My client left South Africa 5 years back. He is tax resident USA (resident alien) and his SA pension fund pay out accrues before Feb 2014 (end of our tax year 2014). As he has been employed more than 2 years out of last 10 years in SA, SARS (our IRS) may tax upfront.
Tax Professional Answers
I have not checked the Tax treaty, but, normally what would happen in this situation is the client would include the income on his US tax return as if it was US pension or SSA benefits. If the income he is receiving is the equivalent of our US Social Security Administration income based on his age, then it would be tax as if it was US SSA benefits. If it is a pension like a 401K then it would be taxed like a normal pension withdrawal. That's the bad news.
The good news is that if the South African government taxes it before he gets it he can take a credit on his US tax return up to the amount of the tax from SA or the amount which it would be taxed in the US, whichever is the lesser. This is done on form 1116.
Please don't hesitate to send me a message if you need assistance. You should give the US/South Africa Tax treaty a read through just to be sure there are no specific exemptions for this type of income.
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