For many US citizens living in New Zealand, understanding how their US pension will be taxed is understandably a matter of concern. The most important part of this question is usually who will tax the pension, rather than how.
For private pensions, such as IRAs, Roth IRAs etc., the rules can be very complicated and personalized advice should be sought. However, for government pensions, the rules are far more straight forward.
To be clear, when using the term “Government Pension”, I’m referring to a pension that is a result of employment with the US Federal Government, a State Government, Local Government, or NZ Government and associated institutions. This type of employment of course stretches far and wide, from fire brigades and hospitals to school caretakers and cleaners. Essentially, the below applies to any form of employment by a government or agency of the government.
To answer the question of who gets to tax a Government Pension, we can go straight to Article 18 of the NZ-US Double Taxation Treaty.
Subject to the provisions of Article 19 (Government Service)
- Pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment shall be taxable only in that State
If we translate this to a US citizen living in NZ, with a US Government Pension, it reads:
- Pensions and other similar remuneration derived and beneficially owned by a resident of a New Zealand in consideration of past employment shall be taxable only in New Zealand
So, this seems fairly straight forward, the pension would be taxable in NZ.
But, we must then take into account the important line “Subject to the provisions of Article 19 (Government Service)”.
Article 19 (2) states:
Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
Again, using the scenario above, this translates as:
Any pension paid by, or out of funds created by the United States or a political subdivision or local authority thereof to an individual in respect of services rendered to the United States or subdivision or authority shall be taxable only in the United States
OK, so again this seems fairly straight forward, the pension from US government employment is taxable only in the US, despite the individual living in NZ.
But then one final clause needs to be considered with Article 19 (2(b)):
However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a citizen of, that State.
However, such pension shall be taxable only in the other New Zealand if the individual is a resident of, and a citizen of New Zealand.
So there we have it, we have our answer.
In this scenario, where we have a US citizen with a pension from US Government, who lives in NZ, the taxation of their pension is determined by the above part of the tax treaty.
If the individual is a resident of NZ, but not a citizen, then the pension remains taxable in the US. If on the other hand the individual is a citizen of NZ and also a resident, then the pension is taxable in NZ.
No doubt, this is food for thought for any long term permanent residents of NZ, in consideration of obtaining NZ citizenship.
It must be noted, the above is a high level overview of the area, and does not apply to private pensions, nor has the Savings Clause been taken into account. The above should not be treated as tax advice in any way.
If you’d like to discuss further, contact us at US Global Tax today.