer's income in the current year. However, the 402(d) exception may be helpful for a taxpayer that earns less than the FEIE. As your income is over the FEIE, it doesn't matter, as the income would still be included in the taxpayer's gross income each year).

Also, where a portion of an employee's salary is withheld and contributed to a retirement plan and the employee has a vested interest in those amounts when contributed, the amounts are includible in the employee's income when paid into the plan under section 61(a) of the Code. See Rev. Rul. 56-473,; Rev. Rul. 57-326.; and Rev.. Rul. 72-250.

In short, the tax law looks clear. The current contributions are included in gross income. If you received different answers from different accountants, you may wish to ask them to support their answers or you are getting some off the cuff advice that is worth the price you pay.


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## BBCWatcher

GFtax, the original poster mentioned that this retirement fund has never made money. If that's correct, would the original poster be able to count future realized capital losses (if any) against future U.S. tax liabilities? That would help soften the blow in the future. (Or how about any losses in 2012 and prior, if applicable and realized?)

Also, could there be Passive Foreign Investment Company (PFIC) complications here?

Would Islandgrl65 be able to shield some of her savings (and capital gains) from future U.S. taxes if she contributes to a Roth IRA (via a "backdoor" contribution if necessary), again to soften the future blow? The deadline for making a tax year 2012 contribution is April 15, 2013 (including the "backdoor" conversion to Roth), correct?

Finally, would Islandgrl65's future U.S. Social Security retirement benefits (if any) be affected by the U.S. Social Security Windfall Elimination Provision when she receives payments from her Cayman defined contribution retirement program? (Although presumably she is not making U.S. Social Security and Medicare contributions now, and presumably her future annuity payouts would be U.S. tax free -- except for any gains -- since the contributions were made with U.S. taxable income.)


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## BBCWatcher

With some more searching, I found this plan description. Some other reports suggest that this plan is doing quite well over the long term, so I wouldn't expect losses by the time you collect benefits. The fund gains look quite good, actually. The Cayman Islands dollar has been successfully pegged to the U.S. dollar since 1974, so I don't think there's much currency risk. (And if they lose peg you could gain in U.S. dollar terms, actually -- the peg might be broken in that direction if it is broken.)

Not that you have much choice, but even with U.S. taxability it looks like you've got a good program. You get a dollar-for-dollar match from the government, and the restrictions look reasonable to me for enjoying that match. U.S. taxability is probably no different than any additional dollars you get above the foreign exclusions, and there's a possibility the gains will be tax deferred (unless PFIC rules complicate things). Governments are generally pretty good about defending earned public employee benefits, and the returns look rather good to me. Benefits are only paid as annuities (it looks like), but that's probably good from a U.S. tax point of view -- and the joint annuity option looks like it's tax compatible with marriage to a U.S. citizen, at least.

By the way, there are some things that people miss with the foreign housing exclusion. One is they forget to check the IRS's table describing the higher exclusions allowed in many places overseas. (The 2012 exclusion for the Caymans is up to US$48,000.) Another thing -- I missed this one until recently -- is that the exclusion applies to more than rent. Quoting the IRS: "Housing expenses include rent, utilities (other than telephone charges), real and personal property insurance, nonrefundable fees paid to obtain a lease, rental of furniture and accessories, residential parking, and household repairs." That means I now keep receipts for my electric, water, and sanitation bills and when I had the washing machine repaired (for example). Cable TV and Internet don't count, though -- elsewhere the IRS clarifies that. Anyway, if you can pull up your FHE (if you're not up as high as possible to the US$48,000 maximum) using these rules then that should help. (Although I mentioned the Roth because I think you need some earned income above the foreign exclusions to contribute, so earning "too much" overseas paradoxically opens up that popular U.S. tax-advantaged savings vehicle.)


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## Islandgrl65

Thanks GFTAX and BBCWATCHER for the posts,

So my gross income ( which includes my employer and my contribution to the pension) is included in my earned income? That's what I'm gathering from others as well

How about filing as a 1099 or employee? Would it make a difference?

Guess I should find a nicer place on the beach to maximize my FHE. Would rather enjoy a beach view vs pay it in taxes...

Blessings to you both


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## BBCWatcher

Islandgrl65 said:


> So my gross income ( which includes my employer and my contribution to the pension) is included in my earned income? That's what I'm gathering from others as well


Yes, for what it's worth I agree with GFtax. Any gains on those savings would be unearned income, however.

For what it's worth I've got a somewhat similar issue in Singapore with the Supplementary Retirement Scheme (SRS), although that's a voluntary retirement savings account here. But I've come to the same fundamental conclusions.



> How about filing as a 1099 or employee? Would it make a difference?


Generally it's better to be an employee rather than self-employed if you have a choice, and if I understand your question correctly. If you're self-employed you would be responsible for Social Security and Medicare taxes at the self-employment rate. I say "generally" because, if you're nearly vested in U.S. Social Security, it can make sense to pay to qualify. (Or I suppose, as another example, it might make sense in some cases if you expect to become disabled soon, especially if you can't get sufficient disability insurance.) The U.S. self-employment payroll tax for 2013 is 15.3% on your first $113,700 of earned income, 2.9% in the next bracket, then 3.8% in the top bracket. (I'm oversimplifying but only slightly.)

Most people would need a very large amount of other tax savings to make up for that. Doesn't seem like it would help.



> Guess I should find a nicer place on the beach to maximize my FHE. Would rather enjoy a beach view vs pay it in taxes...


Well, if you have a washing machine to repair (for example), and if that increases your enjoyment, and if you won't hit the maximum exclusion, and if you have earned income above the exclusions, you should know that such expenses would be U.S. tax favored, yes. Other examples: running your air conditioner more often and at a lower temperature, and taking longer and hotter baths.


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## Islandgrl65

BBCWATCHER

Thanks again. I'm going to check my pension status today.

What if there is a reported loss for 2012? Which has happened in the past.


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## GrandT

BBC-I will reply to your questions as soon as possible. I am a little busy this week, but I will try to summarize replies to the following:
1) losses on the plan
2) PFIC issues
3) Soc Security issues
4) IRA contribution planning.

Islandgrl- I agree with BBC that having foreign housing exp (gathering records) would reduce your taxes. Don't go out of your way to incur additional housing costs. For every additional dollar you spend on your A/C bill, you only reduce your tax by 28cents (if you are in the 28% bracket). Economically, it is better to be frugal.


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## Islandgrl65

Hi bbc
Just found out there has not been a contribution to my plan since May 2012. Every government is struggling at the moment it seems. Not only am I paying tax on money I don't even make in the US but on money that isnt even mine yet. lol. Crazy world. So I have no idea where my plan stands at the moment.


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## BBCWatcher

Could you expand on that? Generally you would not owe taxes on income you're neither receiving nor being credited in your account.


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## Islandgrl65

Thanks for the feedback, I'll get a written statement and use that for my tax records and what I report as earned income. Appreciate the help!

Sunny and 80's. hmmmm never get tired of it


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## BBCWatcher

Yes, that makes sense to me. If you didn't get paid a particular amount or weren't credited that amount in your account(s), it's not income. "I will gladly pay you Tuesday for a hamburger today" is not income, basically. Just keep that statement with your tax records, and that should be perfectly fine.

If/when the Cayman Islands government credits those past promises to your account at some point in the future, then it'll be income in whatever tax year(s) you receive it.


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