lump sum pension from Italy , how do you I report it

[aytaxservices]

my client got a lump sum pension from Italy that she was owed for the last ten years.  no taxes withheld . how do i report it on proseries basic

[Marsha2020]

Use Dec 31 as the currency conversion date and put on return as other income.

[itonewbie]

@Marsha2020What is the technical basis for using year-end rate for conversion?

@aytaxservicesForeign pension is generally taxable as annuities and would be reportable on Lines 4c and 4d.  It is a requirement to use spot rate on the date of receipt for conversion.

Review Article 18 of the US-Italy DTA.  Italy has the right to tax the lump sum distribution under Article 18(3), which is subject to the Saving Clause.  You will need to find out why no Italian tax was withheld - perhaps it is to be settled separately on a return to be filed - as you will need that info for FTC.  Article 18(6) is excepted from the Saving Clause, which means your client may or may not have a basis in the distribution.  You will need to review his prior year returns to establish the position taken and compute the amount taxable.

[Marsha2020]

On second thought if it’s a one time deal, then the date received is a better option rather than Dec 31. Although it’s a pension, other income has always worked for me and my previous employers. Otherwise, I think there would be trouble electronically filing it on a 1099R. I just labeled it Italian Pension in other income. 

[itonewbie · Accepted solution]

Year-end rate conversion is just not a permissible method for conversion, period.  You may have confused that with FBAR and FATCA reporting, which use year-end rates.

Taxpayers are required to use a reasonable method for conversion, which is generally spot rate although average exchange rate may be acceptable if the income is received ratably over that period.  The only other exception is when the business is a QBU.

In PS, I think the only way you can get foreign pension through efiling is to enter that on the Canadian pension page, which works the same way.  Otherwise, Other Income would be a last resort.

In other software like Lacerte/PTO, you do have the option to check it off as a foreign pension unrelated to US services.  It'd then be reported on the Lines 4c and 4d and you will be able to e-file the return.

[aytaxservices]

thank you

[itonewbie]

NP, @aytaxservices!

[BobKamman]

The euro finished the year slightly above 1.12 to the dollar, but traded below 1.09 in September 2019. So if you use the year-end figure, IRS won’t complain about collecting nearly 3% more tax. Your client might.

I use the eyeball method, for regular monthly payments. Find an annual chart and figure out where the average falls. Close enough for government work, and probably higher than what the taxpayer receives once the bank takes its cut.