I have a client who is from Venezuela, and has been in the U.S. for several years. He is a green card holder. His only income, other than about $200 in interest, is his Venezuelan pension. According to the Venezuela/U.S. treaty, his pension is excludable from U.S. income. My thinking is that he is not required to file a U.S. tax return. However, his previous preparer filed form 1040 for him last year, and included form 8833, which is used to take a treaty position to exclude income. Any thoughts on this would be appreciated.
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Treaty-Based Position
A resident alien is treated as a US citizen for tax purposes.
US citizens and resident aliens are taxed on their worldwide income. All income is taxable unless excluded by law.
If your client has gross income that exceeds the filing requirement threshold, i.e., the personal exemption plus the standard deduction, then he is required to file a tax return.
His pension from Venezuela may in fact be excluded from income under the tax treaty. But that does not relieve him from his obligation to file a tax return. When he files his return, he must report all of his income, including that income that is excludable under the treaty. Only be declaring his treaty-based position does the income become excluded.
What you're dealing with, on a philosophical, or theoretical level, is a question of ordering. Which comes first, the income or the exclusion?
If the exclusion comes first, then there is no income, and he doesn't have to file.
If the income comes first, then he has to file in order to report the income, and disclose the treaty-based position, which excludes the income from his AGI. (Read: Negative entry on line 21.)
Factoid: Exclusion is not the same as exemption.
A gift or inheritance is not even considered to be income. It does not even have to be reported.
Municipal bond interest, however, is tax-exempt income, and therefore must be reported.
Your client has income that has to be reported.
Put the horse in front of the cart.
BMK
BMKLast edited by Koss; 04-03-2011, 10:56 PM.Burton M. Koss
koss@usakoss.net
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The map is not the territory...
and the instruction book is not the process. -
Why would pension from Venezuela be exempt? People who get pensions from Canada and from England have to pay taxes on their pensions or that country's social security equivalent. It is very confusing to me that a country in South America would have pension income that would be exempt.
Linda, EAComment
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Why Venezuela?
Pensions from Venezuela are exempt per the treaty between the 2 countries. Why Venezuela and not Great Britain is a question for the treaty writers...Comment
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As I read Pub. 901, a government pension from the UK would only be taxable if the recipient is both a citizen and resident of the U. S., and thus would not be taxable to a green card holder. The same rule applies to Venezuela (but not Canada).
I'm inferring that private pensions are considered income from personal services. I'm also assuming that if someone is a US resident (as is the case here), then they're not a resident of the foreign country (even though they may still be a citizen of that country). If that reading is correct, then for both the UK and Venezuela, they would be taxable.Comment
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I don't have an answer but a thought. Pension doesn't mean the same thing in all countries. Some so called pensions are the same as social security. Social Security is not taxable income per se, only taxable combined with other income and therefor, should not figure into the filing requirement (as long as not taxable).Comment
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Thank you...
Thank you, Burton, for your reply. It was a big help. I am doing as you recommend...Comment
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