Are Foreign Pensions Taxable in the US?

Yes, foreign pensions are generally taxable in the United States and US expats must report foreign pension income on their tax returns. This article provides an in-depth guide to help you ascertain whether and how your foreign pension is subject to U.S. taxation, how to report it on your U.S. tax return, and important details about foreign pension income for U.S. expats.

If you have further questions about foreign pension taxation or reporting requirements, our experts at 1040 Abroad offer free tax advice for U.S. expats.

Do I Have to Pay Tax on Foreign Pensions?

In general, yes. Most foreign pension income is considered taxable in the U.S. As a U.S. citizen or resident, the IRS generally requires you to pay tax on all your worldwide income, which includes income from foreign sources—like pensions earned in another country. However, the specific tax treatment of your foreign pension depends on whether the U.S. has a tax treaty with the country where your pension is based.

Step 1: Check if There’s a Tax Treaty with Your Country

The first thing you need to do is determine if there is a tax treaty between the U.S. and the country where your pension is held. Tax treaties can provide favorable treatment for certain types of income, including foreign pensions, by:

• Reducing the tax rate on the pension income.
• Allowing you to defer taxes on your foreign pension until you withdraw it.
• Exempting some or all of your pension income from U.S. tax.

What If There Is a Tax Treaty?

If there is a tax treaty, it’s essential to understand how it applies to your specific pension plan. Here are a few examples of common treaty provisions:

• Canada (Canadian RRSPs): The U.S. allows for tax deferral on Canadian RRSPs and RRIFs (Registered Retirement Income Funds) under Revenue Procedure 2020-17. This means you won’t pay U.S. tax on the income until you actually withdraw it from the RRSP or RRIF. However, you must still report the existence of these accounts if they exceed the Foreign Bank Account Reporting (FBAR) threshold.
  Related: U.S. Taxation of Canadian RRSP
• United Kingdom (UK Pensions): Under the U.S.-UK tax treaty, some UK pensions can receive favorable tax treatment, including potential tax deferral on contributions and investment growth. When you begin withdrawing from a UK pension, the treaty may allow you to claim a reduced U.S. tax rate on that income, depending on the type of pension.
• Australia (Superannuation Funds): Australia’s superannuation funds are generally treated as foreign trusts by the IRS. While the U.S.-Australia tax treaty provides some tax relief, the IRS still has strict reporting requirements for superannuation funds, and contributions may be taxed differently based on who made them (employer vs. employee).
  Related: U.S. Taxation of Australian Superannuation Funds

What If There Isn’t a Tax Treaty?

If the U.S. does not have a tax treaty with your country, then standard U.S. tax rules will apply to your foreign pension. This usually means:

• Your pension income is included in your gross income and subject to U.S. income tax.
• You may be eligible to claim a Foreign Tax Credit on Form 1116 for any taxes paid to the foreign country on that pension income, reducing your U.S. tax liability.

Examples of countries without tax treaties with the U.S. include many Asian and African countries. Without a treaty, you may face double taxation on pension income because it could be taxed both by the foreign country and the U.S., though the Foreign Tax Credit can help offset this burden.

How to Report Foreign Pension on U.S. Tax Return?

1. Form 1040: Reporting Foreign Pension Income as Taxable Income

All foreign pension income, unless explicitly exempted by a tax treaty, must be included in gross income on your Form 1040. Here’s how this works:

• Line 4a or 4b on Form 1040: Foreign pension distributions are reported on these lines as pension income. The general rule is to report the total amount of foreign pension income on Line 4a and any taxable portion on Line 4b.
• Conversion to U.S. Dollars: Foreign income must be converted to U.S. dollars. You can use the IRS’s average exchange rate for the year, or convert each distribution at the rate on the date received.
• Income Tax Purposes: Foreign pensions are usually classified as unearned income, not earned income, unless specified by a tax treaty.

When to Use Form 1040:

• If you received distributions from a foreign pension plan during the year, report these on Form 1040.
• Even if your foreign pension income is tax-deferred, it must be reported unless a treaty exempts it entirely from U.S. taxation.

2. Form 8938: Statement of Specified Foreign Financial Assets

If you hold foreign pensions, they may be classified as specified foreign financial assets under U.S. tax laws, triggering the requirement to file Form 8938.

• Threshold for Filing: Form 8938 is required if the total value of all specified foreign financial assets (including foreign pensions, foreign bank accounts, and foreign mutual funds) exceeds $200,000 for single filers living abroad or $400,000 for married taxpayers filing jointly.
• What to Report: Include the type of foreign pension plan, the financial institution or entity managing the pension, and the maximum value of the pension assets during the year.
• Foreign Retirement Plans: Most foreign pensions, including defined benefit plans, defined contribution plans, and superannuation funds, fall under the category of foreign financial accounts and must be reported.

When to Use Form 8938:

• If you have significant pension assets or other foreign financial accounts, Form 8938 is required with your tax return.
• Form 8938 is filed alongside Form 1040 and does not replace the FBAR (FinCEN Form 114); you may need to file both.

3. FBAR (FinCEN Form 114): Reporting Foreign Bank and Financial Accounts

The FBAR is necessary if your foreign pension account, combined with other foreign financial accounts, exceeds $10,000 at any point in the year. The FBAR is filed with FinCEN (not the IRS) to report foreign bank accounts and similar assets.

• FBAR Requirements: Include details of the foreign pension account if it qualifies as a financial account.
• Where to File: File the FBAR online through FinCEN’s portal, separate from your tax return. The due date is April 15, with an automatic extension to October 15.

When to Use the FBAR:

• If your foreign pension is held in an account and the combined balance of foreign bank and financial accounts surpasses $10,000, the FBAR is required.
• Foreign pensions with custodial accounts (like certain Self-Invested Personal Pensions (SIPPs) or superannuation funds) typically require FBAR filing.

4. Form 3520: Reporting Foreign Trust Transactions

Some foreign pensions are classified as foreign trusts by the IRS, requiring Form 3520 to report transactions with foreign trusts. For example, UK SIPPs and Australian superannuation funds are often considered foreign trusts by the IRS.

• What to Report: Report any distributions received from the foreign pension trust and any contributions made (especially if you have control over the trust).
• Penalties for Non-Compliance: Failing to file Form 3520 when required can result in substantial penalties, potentially 35% of the transaction’s value.

When to Use Form 3520:

• If the IRS considers your foreign pension a foreign trust and you receive distributions or contribute to the account, you must file Form 3520.
• If you don’t make contributions or receive distributions (e.g., it’s fully employer-funded), Form 3520 may not be necessary.

5. Form 3520-A: Annual Information Return of Foreign Trust with a U.S. Owner

Form 3520-A provides detailed information to the IRS about foreign trusts with U.S. owners. For many foreign pensions structured as trusts, the trust manager should file Form 3520-A on your behalf.

• What to Report: Report income, distributions, and the structure of the foreign pension trust.
• Filing Deadline: Form 3520-A is due by March 15, though an extension to September 15 is possible.

When to Use Form 3520-A:

• If you control or own a foreign retirement plan classified as a foreign trust and the trust does not file this form for you, it is your responsibility.
• This is especially relevant for Australian superannuation funds or UK SIPPs, which may be classified as trusts by the IRS.

6. Form 8621: Information Return for Passive Foreign Investment Companies (PFICs)

Many foreign pension plans hold investments in foreign mutual funds, which may qualify as Passive Foreign Investment Companies (PFICs). PFICs are subject to strict U.S. tax rules, often triggering Form 8621 requirements.

• What to Report: Disclose any PFIC income, gains, or distributions within the pension plan.
• High Tax Rate: PFIC rules can result in higher tax rates and penalties for under-reporting, especially on investment income.

When to Use Form 8621:

• If your pension plan invests in foreign mutual funds or other PFICs, Form 8621 is required.
• This applies particularly to self-directed pensions like SIPPs, where assets may include foreign stocks or mutual funds.

Tips to Navigate Foreign Pension Reporting

1. Identify Pension Type: Knowing if your pension is an employer-sponsored plan, personal plan (like a SIPP), or a government pension helps determine reporting requirements.
2. Check Tax Treaty Benefits: Some income tax treaties provide favorable tax treatment or tax deferral for certain pensions. Review the relevant income tax treaties for specifics.
3. Claim Foreign Tax Credit When Applicable: If taxes were paid to the foreign government on pension income, you may qualify for a Foreign Tax Credit on Form 1116 to prevent double taxation.

If you need assistance with understanding or reporting your foreign pension income, feel free to reach out to us. 1040 Abroad offers free tax advice for U.S. expats, and we’re here to help you navigate the complex tax rules surrounding foreign pension plans, foreign financial accounts, and U.S. income tax reporting requirements.