TaxConnections

Ask Tax Question

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)
TaxConnections Members... Answer This Question Want To be One of Our Tax Experts? Register Here

Tax Professional Answers

User Photo
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.

Leave a Comment 150 weeks ago



Meet Leading Tax Advisors

User Photo Kathryn Morgan

Bossier City, Louisiana, USA

Enrolled Agent, Master Tax Advisor

User Photo Peter J. Scalise

New York, New York, USA

Federal Tax Credits & Incentives Practice Leader

User Photo John Stancil

Lakeland, Florida, USA

Tax Advisor/CEO

User Photo John Dundon, II EA

Denver, Colorado, USA

Tax Director

User Photo Steven Potts JD EA IAR

Fullerton, California, USA

Principal

User Photo Devon McCarthy FCCA, EA

Sanford, Florida, USA

President

User Photo Caran Ebert, CPA

Topanga, California, USA

Tax Advisor

User Photo Lisa Nason CPA, MST

Greenville, South Carolina, USA

Managing Shareholder

User Photo Gary Carter, PhD, MT, CPA

Edina, Minnesota, USA

President

User Photo NEERAJ BHATIA, CPA

Santa Clara, California, USA

Tax Principal - President

User Photo Bill Robinson, CPA

Chattanooga, Tennessee, USA

Owner

User Photo Hugo Van Zyl

Stellenbosch, South Africa

Exchange Control & Master Tax Practitioner (SA)

User Photo Douglas Stransky

Boston, Massachusetts, USA

Tax Partner, International Tax

User Photo Larry Stolberg, CPA, CA

Toronto Mississauga Oakville Burlington Hamilton, Canada

Tax Specialist

User Photo Dr. Daniel Erasmus

West Palm Beach, Florida, USA

Managing Partner/EMEA

View/Select our Current List of Tax Topics

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Previous PageNext Page

Contact Us Today