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Do I need to declare the lump sum from my British pension?

Do I need to declare the lump sum from my British pension?

Old Apr 8th 2008, 2:38 pm
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Default Do I need to declare the lump sum from my British pension?

I reached retirement age in September 07 and started receiving my teacher's pension and my state pension. These would normally be taxed in the UK but I escape that since my monthly total is below the UK personal tax allowance, so I don't mind being taxed on them in the US. However I don't know where on the tax form to report this income.

A bigger question is what to do about my lump sum. It was tax free in the UK so I really don't think Uncle Sam should take a cut. Do I report it and where, and can I report it as non-taxable income (will the IRS agree with that?)
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Old Jul 22nd 2008, 4:37 am
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Default Re: Do I need to declare the lump sum from my British pension?

Originally Posted by jo_march View Post
I reached retirement age in September 07 and started receiving my teacher's pension and my state pension. These would normally be taxed in the UK but I escape that since my monthly total is below the UK personal tax allowance, so I don't mind being taxed on them in the US. However I don't know where on the tax form to report this income.

A bigger question is what to do about my lump sum. It was tax free in the UK so I really don't think Uncle Sam should take a cut. Do I report it and where, and can I report it as non-taxable income (will the IRS agree with that?)
I have just registered and am unfamiliar with how these forums work.

Did anyone ever respond to the lump sum question?

I have the same situation and my feeling is that it is reportable in the US if you are filing as a citizen or permanent resident (ie filing a Form 1040). I am both a Chartered Accountant (UK) and a CPA, so therefore have a fair amount of experience in tax matters. However it is not 100% clear and I would love to hear from anyone who has filed a US return, disclosed that they have excluded the UK lump sum and not been challenged by the IRS; or alternatively has had advice from a Big 4 CPA firm that it is also tax free in the US.
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Old Jul 22nd 2008, 11:17 pm
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Default Re: Do I need to declare the lump sum from my British pension?

I never did get a reply to my question. Since it was a "one off" payment and nothing would have been reported directly to the IRS we could really just not have reported it all. It wasn't a large amount as I didn't work there for long and it was 20 years ago. However my husband wasn't keen on that so we compromised - we entered the total (lump sum plus subsequent monthly payments) in our Turbo Tax software but put the lump sum as non-taxable. When the form printed, the total showed in 16a on the tax form but only the monthly payments showed in 16b.

After we submitted it, we received a letter from the IRS so we thought the worst, but it turned out there was a miscalculation concerning my husband's health savings account, so we owed a small amount on that, but there was no mention of the pension amount - phew! Maybe the HSA served as a red herring which distracted their attention. Anyway we have heard nothing more.

I found this site which seems to confirm that there should be no tax on it anyway - see the second para under Taxation of Pensions and Annuities on http://www.us.kpmg.com/microsite/tax...s/fa03-071.pdf
If this is true then anyone who has the option to take a larger amount of their pension in lump sum rather than monthly payments should probably do so as the tax saved would likely outweigh the loss of later index-linked payment increases. I was not able to take that option as my pension had been frozen for 20 years.

I don't mind paying tax on the monthly payments as they would have been taxable in the UK anyway.

Good luck!
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Old Aug 26th 2008, 10:55 pm
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Arrow Re: Do I need to declare the lump sum from my British pension?

Article 17 and 18 of the US/UK tax treaty covers this - effectively if the lump sum would not be taxable in one's home state, e.g. UK, then it is not taxable in one's country of residence. However, beware, if someone is a US citizen or a long term green card holder deemed domiciled in the US then the US 'savings clause' would tax the lump sum and override the treaty.
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Old Aug 26th 2008, 11:42 pm
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Default Re: Do I need to declare the lump sum from my British pension?

I got a lump sum from my UK government pension.

We have a US CPA do our tax return. His view was it was part of my UK earnings which are taxed in the UK, the tax liability was discharged in the UK, albeit a nil liability and therefore it wasn't taxable in the US.

I had already taken up resdience in the US when my pension became payable, been resident for 6 weeks.

The CPA filled that years tax return in and US tax was not paid on the lump sum. The IRS accepted that return and so far have not raised a problem with it.

The monthly pension payment has tax paid on it in the UK and no tax in the US, under the double taxation part of the UK/US tax treaty.
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Old Aug 27th 2008, 8:37 am
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Thumbs up Re: Do I need to declare the lump sum from my British pension?

Good to hear that, though I'm not sure from the sound of it whether your CPA made that call by luck or judgement But it highlights the point that most CPAs in my experience don't even refer to the double tax treaty with UK pensions to check....a bit like a Doctor taking your temperature and guessing what the reading was and then diagnosing you
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Old Aug 27th 2008, 4:07 pm
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Default Re: Do I need to declare the lump sum from my British pension?

Originally Posted by im9907620 View Post
Good to hear that, though I'm not sure from the sound of it whether your CPA made that call by luck or judgement But it highlights the point that most CPAs in my experience don't even refer to the double tax treaty with UK pensions to check....a bit like a Doctor taking your temperature and guessing what the reading was and then diagnosing you
We are lucky one of the people employed at the office is a Brit GC holder so he was aware of the tax treaty.
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