In the wake of the changes to the way that foreign pensions (including 401-k’s and IRAs) are taxed in New Zealand the Inland Revenue Department (IRD) has recently refined its position with respect to foreign tax credit availability.
The way that pension income derived by New Zealand tax residents is taxable in New Zealand depends, according to the IRD, on the country from which the pension is sourced.
With respect to tax residents who derive a pension from the United States, the IRD’s position is that a pension arising out of past employment is taxable only in New Zealand – with no credit for overseas tax available in New Zealand.
This is in line with the income tax treaty allowing the country of residence to be the sole taxer of the income. However, of major concern to United States’ citizens is the lack of availability of a credit for tax paid in the United States.
The saving clause in treaties to which the United States is party allows the United States to tax its citizens and residents without regard to the income tax treaty.
Different rules apply to pensions that were not related to past employment, with the IRD’s position being that the pension is taxable in both countries, with a credit available in New Zealand for United States’ income tax paid.
We are working on a resolution to this issue of double taxation and will provide further information on this issue as we progress.
It is strongly advisable for any United States’ resident or citizen to seek professional advice before withdrawing from a United States-sourced pension.