Yes, foreign pensions are generally taxable in the United States. U.S. expats must report foreign pension income on their tax returns. This guide provides a detailed overview to help determine if and how your foreign pension is subject to U.S. taxation, how to report it, and key considerations for U.S. expats with foreign pension income.
If you have additional questions about foreign pension taxation or reporting requirements, our experts at expattaxrelief.com offer free tax advice for U.S. expats.
Do I Have to Pay Taxes on Foreign Pensions?
In most cases, yes. The IRS requires U.S. citizens and residents to report and pay taxes on worldwide income, which includes foreign pension income. However, the tax treatment of your pension depends on whether a tax treaty exists between the U.S. and the country where your pension is based.
Step 1: Check for a Tax Treaty
Begin by determining if the U.S. has a tax treaty with the country holding your pension. Tax treaties can offer benefits such as:
- Reducing the tax rate on pension income.
- Allowing tax deferral until pension withdrawals are made.
- Exempting certain pensions from U.S. taxation entirely.
What If There Is a Tax Treaty?
Tax treaties may provide specific provisions for foreign pensions. Below are some examples:
Canada (Canadian RRSPs and RRIFs)
- Under Revenue Procedure 2020-17, U.S. tax deferral applies to Canadian RRSPs and RRIFs. You are taxed only upon withdrawal.
- These accounts must still be reported if they exceed the Foreign Bank Account Reporting (FBAR) threshold.
United Kingdom (UK Pensions)
- The U.S.-UK tax treaty allows favorable treatment for certain pensions, including tax deferral and reduced tax rates upon withdrawal.
Australia (Superannuation Funds)
- Australian superannuation funds are treated as foreign trusts by the IRS. Contributions and withdrawals may be taxed differently, but tax treaties may provide partial relief.
What If There Isn’t a Tax Treaty?
Without a tax treaty, standard U.S. tax rules apply, which means:
- Foreign pension income is subject to U.S. tax and must be included in your gross income.
- You may be eligible for a Foreign Tax Credit (Form 1116) to offset taxes paid to the foreign country.
Examples of countries without tax treaties with the U.S. include many in Asia and Africa. In such cases, double taxation is a risk, but the Foreign Tax Credit can help reduce this burden.
How to Report Foreign Pension Income on U.S. Tax Returns
- Form 1040
Foreign pension income must be reported as taxable income unless explicitly exempted by a tax treaty.
- Line 4a/4b: Report total pension income and the taxable portion.
- Conversion to USD: Use IRS exchange rates to convert foreign income.
- Form 8938 (Statement of Specified Foreign Financial Assets)
File this form if total foreign assets exceed certain thresholds:
- $200,000 (single filers living abroad).
- $400,000 (married filing jointly living abroad).
- FBAR (FinCEN Form 114)
Required if combined foreign account balances exceed $10,000 during the year.
- File separately via FinCEN’s portal.
- Form 3520 (Foreign Trust Transactions)
Applicable if your foreign pension is treated as a trust.
- Report distributions received or contributions made.
- Form 3520-A (Annual Return of Foreign Trusts)
The foreign trust manager should file this form, but if not, you are responsible.
- Form 8621 (Passive Foreign Investment Companies – PFICs)
Necessary if your pension holds investments in foreign mutual funds.
Tips for Navigating Foreign Pension Reporting
- Identify Pension Type: Determine if it is an employer-sponsored plan, personal plan, or government pension.
- Leverage Tax Treaties: Review treaty provisions for potential benefits like tax deferral or exemptions.
- Claim the Foreign Tax Credit: Use Form 1116 to avoid double taxation when foreign taxes are paid.
Need help navigating foreign pension rules? Contact ExpatTaxRelief.com for free expert advice tailored to U.S. expats. We’re here to simplify the complex tax obligations surrounding your foreign pensions.