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Lev
Lev, Tax Advisor
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My wife has a foreign pension from the Brazilian Foreign Service.

Customer Question

My wife has a foreign pension from the Brazilian Foreign Service. Her pension includes a significant amount of income which is not taxed in Brazil because she is "over 65" years old. (1) Is there a legal precedence that has ruled that US residence are required to pay taxes on this "over 65" income in their US Federal Tax Return? Also, she has a large special social security tax deducted from her Brazil pension. Her Brazil government pension is not funded by this social security tax; this is a large tax on Brazilian Government employees and Government retirees that is taken from them to be used to supplement the Brazilian Social Security Fund that is used to pay social security benefits paid to Brazilian non-government retirees and to welfare recipients. (2) Is there a legal precedence that has ruled that US residence are required to pay US taxes on this Brazilian social security tax?

Please do not offer to send your opinion unless you can reference legal precedence (court orders) that specifically address questions (1) or (2) above.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
Unfortunately - in the US income tax liability is not based on age - but rather on total income.
Foreign pensions are taxed as annuity and reported on form 1040 lines 16a and 16b.
Full amount is taxable unless she contributed her after tax funds into that pension account.
Please see for reference - http://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions

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.
Sorry if you expected differently.
It doesn't matter how that income is treated in a foreign country.
Unfortunately - there is no tax treaty between the US and Brazil - so general rule outlined above is in effect.
(2) Is there a legal precedence that has ruled that US residence are required to pay US taxes on this Brazilian social security tax?
Yes - current tax law directed that US residents for tax purposes are taxed on all worldwide income.
Please see this IRS publication - http://www.irs.gov/taxtopics/tc851.html
If you are a resident alien, you must follow the same tax laws as U.S. citizens. You are taxed on income from all sources, both within and outside the United States.
I will address all your followup questions. Please feel free to ask.

Expert:  Lev replied 1 year ago.
Just in case you were not able to use the chat - I am switching to Q&A mode and porting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

Hi and welcome to Just Answer!
Unfortunately - in the US income tax liability is not based on age - but rather on total income.
Foreign pensions are taxed as annuity and reported on form 1040 lines 16a and 16b.
Full amount is taxable unless she contributed her after tax funds into that pension account.
Please see for reference - http://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions


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.
Sorry if you expected differently.
It doesn't matter how that income is treated in a foreign country.
Unfortunately - there is no tax treaty between the US and Brazil - so general rule outlined above is in effect.
(2) Is there a legal precedence that has ruled that US residence are required to pay US taxes on this Brazilian social security tax?
Yes - current tax law directed that US residents for tax purposes are taxed on all worldwide income.
Please see this IRS publication - http://www.irs.gov/taxtopics/tc851.html
If you are a resident alien, you must follow the same tax laws as U.S. citizens. You are taxed on income from all sources, both within and outside the United States.
I will address all your followup questions. Please feel free to ask.

Customer: replied 1 year ago.

LEV,


 


To my question "(2) Is there a legal precedence that has ruled that US residence are required to pay US taxes on this Brazilian social security tax that is included as part of a Brazilian Government Pension gross distribution?"



You replied: "Yes - current tax law directed that US residents for tax purposes are taxed on all worldwide income".


 


There is a problem here in the definition of "worldwide income". I can agree that world wide income would include foreign income tax for which I would get a foreign tax credit but I cannot agree that "worldwide income" would include foreign taxes for which I cannot get a foreign tax credit such as the Brazilian social security tax.

Expert:  Lev replied 1 year ago.

To my question "(2) Is there a legal precedence that has ruled that US residence are required to pay US taxes on this Brazilian social security tax that is included as part of a Brazilian Government Pension gross distribution?"

There is no such precedence, and there is no "US taxes on this Brazilian social security tax". US taxes are applied to income. If the same income is subject of different type of taxes or taxes in a different jurisdiction - that is a separate issues - and doesn't relief from US tax liability.
US residence is not required - the US residence for tax purposes is determined based on US tax law and regulations. Personal who are not US residents for tax purposes are subject of US income taxes ONLY on income from US sources.

 


There is a problem here in the definition of "worldwide income". I can agree that world wide income would include foreign income tax for which I would get a foreign tax credit but I cannot agree that "worldwide income" would include foreign taxes for which I cannot get a foreign tax credit such as the Brazilian social security tax.

That is not a matter if you agree or not - and there is no need to convince me - I am already on your side... There is a tax law and there are regulations that determined what is included into taxable income. The pension - either from US sources or a foreign pension - is considered an income for US tax purposes. If you think differently - you may attach a note to your tax return and explain your position and reasoning to the IRS why you decided not to include that income.

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