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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.

The SA tax credit will be 33% yet his USA tax rate closer to 42%. He asked: Can I not add to my 401(k) to reduce the IRS tax the value of the SA taxes deducted? Our exchange control rules denies him a fund to fund transfer. He has to cash into ZA Rand, suffer the local withholding tax and then only can he remit funds to USA. DUe to the tumbling Rand he will own USA funds to top up 401(k) or similiar retirement fund should there be a tax benefit.
Cross Border Tax Planning Retirement Plans 401(k)
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Tax Professional Answers

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Kathryn Morgan

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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