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Avoidance of double taxation under Tax Treaty

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Level 3

How do you exclude Social Security from a foreign country (under a Tax Treaty) on the Form 1040?  Do you include on line 5b and then deduct on line 7a for a U.S. Citizen living in that foreign country?

Does the same treatment apply for the above scenario but the U.S. Citizen is getting Social Security and living in the U.S.?  

In both instances the Social Security is for work performed.

 

 

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Level 15

Glad to be of help, @Shorebird.

My response was to both of your posts.

Income tax treaties are always reciprocal but it does not mean they assign equal right to both countries to tax different classes of income.

If you refer to Article XI(1), Greece is assigned the primary right to tax Greek social security benefits regardless of the residency of the recipient.  It makes no difference whether the recipient resides in the US or Greece.  While the same income could have been exempted from US tax, that's nullified by the Saving Clause in Article XIV(1) by virtue of the taxpayer being a US citizen.  The US, however, will allow FTC to be claimed for taxes paid to Greece.

Since Greece has the primary right to tax the social security benefits it pays, it is not in breach of the income tax treaty.  Totalization agreement serves a different purpose.  It only dictates how contributions and benefits are coordinated between the two treaty countries, not how those benefits are subject to tax.

As for the article you cited from the Master Tax Guide, you have read it wrong.  That article refers to whether social security taxes paid to a foreign country is creditable for purposes of FTC, not foreign taxes paid on social security benefits paid by a treaty partner.  In any case, what you have with Greece is unusual in modern times.  The only reason why you are in this dilemma is because this is an antiquated treaty.

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Level 15

Which country?

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Level 3

Both instances are for Greece, with which the U.S. has a Tax Treaty and a Social Security Agreement.

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Have been working on the return for the U.S. citizen who is a resident of Greece.

It was not as simple as what I had asked about how to report.  Due to the program calculation of taxable social security, the adjustment on line 21 was not the amount of the Greek Social Security.

It was the difference of the taxable social security with the Greek one deleted and the taxable amount for both the U.S. and Greek Social Security.

Another verification for the correctness of this adjustment was to work from the WHAT-IFS and take the Taxable income difference from each calculation (with both, and with only U.S. Social Security taxed)..

I think I have it right.

The other client who is living in the States is my next problem because I was told that both retirements should be taxed and a Tax Credit taken by Form 1116.  That does not seem right to me because of the Treaty.  It should also be an exclusion for someone living in the U.S. and not be taxed in both the U.S. and Greece and then the taxes paid to Greece attempted to be allowed as a tax credit by filing 1116 (which hardly ever works for the correct amount and leaves foreign tax carryovers).

It would be wonderful if someone could help me with this.

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Level 15

@Shorebird wrote:
How do you exclude Social Security from a foreign country (under a Tax Treaty) on the Form 1040? Do you include on line 5b and then deduct on line 7a for a U.S. Citizen living in that foreign country?

The other client who is living in the States is my next problem because I was told that both retirements should be taxed and a Tax Credit taken by Form 1116. That does not seem right to me because of the Treaty. It should also be an exclusion for someone living in the U.S. and not be taxed in both the U.S. and Greece and then the taxes paid to Greece attempted to be allowed as a tax credit by filing 1116 (which hardly ever works for the correct amount and leaves foreign tax carryovers).

Why do you think social security paid by Greece should be excluded from US taxation, whether or not the US citizen lives in the US or Greece?

What Greece has with the US is an antiquated tax treaty from 1950, which has not been updated since.  Public and private pensions are dealt with by Article XI and everything is subject to Saving Clause without exceptions or re-sourcing provisions under Article XIV(1).

This essentially means social security paid by Greece would be subject to US tax the same way as US social security benefits, except foreign tax credit may be claimed to alleviate double taxation.  What you have been told is correct.

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Still an AllStar
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Level 3

Thank you for your response.  I very much appreciate your help.

Not sure you have seen my second post yesterday or whether your reply is for both.

I do think and know that the social security earned in Greece is taxed correctly by the Greek Government and in accordance with the Social Security Administration's agreement with Greece.  

Both are reported under Social Security on the 1040.  

According to Article XI of the Treaty and paragraph 1 it states that it is EXEMPT from taxation by the other country (not that credit is given)  by the other country.  Somewhere in the front part of the Treaty is says that the treatment is reciptrocal.  

I know that you are very familiar with foreign taxation but my confusion was why residing in Greece if you are a U.S. person you would exempt the soc. sec. income and if you live in the U.S. you could not and would need to use Form 1116 for a tax credit.

Additionally, you mentioned Article XIV which deals with the Tax Credit.  This means all other income taxes posed.   And in my humble opinion (and after one week of research) I would think this corresponds to Article 2477 mentioned in the U.S. Master Tax Guide under Creditable Foreign Taxes.

The second paragraph dealing with this says "no credit or deduction is allowed for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement" (which Greece has).

All this has got me mystified and baffled.

Have a good day!

 

 

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Level 15

Glad to be of help, @Shorebird.

My response was to both of your posts.

Income tax treaties are always reciprocal but it does not mean they assign equal right to both countries to tax different classes of income.

If you refer to Article XI(1), Greece is assigned the primary right to tax Greek social security benefits regardless of the residency of the recipient.  It makes no difference whether the recipient resides in the US or Greece.  While the same income could have been exempted from US tax, that's nullified by the Saving Clause in Article XIV(1) by virtue of the taxpayer being a US citizen.  The US, however, will allow FTC to be claimed for taxes paid to Greece.

Since Greece has the primary right to tax the social security benefits it pays, it is not in breach of the income tax treaty.  Totalization agreement serves a different purpose.  It only dictates how contributions and benefits are coordinated between the two treaty countries, not how those benefits are subject to tax.

As for the article you cited from the Master Tax Guide, you have read it wrong.  That article refers to whether social security taxes paid to a foreign country is creditable for purposes of FTC, not foreign taxes paid on social security benefits paid by a treaty partner.  In any case, what you have with Greece is unusual in modern times.  The only reason why you are in this dilemma is because this is an antiquated treaty.

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Level 3

Thank you, again.

I spent all day reading about this again.  In Greek.  The Greek version of the Treaty definitely states Excluded.  There have been numerous Court decisions, etc. over the years, but I am none the wiser about this after my research.  There was an agreement some years ago that a dual citizen living in the U.S. can take certain steps to have the Greek Government not tax the Social Security at all and remove from the Tax Form (the form always has the social security amount received and the taxes withheld pre-entered on the Tax Form of each individual).   However,  that is very complicated involving residence documents and the exact amounts received the previous year, which after signature by the IRS need to be apostilled and submitted personally in Athens up to the end of February every year.   This has to be done annually, which is very difficult if you live in the U.S. 

For the first client, the dilemma was 2,000 difference so I wanted to be sure.  It did not seem right or fair for such a difference in taxes, but then the taxation law is not always fair.

I am very grateful to you for taking the time and effort to give me the answers.   Especially for the explanations.

 

 

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Level 15

Not a problem, @Shorebird!  When both governments are involved, these usually have to do with treaty tie-breaker.  Could you provide the citation of the case you mentioned?

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If I find it again.   I didn't think to save it.  I only kept a copy of the Form which needs to be completed in duplicate and submitted to both the IRS and the Greek Social Security (IKA) Department.

(In 2017 I had enquired in person during my summer vacation, and was told that by submitting the IRS signed document at the beginning of each year, the amount of the Greek Social Security would not be shown on the E1 Tax Filing Document).

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Thank you for your help.

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