The IRS has many methods of arriving at the taxable amount, they base on the year when you began receiving your retirement benefits.

The IRS has many methods of arriving at the taxable amount, they base on the year when you began receiving your retirement benefits.

How sad it is to read that, from 1991 to 2007, the elderly citizens filing for bankruptcy increased by 150%, due to their overwhelming debt, and the figures were an astounding 433% in the case of those aged 74 to 84 years.  Therefore, it is imperative that you know everything about the Income tax treatment of Pensions at an early date so that you do not have to suffer the condition that some of our elders are having in the financial crisis.  Here are some details that you would do well to remember:

The following are taxable fully from your retirement plans:

  • The complete contributions of your company to your retirement plans.
  • Pre-tax contributions made by you where you skipped paying tax when you filed your returns.  (Ex: Contribution to a 401 (K) plan)

Please note that the contributions made by you into your retirement plans which you have already paid tax initially, are tax-free during allocation.

The IRS has many methods of arriving at the taxable amount, they base on the year when you began receiving your retirement benefits.

If you subscribe into your annuity or pension fund, post payment of tax, your pension payment becomes taxable only partly The excess amounts of the tax returns do not call for payment of tax.  This amount contributes to your investment plan including your employer’s contribution that had suffered tax already when credited to your account.  Partly taxed pension will fall under IRS Tax Topic 410, either under the Simplified method or the General Rule.

What is General Rule

If records show that your pension or annuity payment commenced on 18 November 1996 or earlier, then you use the general rule.  If in case the same began after this date, you can use the simplified method to calculate the right portion of your pension that is taxable.

Simplified Method

It is easy for you to know the correct portion of the tax-free amount of each annuity payment using the simplified method.  Had you contributed to your pension after paying tax, then divide that amount by the total number of predicted monthly payments.  When you do not pay annuity for life, this number refers to the contractual monthly payment of the annuity.

Cross-Border Pension Treatment Liberalized By US-UK Tax Treaty

The treaty ensures that there will be no unfavorable tax consequences on the employees’ pension and retirement benefits.

The treaty ensures that there will be no unfavorable tax consequences on the employees’ pension and retirement benefits.

A new tax treaty between the United States and the United Kingdom that became effective in UK on April 6, 2003 and in US on January 1, 2004, gives an appreciable tax relief for employees who are citizens of UK or US and employed in either country.  This epoch of faster migration permits employers often to transfer employees between the US and UK for major business openings with strategic implications.

The treaty ensures that there will be no unfavorable tax consequences on the employees’ pension and retirement benefits.  The treaty has specific importance because, apart from other matters, it permits US citizens resident in the UK to deduct, for US tax purposes, the subscriptions made to particular UK pension plans.  Similarly, the authorities in both the countries agree that the contributions made by employees and employers on behalf of UK or US expatriate employees will appear as if those contributions originated in the country that sustains these pension plans.

Do you have a US pension or social security and like in the United Kingdom or the reverse?  Have you found the tax treatment fair and easy to report on your income taxes?  Let us know in the comments below.