United States Income Taxes For United Nations Retirees: FREQUENTLY ASKED QUESTIONS
Ines Zemelman, EANov-01-2015
1. Is the pension of a UN retiree taxable in the United States?
UN monthly pensions received by all U.S. citizens or resident aliens are always taxable wherever the UN retiree is living, in the U.S. or elsewhere. Such UN pensions are also taxable for non-resident aliens who qualify as resident aliens, for tax purposes, under the Substantial Presence test (see paragraph 4-7). Otherwise, a non-resident alien is not taxed on the UN monthly pension.
2. Do UN retirees who pay U.S. taxes have to pay quarterly estimated taxes?
All U.S. taxpayers have to pay estimated taxes four times a year – April 15, June 15, September 15, and January 15. Many taxpayers simply forget or do not know about this requirement and as a result may face penalties when they file their tax return. In order to avoid penalties, the payments must be spread evenly over the tax year and must in total equal 90% of the current year’s actual taxes or 100% of the previous year’s taxes paid.
3. Should I place my lump sum in a rollover to an Individual Retirement Account (IRA)?
Some UN retirees have gotten into trouble when mistakenly placing their lump sum into a rollover (IRA) as the IRA is taxable only when the funds are withdrawn. You should not elect a rollover IRA if (a) you are a U.S. non-resident alien whose lump sum is tax exempt or (b) if the tax on the lump sum will be reimbursed by the Organization. Only consider a rollover of the PART OF THE IRA that is taxable and the tax on that part is your responsibility.
4. Will the UN reimburse the tax on my lump sum?
If you were a UN staff member before 1980, the UN will reimburse any income taxes on your lump sum withdrawal. If you joined the UN on or after 1 January 1980, you are responsible for any income taxes on the lump sum that you received.
5. Do UN retirees who are U.S. taxpayers have to pay tax on special service agreements?
UN retirees must pay taxes on their special service agreements (as consultants or contractors) with the UN, including the estimated taxes. Many UN retirees either do not think about it or because the payment was not reported to the IRS they believe that the income is not taxable. However, as they are no longer in the status of UN officials, they are normally taxable regardless of visa status. In addition, they are required to pay social security taxes, if such income exceeds $400 a year (See para. 25 on page 9 above).
6. What taxes are payable on outside income by a U.S. non-resident alien who has not qualified as a resident alien under the Substantial Presence test
Bank interest, including Credit Union dividends, is never taxable in that case nor is the monthly UN pension. However, stock dividends, capital gains and rental income from sources within the U.S. are taxable using form 1040NR. A tax treaty between the home country and the U.S. may affect the amount of such taxes.
7. What is the effect of not having signed the Waiver of UN Privileges and Immunities?
UN staff members who are non-resident aliens have been granted certain privileges and immunities under U.S. law such that they are exempt from U.S. income taxes on their UN earnings as UN staff members. When such staff retire and receive a Permanent Resident Visa, they normally are required to sign a waiver of their tax exemption rights. However, although they have retired and received a Permanent Resident Visa, if they have not signed the Waiver of their Privileges and Immunities, they still remain in tax-exempt status on UN earnings. If they should then receive a short-term appointment with the UN with status as a staff member, the immunity from income taxes stands and the UN will not reimburse such taxes if levied. Such retirees should, of course, make arrangements to sign the waiver as soon as it becomes known that they have not signed.
8. How long will a person be eligible to receive a monthly tax exemption on his or her UN pension?
It differs according to the date of retirement as follows:
Prior to 1 July 1986: those who retired from the UN prior to 1 July 1986 who took the one-third lump sum used up all of their credit for tax-free pension under the Three-Year Rule, which applied up to 1 July 1986. However, those retiring from the UN prior to that date that did not take a lump sum payment would have been eligible for an annual tax-free amount of pension under the General Rule with no time limit. Those who did not to exercise this option and now want to establish this annual credit at this late date could only submit amended U.S. tax returns for the past three years.
From 1 July 1986 to 31 December 1986: those who retired during this period were eligible for a tax-free pension credit calculated under the General Rule or the newly established Simplified Method without a time limit.
From 1 January 1987: the General Rule continued to be available for a considerable time after 1 January 1987 but has now been abolished except for limited special circumstances. The Simplified Method, which was established effective 1 July 1986, was considered to be more favorable and is the method normally used during this period and at present. When the tax-free credit established at retirement has been used or deemed to have been totally used for retirements from 1 January 1986 and onwards, the exempt pension credit ends. Some UN retirees in this time period category have now reached that point, e.g., with a UN pension effective 1 May 1987 and taking a one third lump sum, the retiree’s tax credit was exhausted by November 2001.
9. Why was my actual U.S. Social Security benefit lower than the estimated amount prior to my retirement?
The formula for calculating Social Security benefits provides a higher percentage benefit in respect of the early years of service than for later years, e.g., starting with 95% of the Social Security base income. This procedure is designed to benefit those persons with relatively short working periods at a low income. However, the Social Security rules also provide that if a retiree had periods of service when not contributing to Social Security but building up pension benefits in another plan such as a U.S. national on a UN mission, the higher rate of Social Security benefit will be reduced.
10. What income must I declare on my tax return?
If you are a U.S. citizen or resident alien, you must declare not only income from U.S. sources but also any income from non-U.S. sources.If you are a non-resident alien, you are only required to report income from U.S. sources.
11. Am I entitled to any exclusion from taxation on my UN pension from New York State (NYS)?
If you were 59½ years old before 1 January of any given year, you can deduct the pension income included in your federal Adjusted Gross Income, not to exceed $20,000.If you became 59½ during the year, you can deduct only the amount received after you became 59½ but not more than $20,000.In addition, any pension received from NYS, a local government or the U.S. government is exempt from NYS income tax without a dollar limit and regardless of your age.
12. I understand that benefits received from the UN Pension Fund are considered to be a non-U.S. source of income. What are the implications of this consideration with respect to filing U.S. income taxes?
Non-resident aliens are taxed only on U.S. source income (unless they waive such limitation).Thus, since their UN pension payments are considered to have derived from non-U.S. sources, such income from UN pension payments would be tax exempt.U.S. citizens and resident aliens are taxed on their worldwide income.Thus all of their pension payments would be taxable, including those received from an International Organization.
13. I am a non-resident alien in the U.S. serving as an official of an International Organization on a G-4 Visa. My spouse is a U.S. citizen (or resident alien).May we file a joint U.S. income tax return?
Yes, you.However, you should attach a statement to the U.S. income tax return along the following lines:
“I, John J. Jones, am a non-resident alien working on a G-4 Visa as an official of an International Organization.My spouse, Anna A. Jones, is a U.S. citizen and I elect to file a joint U.S. income tax return, reporting our worldwide income, except for income that I received from an International Organization, which is exempt from U.S. income tax.See IRS Code Sec. 983 (a); IRS Rev. ruling 79-246; IRS Code Sec. 247 (a & b); and IRS Code Sec. 6013 (g)”.
In anticipation of filing a joint U.S. income tax return, it is recommended that the non-resident alien spouse also file IRS Form W-7; “Application for Individual Taxpayer Identification Number” to be used in place of a Social Security number.
Ines Zemelman, EA is the founder of Taxes for Expats