When are Germans eligible for their government pension?

Dear Tax Talk,

My wife is a permanent resident alien receiving her retirement money from the German government in euros, which are deposited directly by the German government into her American credit union. The euros are converted to dollars at the daily rate on the day the money is deposited. Her money never touches any foreign bank that she has any signature or power of attorney over.

My question is this: Are we doing our taxes properly? IRS Publication 915 says that a German pension is equal to a U.S. Social Security payment, so I add her total dollars earned for the tax year — I keep a spreadsheet of the monthly dollars deposited by the Germans — and put that amount on Form 1040 on line 20a; then I do the work sheet for line 20b. Is this the place I am supposed to report her money? Are there any other forms to fill out?

The Germans send us nothing, and there is no 1099 issued by anyone. It seems that the IRS only has our word for how much money she makes. Of course, I keep the bank statements, too, to back up my spreadsheet.

Are we reporting this correctly on tax Form 1040? Thanks in advance for your answer.

— Gary

Dear Gary,

Yes, you are reporting the German Social Security payments correctly on your return by reporting the income on line 20a and then using the work sheet for line 20b.

The United States has tax treaties with Germany and Canada whereby Social Security benefits paid by those countries to U.S. residents are regarded for U.S. tax purposes as if they were paid under U.S. Social Security regulations.

As you will see, the work sheet for line 20b helps you calculate the taxable portion of the German pension payments. Depending on your filing status and other income, up to 85 percent of the benefits may be taxable. Thus, you can see that the tax treaty with these two countries is beneficial to you because at least 15 percent and maybe more of the amount received will not be taxable to you. The work sheet is available in the instructions for Form 1040 and additionally in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. If you are electronically filing your tax return, the tax software will do the calculation for you if your information is input correctly.

There are no other forms to fill out, and you are correct: The IRS is relying on you to not only report the income, but to show how you calculated the amount you reported if it asks you to substantiate your information. The U.S. tax system is based on voluntary compliance, and you are required to file your tax return accordingly.

Thanks for the great question and all the best to you in preparing your return.

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