# Should UK State Pension be in cluded in "Gross Income"?



## iota2014 (Jul 30, 2015)

The 1040 instructions say:


> **Gross income means all income you received in the form of money, goods, property, and services that is not *exempt from tax*, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). *Do not include any social security benefits* unless (a) you are married filing a separate return and you lived with your spouse at any time in 2014 or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly).


Two questions:

1. If pension income is non-US-taxable because of a Tax Treaty provision (and the Tax Treaty provision is exempt from the saving clause), is the pension income "exempt from tax", or does it have to be included in Gross Income and then excluded citing the Treaty?

2. Does the term "social security benefits" include UK social security benefits. (Neither (a) nor (b) applies.)

Be interested in any opinions, certainty being unavailable.


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## Bevdeforges (Nov 16, 2007)

Honestly, I think "non-taxable" means exempt from tax and thus not includable in gross income. In fact, I even noticed in TaxAct that when they ask for your "foreign pension" amount, they ask for the gross amount and then the taxable amount. If you do it that way (i.e. enter the amount you received, and then 0 as the taxable amount) they plop the gross amount on line 16a and 0 in 16b which means there is nothing included for adjustable gross income anyhow.

On question #2, I've always assumed that for US purposes, "social security" refers only to retirement pension related stuff. The IRS tends to think in strictly US terms. (Hey, here in France, "social security" means the health care program.)

See also publication 525 - especially p. 27 where they mention "public welfare benefits" - Lots of room for interpretation there.
Cheers,
Bev


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## iota2014 (Jul 30, 2015)

Thanks Bev. If I can exclude the pension from gross income, I'm below the threshold and don't have to file, so that's what I'm trying to decide.


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## iota2014 (Jul 30, 2015)

After further digging, and some helpful pointers, it seems the correct answers are likely to be:



> 1. If pension income is non-US-taxable because of a Tax Treaty provision (and the Tax Treaty provision is exempt from the saving clause), is the pension income "exempt from tax", or does it have to be included in Gross Income and then excluded citing the Treaty?


Include in Gross Income as non-taxable, filing 8833 to state Treaty provision relied on



> 2. Does the term "social security benefits" include UK social security benefits.


No.


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## iota2014 (Jul 30, 2015)

iota2014 said:


> Include in Gross Income as non-taxable, filing 8833 to state Treaty provision relied on.


8833 requirement is waived (https://www.law.cornell.edu/cfr/text/26/301.6114-1)


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## BBCWatcher (Dec 28, 2012)

How do you arrive at that conclusion?


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## iota2014 (Jul 30, 2015)

Paragraph (c)(1)(iv) of Section 301.6114-1

But as a mark of singular virtue, I'll be filing 8275 instead.


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## BBCWatcher (Dec 28, 2012)

Good catch. You're not barred from filing IRS Form 8833 if you wish, but that section of the tax code looks like it grants you a waiver for this income. Of course you'd still report that income via lines 16a and (to the extent taxable, per the treaty) 16b (2014 edition of IRS Form 1040). In my view Form 8275 is optional for this income.


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## iota2014 (Jul 30, 2015)

BBCWatcher said:


> Good catch. You're not barred from filing IRS Form 8833 if you wish, but that section of the tax code looks like it grants you a waiver for this income. Of course you'd still report that income via lines 16a and (to the extent taxable, per the treaty) 16b (2014 edition of IRS Form 1040). In my view Form 8275 is optional for this income.


Yes, I 'll be reporting it on the 1040. I'm using 8275 because the view has been expressed elsewhere (i.e. in other forums) that both items are fully US-taxable. I want to use 8275 to explain my reasoning for thinking they're _not_ US-taxable, giving references to the Technical Explanation and various IRS Publications in support.


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## BBCWatcher (Dec 28, 2012)

That seems like an odd way to do it, though. IRS Form 8833 is the correct form if you want to make a treaty argument specifically. The section of the IRC you found doesn't _bar_ you from filing that form. ("Waive" does not mean "prohibit.") If you feel you want to explain something treaty-related, that'd be the form to do it. (And what else would it be except the tax treaty?)

My view is that no explanation is needed, and the IRC doesn't require filing one. (Again, good catch.) The IRS can see that you're reporting two different numbers in 16a and 16b and will ask you about that difference if they have any questions about it. So I think you have full permission here for this income to keep it simple.


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## iota2014 (Jul 30, 2015)

That was my first intention, after realising the 8833 wasn't required. But I've been warned elsewhere that if the IRS doesn't agree that the income is not taxable I'll be sent a demand for the tax plus interest plus penalties etc. I'm sceptical about these warnings, as it sounds completely unreasonable, but then CBT itself seems completely unreasonable to me yet here it is. So it's a case of better safe than sorry - I just want to have it over with as peacefully as I can.


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## BBCWatcher (Dec 28, 2012)

If the IRS doesn't agree with your having different values in lines 16a and 16b it'll be in touch. But the IRS might agree (or at least not object)! It's really up to whether you want to argue a case (via Form 8833 I'd recommend) before the IRS even decides whether to ask you a follow-up question never mind make another determination, but I don't see the point. If you're confident in your interpretation, file that way and maintain personal records to back up the position you took.


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## iota2014 (Jul 30, 2015)

On further consideration, and looking again at the forms, I agree it would fit better to use 8833 (despite waiver) rather than 8275. 

However, I've now stumbled across a handy table on the uk.gov website (https://www.gov.uk/government/uploa...356800/Digest_of_Double_Taxation_Treaties.pdf) which gives the UK interpretation (p39 in the document), which I trust is not likely to be widely at variance with the US interpretation on these very basic treaty claims. The table says my pensions are non-US-taxable, as I thought. On the strength of that, I'll go back to my first plan, skip the 8833s as per the waiver, and just put the pensions down on the 1040s as not taxable. 

Thanks for your assistance.


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## iota2014 (Jul 30, 2015)

Unfortunately I misread the table. Can't edit the post.


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## iota2014 (Jul 30, 2015)

An update, in case it may be of interest for any renouncing pensioners who may have similar questions. (And for the satisfaction of getting it off my chest.)

After way too much headscratching and IRS-rune-reading, I proceeded on the basis that:

* the UK State Pension and the UK Government Pension are both exempt under the US-UK Tax Treaty (Article 17 for the UK State Pension, Article 19 for the UK Government Pension)

* these are probably non-contentious treaty positions, since the US Tax Code doesn't require one to file Form 8833 for pensions (Paragraph (c)(1)(iv) of Section 301.6114-1)

* the 1040 instructions say "Foreign-Source Income: 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.*"

With both pensions excluded from Gross Income, I was way below the threshold for filing 1040s, so I didn't. I had previously backfiled six years of FBARs marking them as "Streamlined"; now I amended each to show "Didn't know" instead of "Streamlined", so effectively filing them under the Delinquent FBAR Submission Procedure. And then I filed a timely FBAR for 2015.

When it came to completing Form 8854, the only slightly puzzling bit was calculating Net Worth. The instructions give few clues as to exactly what should be included under Assets. There is a line to include Pensions, but it didn't seem sensible to try to conjure up a Mark-to-Market value for either the UK State Pension or the UK Government Pension, as neither of them can be sold, transferred, given away, bequeathed or cashed in.

Eventually I discovered that the IRS did indeed issue guidance on this, they just don't bother to mention it in the 8854 instructions. The relevant document is IRS Notice 97-19, SECTION III. TAX LIABILITY AND NET WORTH TESTS (https://www.irs.gov/pub/irs-irbs/irb97-10.pdf) (p.41)

This ancient tract states:


> *Determination of net worth.* For purposes of the net worth test, an individual is considered to own any interest in property that would be taxable as a gift under Chapter 12 of Subtitle B of the Code if the individual were a citizen or resident of the United States who transferred the interest immediately prior to expatriation. For this purpose, the determination of whether a transfer by gift would be taxable under Chapter 12 of Subtitle B of the Code must be determined without regard to sections 2503(b) through (g), 2513, 2522, 2523, and 2524.


Since neither of my pensions can be given away, I figure they can't be subject to gift tax, so I left them off.

I sent the 8854 to the "Where to File" address in Philadelphia via Royal Mail International Tracked, in order to obtain proof of delivery via USPS. This worked.


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