When immigrants move to a new country and had a career before doing so, they may be eligible to receive a foreign pension.
However, many immigrants are often taken by surprise when they find out that their foreign pension payments can be taxed even though the amount may not be taxable in their country of origin.
To avoid such a surprise, it’s important to understand how taxation rules work when it comes to foreign pensions.
How Can I Report a Foreign Pension on My Income Tax Return?
If your foreign pension income is considered a taxable income, it needs to be reported on your return.
You may be able to choose to receive the payments as a lump sum or receive them periodically.
Should you choose to receive them as a lump sum, you are required to convert the foreign lump sum payment into the currency of the country you are filing your taxes in. This needs to be done using the exchange rate on the day the payment went into your account.
Alternatively, receiving your payments periodically means you can use the average conversion rate during the period that you received your payments.
How Can I Avoid Double Taxation?
If your foreign pension is taxable in your home country, you may run into a double taxation problem when filing your taxes.
However, you can avoid the effects of double taxation by reviewing any specific provisions of the tax treaty. It may define rules or agreements that deem all or part of your pension income as non-taxable.
If there are no such provisions, you can reduce your tax burden by claiming foreign tax credits on the amount of tax you paid on your pension in another country. This involves filling out a separate form to calculate the credits to report on your income tax return.
Unreported Income and Voluntary Disclosure
Claiming taxes on a foreign pension is considered to be “voluntary disclosure” since there are no official documents held by the government indicating that you need to do so.
Therefore, if you have received offshore pension income that is not tax-exempt, you need to report this on your tax return. Failing to do so can lead to serious financial and legal consequences.
Some countries accept reports of tax evasion and even awards the informant a commission based on the amount of tax collected.
If you do not claim taxes on your foreign pension, many governments do offer a program that allows you to come forward with unreported income and receive relief from penalties, interest, and criminal prosecution.
However, accepting your application for voluntary disclosure depends on whether or not you meet the requirements of acceptance. The application must be voluntary, the provided information must be complete, the application must be related to a penalty, and the application must be made one year past due.
You’ll also have to provide payment for the estimated taxes owing.
Because the acceptance of such an application depends on the circumstances of your situation, it’s advised that you consult with a professional tax lawyer to ensure the process is completed in its entirety.
Tax Tips for Foreign Pension Income
Receiving a foreign pension income can be tricky and different tax laws in different companies will dictate how you pay taxes on this income.
To avoid any penalties or criminal charges, it’s best that you speak with an expert who can help guide you through the process of claiming taxes on your foreign pension.
Don’t forget to check out our vast collection of tax-related articles!