With today’s global footprint, many U.S. taxpayers have pensions from employment in other countries. A pension plan that is in another country may not have the same tax benefits in the U.S. as it does in the other country. Unfortunately, this can lead to an unwelcome surprise in terms of U.S. income tax and foreign reporting obligations.
Pensions earned by U.S. taxpayers and still held outside of the U.S. are subject to U.S. tax and foreign disclosure reporting. In fact, U.S. citizens, including Expatriates (Expats) living abroad and tax residents are required to report world-wide income and disclose world-wide financial assets. This includes pensions as well as retirement-type accounts which may be tax-free in the other country. For example, Canada and the U.K. offer tax-free accounts and Individual Savings Accounts, respectively, to encourage personal retirement savings. However, the tax-free status is not always recognized for U.S. tax purposes. The value of these accounts must be reported annually on the Foreign Bank Account Report and Form 8938 Statement of Specified Foreign Financial Assets and interest, dividends and capital gains and losses must be reported on the U.S. taxpayer’s income tax return.
If the U.S. has an income tax treaty with the country where the pension is held, the treaty may provide for tax deferral of the earnings for certain pensions. For example, under the U.S./U.K. income tax treaty, qualified pension schemes are not subject to U.S. tax until distributed. A word of caution, though, to taxpayers because very few U.S. income tax treaties have this provision. Without this provision, interest, dividends, and capital gains and losses may be subject to U.S. tax each year even when there are no distributions. Be sure the tax professional you choose to work with is knowledgeable about both the benefits and limitations regarding foreign pensions in income tax treaties.
Even though a treaty may provide for a deferral of pension earnings, there is no treaty that provides for an exception to the disclosure of the name, address and value of the pension on the Foreign Bank Account Report and/or Form 8938. The value of a foreign pension may be hard to determine particularly when the taxpayer has an employer-type pension that provides only for a monthly benefit at retirement age. In this instance, the instructions to Form 8938 are to report the value as $0 if no distributions were received during the year. If there were distributions, the taxpayer should report the amount of the distributions received during the year as the value for an employer-type pension.
If the foreign pension is not an employer-type plan, the reportable value for the Foreign Bank Account Report and Form 8938 is based on the value of the cash and assets in the plan, similar to a brokerage or securities account. Examples of these types of plans are the Registered Retirement saving plan (RRSP) in Canada and the Self-Invested Personal Pension in the U.K. As mentioned before, the U.S. has income tax treaties with these two countries which allows for the deferral of earnings until distributions are taken.
There are special rules that apply to some pensions. For example, under the U.S. income tax treaties with Germany and Canada, social security-type pension payments are taxed in the same manner as U.S. Social Security. Some foreign pensions may be subject to a special rule that would require reporting on Form 3520 Annual Return to Report Transactions with Foreign Trusts. Superannuation Funds in Australia may require foreign trust reporting.
U.S resident taxpayers as well as Expats living abroad should consult with a U.S. tax professional who is knowledgeable and can advise about the tax consequences and foreign disclosure reporting requirements before moving a foreign pension from one plan to another or particularly about moving the plan to another country or to the U.S. Otherwise, the balance of the account could immediately become subject to U.S. tax. Likewise, individuals who are planning to become permanent resident aliens (Green Card Holders) should consult with a U.S. tax professional and understand how their foreign pensions will be treated for U.S. tax purposes.
The rules for reporting foreign pensions are complex. The tax professionals in the International Tax department at Kerkering, Barberio & Co. would welcome the opportunity to discuss your foreign pension with you.