Have you or your spouse ever worked outside the U.S.?
If you or your spouse have ever worked outside the U.S., you may have an employer pension or a retirement or private savings plan in another country (pensions or plans). Unfortunately, for the U.S. taxpayer, a pension or plan in another country will not have the same tax benefits as a qualified retirement plan does in the U.S. This can lead to an unwelcome surprise for those with a foreign pension or plan in terms of U.S. income tax and foreign disclosure reporting obligations.
What are the U.S. reporting requirements for foreign pensions and plans?
U.S. taxpayers with pensions or plans are subject to U.S. income tax and foreign disclosure reporting. U.S. taxpayers include U.S. citizens, U.S. permanent residents and Expats, no matter where they live. Pensions or plans that are tax-deferred or tax-free in the other country are also subject to reporting. For example, Canada and the U.K. offer Individual Savings Accounts (ISAs). To encourage personal retirement savings investment earnings in such accounts are tax-free. However, the tax-free status is not recognized for U.S. tax purposes. Interest, dividends and capital gains and losses from the ISAs must be reported on the U.S. taxpayer’s income tax return.
Pensions and plans are also subject to U.S. foreign disclosure requirements even if there are no distributions. This includes the disclosure of the owner’s name and address and the payer’s name, address and value of the pension or plan on the Foreign Bank Account Report and/or Form 8938 Statement of Specified Foreign Financial Assets.
Will I pay tax on my pension to two countries?
There are ways to avoid double taxation by both the U.S. and the other country on foreign pensions and plans:
- Claim a foreign tax credit – If the other country is withholding foreign taxes from your distributions, you may be able to claim a foreign tax credit on your U.S. tax return to reduce your U.S. tax liability.
- Apply to stop or reduce the withholding by the foreign country – Form 8802 Application for United States Residency Certification and Form 6166, are used for this purpose.
- Use the benefits in a U.S. income tax treaty – If the U.S. has an income tax treaty with the country where the pension or retirement savings are held, there may be a provision to defer tax on earnings until distributions begin.
What else do I need to know about my foreign pension or plan?
There is a benefit 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 which results in only a portion of the payments being subject to U.S. tax.
States may or may not allow treaty benefits. This could result in a foreign pension not being subject to federal tax but nonetheless subject to state tax.
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. As an example, Superannuation Funds in Australia may require foreign trust reporting.
Before moving from one foreign pension or plan to another, or moving the money to another country or to the U.S., U.S 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. Otherwise, such a move could result in the balance of the account immediately becoming subject to U.S. tax. Likewise, individuals who are planning to become U.S. permanent residents (Green Card Holders) should consult with a U.S. tax professional and understand how their foreign pensions or plans will be treated for U.S. tax purposes.
The rules for reporting foreign pensions and plans are complex. A U.S. taxpayer that has failed to report a foreign pension or plan may benefit by participating in a voluntary compliance program. The International Tax Team at Kerkering Barberio specializes in voluntary compliance filings including preparation of prior years’ income tax returns, international tax forms and foreign disclosures. To discuss your international tax and financial planning needs, contact Phoebe Trumpler, CPA at (941) 365-4617 or .