Tax Treaties and Pension Income: How Treaties Protect Expats in Retirement

Many US tax treaties contain specific provisions for pension income that determine which country has the right to tax retirement distributions, and understanding those provisions can significantly affect a retiree's overall tax bill. The US-UK treaty, for example, generally provides that pensions and annuities paid to a resident of one country from sources in the other country are taxable only in the country of residence, which means a UK resident receiving US Social Security or a 401(k) distribution may only pay UK tax on it. The US-Canada treaty has similar provisions for registered retirement savings accounts, though the specifics differ from the UK rules. Some treaties also provide that government pensions paid for public service are taxable only in the paying country, which matters for US federal employees who retire abroad. The saving clause in most treaties means that US citizens cannot rely on treaty pension provisions to reduce their US tax, but non-citizen spouses and residents of treaty countries without US citizenship often benefit significantly from these provisions. For a detailed look at how the US-UK treaty works, see this post on the US-UK treaty.