lansbury

If you are a US citizen the lump sum is taxable in the US.

If you live in the US but are not a US citizen it isn't taxable.

There is a document from HMRC which states that position. I have not been able to find a corresponding document from the IRS, so anyone arguing that with the IRS would have to rely on HMRC opinion.

ETA: https://www.gov.uk/hmrc-internal-man...elief/dt19876a Look at the last section on lump sums.

Desertsun2018

I am a US citizen. I’m not sure I agree with your answer. This article refers to 17 2 which is a lump sum. I am not taking a lump sum I am taking smaller amounts which are classified under clause 17 1b and the savings clause does not apply to this clause for US citizens. I think HMRC have also got it wrong as the lump sum referred to is the US lump sum which is a total distribution of pension. That’s how I read it. It seems most British expats have previously just accepted this answer without fighting the IRS. What was the original intention of the treaty?

lansbury

In your original question you referenced the 25% payment and also used the term lump sum. If you are not talking about the lump sum perhaps you should ask the IRS, I’m sure many of us would be interested to see their reply.

Desertsun2018

As I am sure you know this is the hard part! How do I get a response from the IRS without legal help? The 25% I mentioned was figurative to show that these amounts are part of the tax free portion. In my UK pension the drawdowns are all shown as tax free... I would like to know if anyone has simply not included this income in their taxes and been contacted by the IRS? I also think being resident or a citizen is the same for tax purposes.

durham_lad

There is also this opinion.

“Lump-Sum” Distributions From U.K. Pensions - International Tax Blog

I have been in a similar situation twice with 2 UK pensions and each time I elected to take the full pension with no lump sum and have had no regrets, although I did not need the lump sums.

Desertsun2018

I have been researching this for several years and seen most of the replies that suggest it IS taxed. I’m also convinced that it should NOT be in the spirit of the reason for the tax treaty which unfortunately is not well written. More and more people are starting to suggest that article 17 1b is the relevant clause from the treaty which is for pension withdrawal payments (not the US version of lump sum) and these payments would then be tax free. It is irrelevant if you are a US resident or a citizen as both are treated the same for tax purposes.

Desertsun2018

Does that mean you are paying US tax on each pension payment? Of course that is an option but I think the treaty was written to protect our pensions even though we are no longer in the U.K.?

durham_lad

Yes, I have been paying US tax on my UK pensions for quite a number of years. Since moving back to England I still pay US tax but now claim the HMRC tax paid as a foreign tax credit.

Desertsun2018

It just seems unfair to pay additional tax to the IRS if we don’t need to. For me it’s several hundred dollars a year that could be in my pocket not theirs. It’s a pity no one seems to have a definitive answer on this. I did include it in my taxes last year but each tax year frantically search to see if someone has come up with a different answer!

durham_lad

Why is it unfair in my case (no lump sum)? While living in the USA I was not taxed on my pension distributions in the UK and now that I am living in the UK I pay tax on it in the UK which zeroes out the tax I pay on it in the USA through foreign tax credits.

Note that I did not offer an opinion on lump sums paid tax free in the UK as I don’t know the answer.

I have started taking distributions from my US Roth retirement account which is tax free in both countries.

Desertsun2018

I not sure why everyone is so hung up on the term lump sum? Pension is pension and in the U.K. we are entitled to 25% tax free if we take it as either one amount or several up to that limit. As a US resident we have to pay tax on ALL the pension or so it seems unless the treaty can in fact work for us. I’m not sure why you say you were not taxed in the USA on your distributions. I do not have ant foreign tax credits. All my income is taxed in USA and includes British state pension and the drawdown amounts I have been discussing. Unfortunately this forum like any other is not fully representative of all but I am writing these comments as I know there are many of us out there who are receiving UK pensions and potentially being taxed in excess of what we would have been taxed if we were in the UK.

durham_lad

Where did I say that?

I can see that maybe my statement above was misleading so let me say more clearly that while living in the USA I did pay US tax on my UK pensions but did not pay UK tax on the pension.

Desertsun2018

I too thought that was the way to go. I’m now seeing several people also think that if the payments are tax free in the UK they should also be tax free in the US. I cannot afford to hire a tax lawyer. It seems the only way is to take on the IRS.

1penelope1

I am getting confused now. I am a USC, resident in U.K. for many years. I have no US accounts or pensions - just U.K. So what is the position regarding US taxation for my U.K. pensions and “lump sum “ as a U.K. resident?

Desertsun2018

You declare all your income for US taxes. This discussion is about whether the pension 25%,so called lump sum in the UK, is taxed or not?