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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Last year my wife started receiving a pension from the UK.

Customer Question

Last year my wife started receiving a pension from the UK. I plan on reporting that on form 1040 line 21 is that correct? My wife only worked a few years and did not qualify for a full pension but the UK allows you to make a lump sum contribution to improve your position. She did that, also in 2009. Can that lump sum contribution be deducted? If so where? If it cannot be deducted would it be reasonable to not report the income for 2009 since there was a net loss?
Submitted: 6 years ago.
Category: Tax
Expert:  Lev replied 6 years ago.

A foreign pension or annuity distribution is a payment from a pension plan or retirement annuity received from a source outside the United States.

 

The lump sum contribution to a foreign retirement fund may not be deducted on the US tax return. However - that after tax contribution will constitute the basis in the plan and will reduce taxable plan of future benefits.

 

Just as with domestic pensions or annuities, the taxable amount 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.

 

Your spouse would report full amount of pension on the line 16a, and taxable part on the line 16b - form 1040 - http://www.irs.gov/pub/irs-pdf/f1040.pdf
Customer: replied 6 years ago.
Thanks for answering. I do not fully understand everything you wrote:

What does this mean?
"However - that after tax contribution will constitute the basis in the plan and will reduce taxable plan of future benefits."

What does this mean?
"Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract)."
Expert:  Lev replied 6 years ago.

What does this mean?
"However - that after tax contribution will constitute the basis in the plan and will reduce taxable plan of future benefits."

Please consider the example - your spouse will pay $10,000 into her retirement plan - that means her basis in this retirement plan will be $10,000. When she will start receiving pension benefits - $10,000 of these benefits will be not taxable.

 

What does this mean?
"Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract)."

If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid. This amount is your cost in the plan or investment, and includes the amounts your employer contributed that were taxable to you when contributed. Generally she will use the Simplified Method to figure the tax-free part of the payments by completing the Simplified Method Worksheet in the Form 1040 Instructions

For instance - your total benefits are $1000, but taxable part is $900.

 

Customer: replied 6 years ago.
When I click on your Form 1040 Instructions link I get the following error message:
"404 - Oops! Seems you accessed an invalid link"
Expert:  Lev replied 6 years ago.

I corrected the link for you - http://www.irs.gov/pub/irs-pdf/i1040.pdf - it is pointed directly to the IRS website.

See Simplified Method Worksheet on the page 27.

Let me know if you need any help.

 

 

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