Pension Tax Question

[ExpatCM]

Hello


I'm unsure what forum taxes falls under so if this is an inappropriate question, please advise what forum would be better

My wife and I live outside the USA and have filed joint tax returns before we retired in 2015. Because our gross adjusted worldwide income has fallen below the threshold required for filing a tax return ($24,400 for 2019), we have not filed a federal or state tax return since 2016.

We do have overseas bank accounts and file the required FBAR report every year. We also maintain careful spreadsheets listing our taxable income which consists of CD interest in US banks, US checking account interest, foreign bank account interest (which we convert to USD using government year end rates) and a small amount of taxable investment income in a brokerage account (about $1000). Neither of us is old enough to qualify for Social Security yet. The bulk of our assets are in tax sheltered brokerage retirement accounts for future use.

I am eligible to begin a small pension from my last employer in 2020 that will amount to a total of $5,760 annually. Since the entire gross amount plus all our worldwide taxable income will still not exceed the requirement for filing a return, my question is this for anyone that might know.

1) Do I have to have the employer withhold any federal tax at all? If they are required to withhold something, I guess that means I'd be required to begin filing again to receive the taxes back in the form of a refund due to overpayment of taxes?

2) Is there any requirement to file a federal tax return when you receive a pension even if the amount is too small to incur a tax liability?

3) Do estimated quarterly taxes come into play at all? It seems stupid to pay even small amounts four times a year when we'd be eligible to receive the entire tax amount back because we will not exceed the amount required to file a 1040.

I'm trying to avoid asking the last guy that filed a return for us because he will not give advice for free. Because my wife is a Canadian/US dual citizen with tax sheltered Canadian brokerage assets, we have always paid a cross border tax specialist in the past to file our returns to ensure we are meeting IRS requirements for exempting Canadian assets from US taxes as well as any strange foreign tax rules that I wouldn't know about. Since expat tax filing fees are pricey for having a zero liability, we're trying not to file until later in life when the situation warrants it.

Thanks for any advice in advance.

 

[triangle]

I am not sure I know the answers to your question, I can only offer what I would think without doing any research.

1a) I thought you had to file a IRS return if you had any income over $100-1000 (not sure the exact threshold), even though you did not owe any tax.

1b) I do not think the employer must withhold anything. As long as you give them proper instructions about your withholding needs I think they will comply. Especially since the amount is not large.

2) See above 1a, I am under the impression you should have already been filing, where the form would simply show that you owe no tax and the IRS will be happy.

3) You should not need to file any quarterly estimated taxes (1040-ES). If there was ever a case that you should have paid and did not it would be handled when you filed your year end 1040, in which case you would owe the full tax along with a penalty (basically an interest payment) for not having sent quarterly estimates.


Edit: I am not even considering your wife's situation. If I were in your situation I would try to figure out what the cross border tax specialist did and repeat the steps each year. Just add the extra pension income into the picture (forms) and work the numbers from there.

 

[kaneohe]

You might want to post your question in the Retirement Forum at Fairmark.com
esp. w/ your overseas situation (taxhelp/Fairmark forum/Retirement Savings & Benefits).

My guess (w/o considering the overseas situation):
1) Don't need to withhold https://www.irs.gov/pub/irs-pdf/fw4p.pdf
see top of p.3 "Distributions that are (a).........., (b) one of a
specified series of equal payments, or (c) ... are not “eligible rollover distributions” and aren’t subject to the mandatory 20% federal income tax withholding. See Pub. 505 for details

2)You need to file if your total income exceeds the threshold (24.4K for 2019).
See p. A-1 of Pub 4012 https://www.irs.gov/pub/irs-pdf/p4012.pdf

3) no need for estimated tax if tax=0 https://fairmark.com/general-taxation/estimated-tax/who-must-pay/

 

[Sunset]

....My wife and I live outside the USA and have filed joint tax returns before we retired in 2015. Because our gross adjusted worldwide income has fallen below the threshold required for filing a tax return ($24,400 for 2019), we have not filed a federal or state tax return since 2016.

We do have overseas bank accounts and file the required FBAR report every year. We also maintain careful spreadsheets listing our taxable income which consists of CD interest in US banks, US checking account interest, foreign bank account interest (which we convert to USD using government year end rates) and a small amount of taxable investment income in a brokerage account (about $1000). Neither of us is old enough to qualify for Social Security yet. The bulk of our assets are in tax sheltered brokerage retirement accounts for future use.

I am eligible to begin a small pension from my last employer in 2020 that will amount to a total of $5,760 annually. Since the entire gross amount plus all our worldwide taxable income will still not exceed the requirement for filing a return, my question is this for anyone that might know.

1) Do I have to have the employer withhold any federal tax at all? If they are required to withhold something, I guess that means I'd be required to begin filing again to receive the taxes back in the form of a refund due to overpayment of taxes?

2) Is there any requirement to file a federal tax return when you receive a pension even if the amount is too small to incur a tax liability?

3) Do estimated quarterly taxes come into play at all? It seems stupid to pay even small amounts four times a year when we'd be eligible to receive the entire tax amount back because we will not exceed the amount required to file a 1040.

....

I had to check OP , but you are correct about the ~$24,000 threshold.
My answers are:
1) No. tell employer to hold nothing.
2) No.
3) No.

Here is a site you may have already seen:

https://brighttax.com/blog/irs-foreign-earned-income-exclusion-us-expats-guide/

Now, my question is: How are you living on less than $24K taxable income per year ?

 

[ExpatCM]

I had to check OP , but you are correct about the ~$24,000 threshold.
My answers are:
1) No. tell employer to hold nothing.
2) No.
3) No.

Here is a site you may have already seen:

https://brighttax.com/blog/irs-foreign-earned-income-exclusion-us-expats-guide/

Now, my question is: How are you living on less than $24K taxable income per year ?

Hi
Thanks for the responses. I do believe you are correct but felt better asking

As to how we live, we are in a rare tax sweet spot. Sold our overpriced California house in 2015 that was 80% paid off. Then we moved to Malaysia and now Chiang Mai, Thailand and next year we are moving to a Mexico.

We put all the house cash into CD’s and high yielding bank accounts and tier them accordingly. We wire an appropriate amount for living expenses annually and convert the funds to the local currency and live on cash except when we fly or travel. So we live on more than 24K but none of it is taxable until you pass 24K because you’re only taxed on things like bank interest, CD income and other misc income you may earn like self employed business or the like (we have none of that)

The bulk of our assets are in rollover and ROTH IRAs which have grown about 35% in five years. We have only about 20% in a taxable brokerage account with all mutual funds. So if you add up all our CD interest, bank account interest and taxable mutual fund distributions, it’s less than 24.4K. Thus, no requirement to file a tax return and no taxes.

We ensure all our foreign assets are below the threshold for FATCA reporting and file
the FBAR which is independent of the IRS.

You’d need to hold well over 1 million in CD’s before you’d ever have enough to make 24K but since it only costs us less than 40k to live comfortably, we will not deplete our CD cash for another ten or twelve years. Then my wife gets a small pension and we will begin withdrawals from the ROTH at which time we will finally pass 24K and have to file returns.

But livings tax free bit with no cash problems for 15 years is pretty cool.

 

[ExpatCM]

I am not sure I know the answers to your question, I can only offer what I would think without doing any research.

1a) I thought you had to file a IRS return if you had any income over $100-1000 (not sure the exact threshold), even though you did not owe any tax.

1b) I do not think the employer must withhold anything. As long as you give them proper instructions about your withholding needs I think they will comply. Especially since the amount is not large.

2) See above 1a, I am under the impression you should have already been filing, where the form would simply show that you owe no tax and the IRS will be happy.

3) You should not need to file any quarterly estimated taxes (1040-ES). If there was ever a case that you should have paid and did not it would be handled when you filed your year end 1040, in which case you would owe the full tax along with a penalty (basically an interest payment) for not having sent quarterly estimates.


Edit: I am not even considering your wife's situation. If I were in your situation I would try to figure out what the cross border tax specialist did and repeat the steps each year. Just add the extra pension income into the picture (forms) and work the numbers from there.

Hello
A few pages into the 1040 instructions you’ll find a small section titled “who must file”. If you owe no special taxes as they list and have worldwide income of less than 24.4K, you don’t file. The reason is that’s the standard deduction for married filing joint now that eliminated the personal deduction.

 

[Alan]

I agree with the answers given above and it would be good if you can persuade your pension provider to make no withholding on the pension otherwise you are going to have to file just to claim back those withheld taxes.

For overseas filers IRS Pub 54 is good to read and it also states that you won't need to file if your joint income is below the married threshold.

https://www.irs.gov/pub/irs-pdf/p54.pdf