How do I show that Social Security is nontaxable on Form 1040 for a US citizen who is a full-time resident resident of Ireland?

[itonewbie · Accepted solution]

The US social security income is still reportable as taxable income on the F.1040 even though the income as described in Article 18(1)(b) is excepted from the saving clause under Article 1(5)(a).  Article 24(3) is the mechanism that is employed to eliminate US tax due on the otherwise taxable US social security income.  In other words, it should be taken care of through FTC on F.1116 and treaty disclosure would be required.

[beancounternh]

itonewbie, thank you. Your answer led me to do some further digging and here is what I've come up with: 1. Pub 915, page 5, US citizens residing in eight specific countries (including Ireland) are exempt from US tax on their SS benefits. Page 6, if SS benefits are not taxable and you are reporting on 1040, you report your full net benefits on line 20a and enter -0- on line 20b. That should be the end of it. I also looked at Pub 514 Foreign Taxes for Individuals, page 7, which states "You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from US gross income" but I don't think I'd need to go this far because of my interpretation of Pub 915. I take this to include Social Security benefits excluded from US income. I did look at Form 1116 and I see a checkbox at the top for "certain income re-sourced by treaty". As for treaty disclosure, the instructions for form 8833, page 3, list exemptions from reporting, which include social security (third column, third bullet point). I did also read carefully the treaty Articles 18 and 24 as well as the related technical explanations. Article 18 states what we've already agreed upon, that a US citizen resident in Ireland is not subject to US tax on SS benefits (but is subject to Irish tax). I think that Article 24 is superfluous in this case because of what I read in Pub 915. If I'm right in this, my only problem is how to get my tax program to put a -0- on line 20b, which is a software issue. If I'm wrong, please tell me where my analysis has gone astray.

[TaxGuyBill]

"I think that Article 24 is superfluous in this case because of what I read in Pub 915."

You think part of an authoritative legal document is superfluous, but want to interpret a completely non-authoritative Publication to do it differently???

[abctax55]

SMH...

[itonewbie]

If you read Pub 915 carefully, page 5 only explains that the income would be exempt for tax residents of those treaty countries and that no tax would be withheld on US citizens.  It does not deal with how the income may or may not be reported on the return.  The paragraph you quoted from page 6 should also be read in conjunction with the section "How Much Is Taxable?"  As you can see from that section, treaty exemption is not one of those exceptions for not using any of the worksheets to determine taxable portion of the benefits.

Since there is no clear regulations or guidance that explicitly instructs taxpayers to simply report $0 as taxable social security benefits on Line 20(b) F.1040, I would follow the text of the treaty article to the tee if your client is claiming treaty exemption.

If the taxpayer were a nonresident alien, it would have been possible for the individual to certify his/her foreign status and claim for treaty benefits to the SSA, in which case, an SSA-1042S would be issued with the final withholdings, where applicable, and the taxpayer would not otherwise have to file a US return if he/she has no other US-ECI and all the US taxes owed had been properly withheld.

In terms of treaty-position disclosure, I agree that none would be required so long as it is taken care of through income re-sourcing on F.1116, which must be computed separately and is excepted under §§301.6114-1(c).  The reason these exceptions exist is, in part, because there are corresponding information return filing requirements (e.g. F.8233 for dependent personal services, 1042-S for FDAP, etc.).  In the absence of these information returns, there would need to be proper disclosure somehow or it will likely trigger a tax notice from the IRS.

I tend to be in the conservative camp but would be happy to learn from you and others, provided there are solid technical citations for the alternative reporting position.

[beancounternh]

itonewbie, thank you for your very thoughtful reply. I reread Pub 915, pages 5 and 6, with your comments in mind. I think you missed something, though.

On page 6, column 1, How to Report Your Benefits, very last line "Benefits Not Taxable" which runs to the top of the next column, "If you are filing Form 1040..., report your net benefits on line 20a... Enter -0- on line 20b." This to me is VERY clear and VERY explicit guidance. Since none of the benefits are taxable (due to the treaty), this is what I would do.

The next section you cite "How Much is Taxable" starts, "If PART of your benefits are taxable" (again, my emphasis). Since NONE is taxable, I believe the entire following set of instructions does not apply.

I might, as a precaution, attach a statement to the tax return, explaining why I put -0- on line 20b.

Please do reply. As I stated at the outset, I appreciate your thoughts. Incidentally, have you ever come across this situation with any of your clients? This is obviously my first time, and I do want to get it right.

[itonewbie]

My read is that it refers to social security and railroad benefits that are not taxable under domestic tax law, not when it is exempted under a tax treaty, where the tax treatment is clearly laid out in the article.

[beancounternh]

itonewbie - I had a nice long phone discussion with an IRS agent at the IRS International Taxpayer Service Call Center. She agreed with my take on the question and instructed me to do exactly what my thinking was heading me towards: Enter the net SS benefits on form 1040 line 5a (on the 2018 return - replaces line 20a on the old form 1040) and enter -0- on line 5b (replaces 20b). She said all international 1040s are processed in Austin and that they are quite accustomed to this practice so that there would be no need to attach any reference to the US-Ireland treaty.

I also called Intuit help on how to get the software to do this. The man I talked to said there is no "button" to tell the software to put the zero in - I'll just have to override.

And to anyone following this conversation - be advised that Ireland is one of only eight countries with which the US has this arrangement. Canada is one of the other seven. Mexico is not.

Thanks again for all your thoughts on this. I've enjoyed our conversation.

[IRonMaN]

Why would it be nontaxable?

[beancounternh]

Because ff the tax treaty between the US and Ireland, it is fully taxable in Ireland, but not taxable in the US

[abctax55]

@beancounternh - perhaps you would like to retract your *No* vote, as Mr. Yote was correct.

[IRonMaN]

Every once in awhile I kinda know what I’m talking about - it scares me when that happens :worried:

[beancounternh]

abctax, who is Mr Yote? I do not understand your comment.

[itonewbie]

"who is Mr. Yote?"
Take a look at the avatars here and you should recognize who that is.

[beancounternh]

itonewbie, the best I can come up with is "Wiley Coyote" for "Mr. Yote". And if I'm correct in that, then Mr. Yote's comment was a question, which is neither correct nor incorrect. The question did not help me because I already knew WHY it would be nontaxable. My original question was HOW to deal with it on the 1040. It is certainly a legitimate question but it did not answer mine.

[poolcleaner]

I checked on our tax treaties with a few other countries with this situation and they all had the US citizen paying taxes on US Social Security on their 1040 but they did not have to pay US taxes on the Social Security from the country where they are a resident. The Philippines is one example.

[itonewbie]

The right to tax certain item differs by treaty based on negotiation between the US and the treaty partner.  The one with Ireland is one of those that assigns the sole right to tax social security income to the country of resident and where the article is excepted from saving clause.

[poolcleaner]

Maybe we should put it out there in bold print that the tax treaties with other countries are not all the same. You have to read the treaty for the country with which you are dealing. https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z     https://www.irs.gov/individuals/international-taxpayers/tax-treaties

[itonewbie]

Yep, people just need to do a bit of reading to find the answer.  This forum is really not a research service. :+1:

[beancounternh]

I know that SS is not taxable in the US for a resident of Ireland. That is not my question. My question is, how do I show that on the 1040, using Pro series Basic Edition? Do I just leave it off altogether? Or is there another way?

[TaxGuyBill]

@beancounternh   Did you read the answer from @itonewbie   ?  He pointed out that Article 24(3) of the tax treaty says you use the Foreign Tax Credit.

[beancounternh]

Actually, I did. I will try that in the next couple of days