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11-13-2017 11:32 AM
I will be receiving a private pension lump sum from the UK. The amount I receive will be reduced by 20% due to UK tax. However, I expect to get this tax back from the UK government.
When reporting the income to the IRS, do I report the initial amount and then the UK tax refund separately at a later date (i.e. as if they were two separate incomes), or do I report the full amount in one go and therefore not inform the IRS when I get the refund (since I will already have paid USA tax on it)?
There may be some delay (perhaps crossing a tax year boundary) between getting the initial amount and then the UK refund.
Solved! Go to Solution.
11-13-2017 03:29 PM
Welcome to the H&R Block community.
You have to report all of the income on your U.S. tax return in the year that you receive it. However you may be able to take a tax credit for tax paid to the United Kingdom. The foreign tax credit is claimed on Form 1116.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)
11-13-2017 06:26 PM
Thank you for your reply.
The tax is taken at source, so I don't receive the taxed part of the income until I get a refund.
IRS Publication 514 says
" You cannot take a foreign tax credit for income taxes paid to a foreign country if it is reasonably certain the amount would be refunded, credited, rebated, abated, or forgiven if you made a claim."
I read this as saying that tax credits are not an option in my case, since the UK tax office (HMRC) are fairly confident I will receive the tax back if I ask them for it.
So, just to be certain that I understand your advice correctly-
If my pension company pays $100, of which they pay $20 directly to HMRC and $80 to me, I record income of $100 to the IRS (as "Other Income" presumably). When I get the $20 back from HMRC I don't need to record anything with the IRS since I have already paid the tax on it when I recorded the full $100.
Furthermore, the option of paying IRS tax on the $80 and then separately on the $20, when I actually receive it, is not an option.
11-13-2017 07:10 PM
Correct on both counts.
When tax is withheld from your income at the source it's the same as if you had received the money and then paid the tax yourself. In other words, the withholdings are part of your income but instead of you writing the check for the tax the account custodian wrote it for you ahead of time with your money so that you wouldn't have to. When you have tax withheld by an employer or when you have tax withheld on U.S. retirement income it works the same way. Your total income is reported on your tax return and then you report the amount of the income that was withheld again on the second page of the 1040 before subtracting it from your tax liability to determine your refund amount.
The only time you have to report a tax refund as income is if it provided a benefit to you on your previous tax return. This only happens with state taxes here in the USA because those taxes are deductible on the federal return. Foreign tax refunds do not have to be reported on a U.S. 1040.
If you know that you will get that tax you paid back from the United Kingdom then you're correct that you won't take the foreign tax credit and double-taxation won't be an issue. I only suggested that because it's one way to avoid double-taxation if you can take it.