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"Lump-Sum" taxable amt. taxing comprehension

"Lump-Sum" taxable amt. taxing comprehension

Old Mar 19th 2013, 5:23 pm
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Exclamation "Lump-Sum" taxable amt. taxing comprehension

Has anyone dealt with the following?
With regard to a lump- sum received from a private UK Pension fund policy prior to its transfer to a UK Annuity:
Does the IRS allow the deduction of your contributions (total cost) from the total lump-sum amount when you determine the taxable amount? (My contributions were made with "after tax" money, years ago in UK. and I'd like to recapture my cost basis straight away, if possible)

I'd appreciate any guidance. A lot!!!
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Old Mar 19th 2013, 8:17 pm
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

If you are using the money to buy an annuity, do you not just pay tax on what the annuity pays out?

There maybe other requirements in declaring the value of the fund as a FBAR etc.

Last edited by lansbury; Mar 19th 2013 at 8:19 pm.
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Old Mar 19th 2013, 10:06 pm
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

Originally Posted by lansbury
If you are using the money to buy an annuity, do you not just pay tax on what the annuity pays out?
There maybe other requirements in declaring the value of the fund as a FBAR etc.
The Annuity didn't pay out till this year (2013).
Meanwhile I must pay tax for the lump-sum Pension payment received in 2012. That's what I'm inquiring about. I hope someone has dealt with this issue can offer some guidance.......?????? ???????

As for FBar (filed separately with US Treasury) and also form 8938 (which accompanies my 1040 to IRS)....I think I understand how to deal with them.
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Old Mar 19th 2013, 11:08 pm
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

The way I read your OP was you were using the lump sum to buy an annuity. If that is the case my take is you don't pay tax on the lump sum. You pay the tax on the payments from the annuity.

If I have misread your post and they are two separate things. Then yes if you have a lump sum from a pension you pay take on it, and no contributions cannot be deducted from the lump sum for tax purposes.
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Old Mar 20th 2013, 12:39 am
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

Originally Posted by lansbury
The way I read your OP was you were using the lump sum to buy an annuity. If that is the case my take is you don't pay tax on the lump sum. You pay the tax on the payments from the annuity.
If I have misread your post and they are two separate things. Then yes if you have a lump sum from a pension you pay take on it, and no contributions cannot be deducted from the lump sum for tax purposes.
Sorry - perhaps I didn't describe it clearly.
It's all gotten me so befuddled - I can barely express myself clearly ....but...here goes, I'll give it another try:

1. In 2012 I received a 25% "lump sum" payment from my private UK non-qualified pension plan - before transferring the remaining 75% of that funds final value into......
2. ..... a new policy: A single payer, lifetime Annuity, at the same UK insurance company.
3. My lump sum was NOT used to purchase the new Annuity (as explained above)
4. Furthermore, the Annuity paid me NOTHING in 2012.
5. What I'm trying to determine is......can I subtract my PENSION "Cost Basis - (ie: the yearly payments, made with post-tax money which I contributed to my pension fund for several years ) from the gross amount of the lump sum received?
According to IRS rules, I think the "taxable amount" of that lump-sum should be:
Total (lump-sum amount) received minus my Contributions = Taxable Amount
6. What do I base this on?
It's my (feeble) interpretation of IRS Publication 575 - page 17:
http://www.irs.gov/pub/irs-pdf/p575.pdf - scroll down to page 17:
Distribution Before Annuity Starting Date From a Nonqualified Plan.
And the pararagraph beneath that heading titled: Exception to allocation rule.....and beneath that - where it says "this exception applies to the following distributions"........ the 3rd exception cited seems to apply to my situation.

OMG .....is anyone still awake....or reading......this is mind bending/boring-snoring....but hey......it's the (dreaded) IRS and I'm just (desperately) struggling to comprehend the incomprehensible
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Old Mar 20th 2013, 12:57 am
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

The following is quoted from the 2012 IRS Publication referenced in my prior post. It's on page 17; I've highlighted in red what seems applicable and hope for any insight/guidance........

"Distribution Before Annuity Starting Date
From a Nonqualified Plan"

If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan, it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. You include in your gross income the smaller of:
The nonperiodic distribution, or
The amount by which the cash value of the contract (figured without considering any surrender charge) immediately before you receive the distribution exceeds your investment in the contract at that time.
Example.
You bought an annuity from an insurance
company. Before the annuity starting date under your an-
nuity contract, you received a $7,000 distribution. At the
time of the distribution, the annuity had a cash value of
$16,000 and your investment in the contract was $10,000.
The distribution is allocated first to earnings, so you must
include $6,000 ($16,000 −$10,000) in your gross income.
The remaining $1,000 ($7,000−$6,000) is a tax-free re-
turn of part of your investment.

Exception to allocation rule.
Certain nonperiodic distributions received before the annuity starting date are not subject to the allocation rule in the preceding discussion.
Instead, you include the amount of the payment in gross income only to the extent that it exceeds the cost of the contract.

This exception applies to the following distributions.
Distributions under contracts entered into before August 14, 1982, to the extent that they are allocable to your investment before August 14,1982."
[

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Old Mar 20th 2013, 2:52 am
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

Originally Posted by MMcD
Has anyone dealt with the following?
With regard to a lump- sum received from a private UK Pension fund policy prior to its transfer to a UK Annuity:
Does the IRS allow the deduction of your contributions (total cost) from the total lump-sum amount when you determine the taxable amount? (My contributions were made with "after tax" money, years ago in UK. and I'd like to recapture my cost basis straight away, if possible)
You probably need professional tax advice to work out how much tax is due on your annuity. However, generally speaking, there are a few principles to bear in mind:

1. The tax-free lump sum on U.K. pensions is normally taxable in the United States.

2. If you invested money that has already been taxed into an annuity (as an investment), then you normally have "basis" in that annuity and should not be taxed a second time on the return of capital, but you can still be taxed on any embedded interest or capital gains.

It probably would have been better to have taken tax advice/planning before you made your investment choices. Nevertheless, tips on choosing a tax accountant:
http://britishexpats.com/wiki/Choosi...Accountant-USA
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Old Mar 20th 2013, 5:50 am
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

MMcD go see a tax professional. For what it will cost, you could well save that in getting it right as to how much you need to pay. Probably worth it just to save your sanity trying to understand it yourself.
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Old Mar 20th 2013, 6:04 am
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Default Re: "Lump-Sum" taxable amt. taxing comprehension

When you receive a pension from a US source, they send you a 1099-R which gives both the total pension distribution, which you put on 1040 line 16a, and the taxable amount, which you put on 16b (and are taxed on). If they don't give you the taxable amount, you have to calculate it using one of their preferred methods, "the simplified method" or "the general rule." You need to do the equivalent with your pension distribution, even though you weren't given a 1099-R.

I'd start here:
http://www.irs.gov/taxtopics/tc411.html
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