Recovering overpaid taxes on US pension
Moderator: Mark T Serbinski CA CPA
Recovering overpaid taxes on US pension
I am filing a 1040NR to recover overpaid tax on a US pension for a Canadian client, as they had over 15% withheld on the US pension. They have contacted their pension administrator to correct the issue going forward. I am using Taxact to prepare the 1040NR. From reading the forum, it sounds like we just override the tax calculation, and put in 15% as the amount owing. Are there any supporting forms, other than the actual slips, that need to be attached to the 1040NR?
Is this a 2015 withholding? You can't do anything about 2016 until next spring.
Why would you need to override anything.
You report the pension on the 1040NR -NEC page, and indicate the 15% tax rate and multiply.
Alternatively, you could just include the pension in come on page one and apply the graduated tax scale, if this is less than 15%.
Then you include the tax withheld as tax paid, and request a refund.
Sounds like you haven't dealt with 1040NR (or even the IRS) very much. Does your client know this?
Why would you need to override anything.
You report the pension on the 1040NR -NEC page, and indicate the 15% tax rate and multiply.
Alternatively, you could just include the pension in come on page one and apply the graduated tax scale, if this is less than 15%.
Then you include the tax withheld as tax paid, and request a refund.
Sounds like you haven't dealt with 1040NR (or even the IRS) very much. Does your client know this?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Hi Nelsona,
I’m curious about your comment indicating that you have the option of taxing this income at graduated rates instead of the flat 15%. Do you always have this option? If so, and your pension income is relatively small, would it not benefit most people that have the correct 15% non-resident flat tax withheld at source to file an optional 1040NR return to claim the income as effectively connected income instead? This way they can claim the $4K exemption and likely pay zero tax or much lower than 15%.
I read the 1040NR instructions and line 17 seems to support what you are saying.1) All pension income earned while a non-resident alien is considered effectively connected income and 2) If you worked in the US, pension income that is attributable to services after Dec 31, 1986 is also considered effectively connected. This begs the question as to what pension income is NOT considered effectively connected income and subject to the 15% flat tax. This makes it sound like virtually all pension income is effectively connected.
Any insight on this would be greatly appreciated.
I’m curious about your comment indicating that you have the option of taxing this income at graduated rates instead of the flat 15%. Do you always have this option? If so, and your pension income is relatively small, would it not benefit most people that have the correct 15% non-resident flat tax withheld at source to file an optional 1040NR return to claim the income as effectively connected income instead? This way they can claim the $4K exemption and likely pay zero tax or much lower than 15%.
I read the 1040NR instructions and line 17 seems to support what you are saying.1) All pension income earned while a non-resident alien is considered effectively connected income and 2) If you worked in the US, pension income that is attributable to services after Dec 31, 1986 is also considered effectively connected. This begs the question as to what pension income is NOT considered effectively connected income and subject to the 15% flat tax. This makes it sound like virtually all pension income is effectively connected.
Any insight on this would be greatly appreciated.
PENSION income is Effectively connected (ECI) and can be claimed as such on 1040NR. The withholding is 15% by treaty, which you can choose to accept as is or file to reduce. Don't forget the distinction between the tax and the withholding.
In reality, if you made up to ~ $50K in pension, and that was your only US-source of income, you would benefit (lower your US tax) from filing 1040NR a with pension as ECI.
This includes 401(k) and similar employer-sponsored plans but it does not necessarily include IRAs, which can be considered ECI, NEC, or mixed. I won't go into that here.
Why do most Cdn residents accept the 15% rate? probably because their Cdn tax rate is higher than that (so Canada would take the extra) or they don't want to be bothered filling a 1040NR.
I guess it is analogous to a Cdn living in US accepting the 15% withholding on his Cdn pension instead of filing a 217 (although, the 217 is a lot harder to file and to benefit from than the 1040NR steps mentioned above.)
In reality, if you made up to ~ $50K in pension, and that was your only US-source of income, you would benefit (lower your US tax) from filing 1040NR a with pension as ECI.
This includes 401(k) and similar employer-sponsored plans but it does not necessarily include IRAs, which can be considered ECI, NEC, or mixed. I won't go into that here.
Why do most Cdn residents accept the 15% rate? probably because their Cdn tax rate is higher than that (so Canada would take the extra) or they don't want to be bothered filling a 1040NR.
I guess it is analogous to a Cdn living in US accepting the 15% withholding on his Cdn pension instead of filing a 217 (although, the 217 is a lot harder to file and to benefit from than the 1040NR steps mentioned above.)
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Tremendous insight as always Nelsona. Greatly appreciated!!!
Yes, I suppose it generally makes no sense trying to reduce your taxes on the US side, as your ultimate tax liability is to Canada. Even if I can reduce the tax to zero on the US side, it doesn't really help me OVERALL; as I still owe tax on this income to Canada. All I would be doing is paying less tax to the US and more to Canada.
Perhaps the only time this would make sense is when you have no tax owing in Canada because your income is relatively low and/or you have a significant amount of other credits and deductions to use. In which case, it might make sense to recover some or all of the 15% tax on a 1040NR, because you won’t owe anything to Canada on this income anyway?
Another time might be when you withdraw YOUR PRE 2009 contributions (not growth or employer contributions) made to a 401K by a resident of Canada commuter, that were not eligible for a deduction on the Canadian side, and were properly grossed up and taxed on your T1 General in the year the contributions were made. These contributions when withdrawn would only be taxable in the US, not Canada correct? In which case it might make sense to recover some of the 15% tax on these?
Yes agreed, the S.217 normally only works if you don’t have any other worldwide income, or very little. The 1040NR option seems that it might be beneficial in slightly more situations.
Am I on the right track with these two examples? Thanks again for your time.
Yes, I suppose it generally makes no sense trying to reduce your taxes on the US side, as your ultimate tax liability is to Canada. Even if I can reduce the tax to zero on the US side, it doesn't really help me OVERALL; as I still owe tax on this income to Canada. All I would be doing is paying less tax to the US and more to Canada.
Perhaps the only time this would make sense is when you have no tax owing in Canada because your income is relatively low and/or you have a significant amount of other credits and deductions to use. In which case, it might make sense to recover some or all of the 15% tax on a 1040NR, because you won’t owe anything to Canada on this income anyway?
Another time might be when you withdraw YOUR PRE 2009 contributions (not growth or employer contributions) made to a 401K by a resident of Canada commuter, that were not eligible for a deduction on the Canadian side, and were properly grossed up and taxed on your T1 General in the year the contributions were made. These contributions when withdrawn would only be taxable in the US, not Canada correct? In which case it might make sense to recover some of the 15% tax on these?
Yes agreed, the S.217 normally only works if you don’t have any other worldwide income, or very little. The 1040NR option seems that it might be beneficial in slightly more situations.
Am I on the right track with these two examples? Thanks again for your time.