Foreign Tax Credit/Refund

Financial Planning Tax Strategies
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This year I inherited a pension from the UK, and to try to keep the paperwork simpler I also took a small UK pension of my own. Both have been paid as lump sums, and both had UK emergency tax withheld. I did the appropriate forms to get certification as a US resident for tax purposes. The UK tax authorities acknowledged this and sent a letter saying I will not owe UK tax for 2023/2024 and will be due a refund. All good.

The problem: the refund is unlikely to show up in 2023. The UK tax year is April-April, and they will probably do the refund after April 2024.

The foreign tax paid is around $48k. Not trivial.

I found this:
Topic No. 856, Foreign Tax Credit | Internal Revenue Service (irs.gov)

Foreign Taxes That Don’t Qualify for a Credit:

  1. Taxes paid to a foreign country that you don’t legally owe, including amount eligible for a refund by the foreign country.

That seems to apply. It would keep things simpler if I do not claim a foreign tax credit. But what do I use as income and for which year?

Gross = Net + Refund

Gross amount on 2023 taxes?
Net amount on 2023 taxes and Refund amount on 2024 taxes?
Some other byzantine concoction?

Any insight or thoughts?

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That’s a really interesting question, and I would suggest that to be sure on what you should do, you need to find a tax attorney who has dealt with UK pension income.

Given that you’ve done some research, you probably already have found this page The Taxation of Foreign Pension and Annuity Distributions | Internal Revenue Service (irs.gov) but if not, it might have some useful information.

Based on the concept of constructive receipt of the income, you could probably defend claiming the net in 2023 and the refund in the year it shows up. But again, I would want to consult someone who actually knows the tax treaty and has an understanding of UK pension income.

AJ

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Thanks, AJ. That makes sense to me. I run my small business on a cash basis and it’s the same way - I recognize income when it arrives in my bank account.