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I have a question regarding the Windfall Provision and the…

I have a question regarding...
I have a question regarding the Windfall Provision and the Totalization Agreement (with the UK). Would you be able to engage in a chat session to answer my question.
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4/2/2014
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Social Security
Satisfied Customers: 16,606
Experience: Licensed CPA, CMA, CFE, CGMA M.Accy Also Teach Accounting courses at Master's Level
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Megan C :

Thank you for your question, my name is XXXXX XXXXX I will be happy to help you today

Megan C :

How are you doing?

Customer:

great thanks.

Megan C :

What is your question?

Customer:

please hold while I type out my scenario..

Megan C :

Okay

Customer:

I am a UK citizen and a US citizen. I worked in the UK from the age of 17 through 24 and I was paying into the UK State Pension program (deducted from my wages). I left the UK 32 years ago when I was 24 and have lived in the US and paid social security taxes for the past 21 years. And even though I am NOT a UK tax resident I have been paying into their system for around 20 years also. The payments have not been deducted from any income or based on any income because I am not a UK tax resident. I simply mailed the UK government a check each year to continue my eligibility for their State Pension because this is something they give their citizens the option to do.



The US and the UK have no problem with tax payers for both countries receiving social security / state pension but my understanding is that the Windfall Provision Act would prevent me from receiving my full entitlement to my full US social security payment on a sliding scale - and in the best case scenario if I pay into the US social security system via social security taxes I can get 90% of my US entitlement. The less years I have paid into the system the higher percentage my US SS check will be.


This was my understanding up until recently but then I'm thinking: this doesn't make sense. It's not like I'm a federal employee who doesn't pay SS taxes because i've been paying them (around 13.2%) for 21 years **AND** I've been paying into the UK system. I feel like the WP doesn't apply to me and I should get a full check from both countries.

Megan C :

Thank you for your follow up - unfortunately when you have ANY pension from work where you did not pay into social security, WEP applies.

Megan C :

So, if you do not have at least 30 years of work in the US, it will apply to you

Customer:

OK. What is the Totalization Agreement and what does that mean? I think I also read some act of law saying that the WP is only for people who earn less than somewhere around $2,500/month and if their combined income from the two pensions and any other income would come to less than that amount it won't apply. Is that correct?

Megan C :

The totalization agreement makes it possible if you did not work in either country long enough to earn benefits, they would combine your work and allow you to draw benefits in one country

Megan C :

And WEP is for everyone who has a pension from work where they did not pay into social security.

Customer:

OK thanks. One other item for confusion for me is that when I get a social security statement it says my estimated benefits if I stopped working now and retired at 67 my benefits would be around $1,500/month (as mentioned, I have worked and paid SS taxes for around 21 years in the US). Does that literally mean that if I quit working today and never worked one more day or earned a penny between now and the age of 67 that would be my estimated SS check or is it based on some average that would cause the $1,500 estimate to be too high?

Megan C :

It means that it is the benefit that you have accrued.

Customer:

So if I didn't work one more day I would get the estimated $1,500 still at 67?

Megan C :

Yes, that's what you would get, less the WEP reduction

Customer:

OK. Thanks. I'm still trying to understand why WP would apply for me if my US SS check is ONLY calculated based on the years I actually worked and paid SS taxes to the US. It doesn't make sense, and even more so when the fact that I wouldn't need medicare if I was living outside the US when I am drawing both checks. Both countries would based their "SS" payments to based ONLY on the years I actually worked there and paid SS payments (and in the case of the UK on payments I voluntarily made to them AS WELL AS the payments I was making to the US at the same time).

Megan C :

I understand, it's sort of a provision you unfortunately got stuck with, because they treat foreign pensions like US Government pensions

Customer:

OK. How does the US police the WP in my case? Also; the WP is based on substantial earnings as you know. What line do they use off the 1040 for the substantial earnings to make the calculation?

Megan C :

Social security gets information from the IRS regarding your income. They use earnings from W-2 or schedule C to determine substantial earnings


 

Customer:

so it's not the AGI they use?

Megan C :

No, it's based on your earnings, not your income. They don't count investment and passive income

Customer:

Thank you. What about a foreign tax credit? Would that reduce my income as far as substantial earnings calculation is concerned? As you know: I could for example earn $50K from self employment and pay zero tax to the US if I lived outside the US.. In that scenario my substantial earnings STILL be $50K? I am well aware by the way that there is no way around SE tax but that's a separate issue.

Customer:

..of course I was referring to the US tax return I would need to file if living overseas because I'm a US citizen

Megan C :

Foreign tax credit only impacts your income tax, nothing to do with social security

Customer:

OK. So say I earned $50K from SE and the taxes due directly on it were $15K in federal taxes. And say I had a foreign tax credit for $15K. What would my substantial earnings be in this scenario?

Customer:

..take SE taxes out of the equation for simplicity

Customer:

i'll let you go soon by the way : )

Megan C :

Your substantial earnings would still be $50K, because you still had to pay SE tax on that.

Megan C :

The foreign credit does not reduce that

Customer:

OK. Very last question: the social security statement I get which shows all my "earnings" for the last 21 years - are those the "substantial earnings". If not - how do I find out what they were for each year? I'm finding that most SS employees don't know much about WP or Totalization Agreements.

Megan C :

Those are your substantial earnings, yes

Customer:

OK. Thank you very much. I will tip you. Bye

Megan C :

No problem, always like working with you. I've worked for you quite a bit :-)

Megan C
Megan C, Certified Public Accountant (CPA)
Category: Social Security
Satisfied Customers: 16,606
Experience: Licensed CPA, CMA, CFE, CGMA M.Accy Also Teach Accounting courses at Master's Level
Verified
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Category: Social Security
Satisfied Customers: 16,606
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Experience: Licensed CPA, CMA, CFE, CGMA M.Accy Also Teach Accounting courses at Master's Level

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