Treatment of DB pension plan and 401K on 1040NR for Covered
Moderator: Mark T Serbinski CA CPA
Treatment of DB pension plan and 401K on 1040NR for Covered
I'm going to be a covered expatriate. How will the IRS tax my US monthly DB pension plan payments and 401K withdrawals after I pay the exit tax and expatriate to a tax treaty country?
I understand that my monthly DB pension plan payments and 401K withdrawals will be subject to a 30% withholding at source.
But when I file my 1040NR each year, can I claim both as "effectively connected" income on page 1 line 17? Or do they have to be NEC on page 4 line 7 box (c)? Or some combination of either?
For example, if my annual DB pension in $50K and my monthly 401K withdrawals total $40K, then treating both as effectively connected income on page 1 results in tax of about $18K (tax table page 72). Which would give me a $12K tax refund each year.
Treating them as NEC gives me no refund.
I understand that my monthly DB pension plan payments and 401K withdrawals will be subject to a 30% withholding at source.
But when I file my 1040NR each year, can I claim both as "effectively connected" income on page 1 line 17? Or do they have to be NEC on page 4 line 7 box (c)? Or some combination of either?
For example, if my annual DB pension in $50K and my monthly 401K withdrawals total $40K, then treating both as effectively connected income on page 1 results in tax of about $18K (tax table page 72). Which would give me a $12K tax refund each year.
Treating them as NEC gives me no refund.
First your DB will only be taxed at 15% by treaty, and your 40(k) *should* only be taxed 15%,. None should be subject to any penalty even if under 59.5. A w8-BEN should be sufficient t oget those rates.
But, yes, you may report one or both as effectively connected "page 1" income.
Canada will expect you to have taken all steps required to reduce the tax to 15%, so will not grant more than that in credit, so it is in your interest to lower the US tax as much as possible.
But, yes, you may report one or both as effectively connected "page 1" income.
Canada will expect you to have taken all steps required to reduce the tax to 15%, so will not grant more than that in credit, so it is in your interest to lower the US tax as much as possible.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
When I say "should only be taxed 15%", I mean should only have 15% withheld. In that case, you wouldn't ewven have to bother with the tax return.
I am assuming you are moving back to Canada.
I am assuming you are moving back to Canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
nelsona : Thanks for that answer but now I'm confused.
I thought being a covered expatriate meant an automatic 30% withholding (not eligible to be reduced by treaty) and a 30% tax on all NEC income (i.e. everything declared on page 4).
If it only means 30% withholding and everything else is treated the same as a non-covered expatriate, then the only main issue with being covered is cash flow once you have expatriated. (Ignoring any actual tax at exit or long term gift estate tax issues)
If true, this makes the consequences of expatriating as covered or not-covered almost trivial for many people (like me) headed back to Canada.
I thought being a covered expatriate meant an automatic 30% withholding (not eligible to be reduced by treaty) and a 30% tax on all NEC income (i.e. everything declared on page 4).
If it only means 30% withholding and everything else is treated the same as a non-covered expatriate, then the only main issue with being covered is cash flow once you have expatriated. (Ignoring any actual tax at exit or long term gift estate tax issues)
If true, this makes the consequences of expatriating as covered or not-covered almost trivial for many people (like me) headed back to Canada.
That makes sense to me too. Thank you.
Summary : if you send a W-8CE to your DB pension plan and 401K administrators (within 30 days of expatriation), they withhold 30% at source (regardless of any treaty rates) and you file a 1040NR each year to get the treaty rate (15% if Canada) applied - resulting in a refund of the other 15%.
It's amazing how hard it is to tease a simple explanation like that out of anything you can find published online (especially the IRS guidelines).
Summary : if you send a W-8CE to your DB pension plan and 401K administrators (within 30 days of expatriation), they withhold 30% at source (regardless of any treaty rates) and you file a 1040NR each year to get the treaty rate (15% if Canada) applied - resulting in a refund of the other 15%.
It's amazing how hard it is to tease a simple explanation like that out of anything you can find published online (especially the IRS guidelines).
Thanks nelsona. FWIW, I'm headed the other way - expatriating from the USA (long term LPR & covered expatriate) back to Canada (citizen).
I'd love a link to any websites that simplifies or clearly explains that process. Most of what you find is basic high level stuff designed to scare people and attract legal/accounting clients. Some of it is fluff, some of it is simplistic, some of it helps, and some of it is just plain wrong.
I'd love a link to any websites that simplifies or clearly explains that process. Most of what you find is basic high level stuff designed to scare people and attract legal/accounting clients. Some of it is fluff, some of it is simplistic, some of it helps, and some of it is just plain wrong.
http://isaacbrocksociety.ca/how-to-renouncerelinquish/
A bit heavy on the hyperbole, but will have all the experiences.
Thought you would have found them by now.
A bit heavy on the hyperbole, but will have all the experiences.
Thought you would have found them by now.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Re:
nelsona wrote:
> That is how I understand it. Once expatriated, the treaty overrides these punitive measures.
Keep meaning to come back and correct this. I did a bunch more searching and asked this question of the international tax lawyer I work with. My understanding was wrong.
Once you are determined to be a covered expatriate, all future taxes due in the USA are calculated at 30% - you lose the ability to apply treaty reduced rates and should not try to use them when filing tax returns.
> That is how I understand it. Once expatriated, the treaty overrides these punitive measures.
Keep meaning to come back and correct this. I did a bunch more searching and asked this question of the international tax lawyer I work with. My understanding was wrong.
Once you are determined to be a covered expatriate, all future taxes due in the USA are calculated at 30% - you lose the ability to apply treaty reduced rates and should not try to use them when filing tax returns.
Re: Treatment of DB pension plan and 401K on 1040NR for Covered
I'm not so sure I agree with that statement. At the time of expatriation you may not be able to use treaty, but certainly afterwards you should be allowed to. That is the point of expatriation.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Re: Treatment of DB pension plan and 401K on 1040NR for Covered
On second reading, yes, specifically trust income is not to be reduce by treaty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Re: Treatment of DB pension plan and 401K on 1040NR for Covered
Per the title of the thread, I'm talking about a USA DB pension plan and 401K. I'm not sure if that's what you mean by "trust income"?
Regardless, the rules are brutally clear. If you expatriate as a "high net worth" individual as defined by the IRS (or don't have clean tax returns for recent years) then you are considered a covered expatriate. And the IRS will tax all deferred tax items (IRAs, stocks, homes, other investments) as if you had cashed them out the day before you expatriated.
Defined benefit pension plans and 401K's get special treatment for covered expatriates. While they are not taxed on exit like an IRA, all income from those after you leave gets taxed @ 30% via a 30% withholding that you won't get back. The 30% cannot be reduced by any tax treaty. You make that irrevocable election when you choose not to have your DB pension or 401K taxed fully on expatriation.
Regardless, the rules are brutally clear. If you expatriate as a "high net worth" individual as defined by the IRS (or don't have clean tax returns for recent years) then you are considered a covered expatriate. And the IRS will tax all deferred tax items (IRAs, stocks, homes, other investments) as if you had cashed them out the day before you expatriated.
Defined benefit pension plans and 401K's get special treatment for covered expatriates. While they are not taxed on exit like an IRA, all income from those after you leave gets taxed @ 30% via a 30% withholding that you won't get back. The 30% cannot be reduced by any tax treaty. You make that irrevocable election when you choose not to have your DB pension or 401K taxed fully on expatriation.