MMcD

Vulcan:

I'll second what lansbury just posted.

I, too, have 3 different pensions (in my case...annuities...but same tax rules apply). No UK tax has ever been deducted - because my tax status has been classified in UK as "NT". That's what occurs after you carry out the procedure indicated by lansbury and by nun.

nun

HMRC and UK pension providers will probably give you correct UK tax information, but they won't usually be able to give guidance for US residents as they do not automatically think of how the tax treaty might influence things.

The Individual2002 form covers a variety of payments from UK sources when made to US tax residents.....lump sum payments from UK pensions are not included. I don't know what exactly HMRC considers lump sum payments in the context of the treaty....do they use the same definition as the IRS.

The UK allows someone to take their UK 25% tax free amount as a single payment leaving the 75% taxable amount in the pension pot. To my understanding this actually is not a lump sum distribution as defined by the IRS as the entire amount of the pension is not withdrawn. This might also offer an argument for it being US tax free. In the IRS letter often quoted the term "lump sum" is not defined, so I think it's sensible to use the IRS definition.

http://www.irs.gov/taxtopics/tc412.html

so if you only take the UK 25% tax free lump sum and leave the rest of the pension alone. I'd argue that Article 17.1 applies, and not 17.2

vulcan

My main concern was the US tax liability for a lump sum.

United States Income Tax Treaties - A to Z

This in particular on the above page

Most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

Yet we see this in the DOT letter of March 2008

Article 1(5) of the Treaty provides a number of exceptions to the saving clause, but there is no exception for Article 17(2). Therefore, the saving clause overrides Article 17(2) and allows the United States to tax a lump-sum payment received by a U.S. resident from a U.K. pension plan.

theOAP

I've been following threads on TaxProTalk, and I note that a particular well versed US/UK tax person we're both aware of has now started taking this same line, although it seems to come with a subliminal warning that one must convince the IRS of this argument, which may not be easy. Solid argument, but not for the faint hearted (or a DIY filer?).

mrken30

the differences are probably due to the fact in the US you can take out lump sums from your 401k before retirment. This is not the case in the UK. However I would not like to have to argue the case with the IRS

nun

The critical thing in all of this is the definition of a lump sum. For the IRS a lump sum withdrawal from a pension plan is defined as taking the entire amount of the pension in a single tax year. So taking 25% out would not be a lump sum withdrawal to the IRS.

theOAP, I just found a couple of threads on TaxProTalk that deal with the 25% tax free distribution and I'm gratified that I seem to have come to the same conclusion as our favorite expert.

Samxboy

This is all good news...but how do we turn this growing tide of consensus into a practical reality? I'd love to try it out, but alas I've got way too much to loose with my particular circumstances. In any event I wouldn't be taking my pension till next year or even the year after. In preparation for that I'd have to return my GC in the year before that to ensure tax exemption status.
Is there a particular US tax attorney you would recommend that I could discuss this issue and see what they recommend?

nun

If you take the 25% tax free amount from a UK pension I would just enter it on your 1040 on line 16 and claim that none of it is taxable by filing an 8833 and referencing Article 17.1

MMcD

Like this?

Samxboy

And the life span of a Guinea Pig is 5 years in CAPTIVITY!

mrken30

Depends on location and owner.

MMcD

Captivity, yeah but:

Silver lining....

It's rent-free

mrken30

and no property tax

lansbury

and free medical

MMcD

No vindaloo though