Do you know how to report foreign income on your federal tax returns? The Internal Revenue Service has specific requirements for reporting this type of income on your IRS tax forms. What follows is NOT tax advice–you will need to consult a trained tax professional to discuss how you should approach the latest tax laws. You should also know that tax law changes every year and you’ll need a tax professional or an IRS representative to help you with any future changes in a definitive way.
How to Report Foreign Pension Income
IRS rules governing foreign pensions also apply to annuity distributions “received from a source outside the United States”. This type of reportable income may come from any of the following sources:
- Foreign employer
- A trust established by a foreign employer
- A foreign government or one of its agencies
- Foreign versions of a social security pension
- A foreign insurance company
- A foreign trust
- Any other type of foreign entity “designated to pay the annuity”
In 2020, the Internal Revenue Service advises that the taxable amount for this type of income is “generally is the Gross Distribution minus the Cost (investment in the contract). Income received from foreign pensions or annuities may be fully or partly taxable, even if you do not receive a Form 1099 or other similar document reporting the amount of the income.”
A General Rule
The IRS says “most income tax treaties” between the United States and other countries, “allow for exclusive taxation of pensions or annuities under the domestic law of the resident country (as determined by the residence article).” This, the IRS says, is generally true unless there is language in a treaty stating otherwise. The burden of proof may be on the tax filer to determine what laws apply in this instance when compiling the tax forms. Some may have lump-sum rules that don’t apply in other countries.
Those who receive government pensions or public pensions/annuities or the equivalent of social security payments MAY find those payments are “only taxable by the country in which the government is making the payments” but the IRS will have the final determination outside of the specific language of an applicable treaty.
Some exceptions may apply. The IRS says those who live in another country and receive a pension from a U.S. company “you may claim an exemption from withholding of U.S. Federal Income Tax (FIT) under a tax treaty by completing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting , and delivering it to the U.S. payor. You must report your U.S. Taxpayer Identification Number (TIN) on Form W-8BEN for it to be valid for treaty purposes.”
Those who live in the USA and get a pension paid by an overseas company, the taxpayer must “claim the appropriate treaty withholding exemption on the form, and in the manner specified by the foreign government.”