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Question on USA/UK tax treaty

Question on USA/UK tax treaty

Old Jul 18th 2020, 12:00 am
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Question Question on USA/UK tax treaty

Hi Everyone,

I am looking for anyone who may have some expertise in the USA/UK tax treaty. Last year, my status changed from being a legal resident to becoming a US citizen. I have a UK Government qualified teachers' pension, which as a US legal resident was previously taxed in the UK. Now, I have become a US citizen, the USA/UK tax treaty does not apply favorably to me, and I now have to pay the IRS tax on it. I wish to know, because I became a USC in August, 2019, do I have to pay the IRS tax for the whole years worth of pension or for August to December? i.e. report 7 months of pension as tax free and the remaining 5 months of pension as taxable income?
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Old Jul 20th 2020, 4:45 pm
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Default Re: Question on USA/UK tax treaty

When I became a US citizen in December 2009, I had to pay US tax on my UK government pension for the whole of 2009. I got back what had been already paid to HMRC. Not sure why you say the tax treaty doesn't apply favorably, I paid 20% to HMRC, and on part of my UK income 40%, and now at most 15% to the IRS. Maximizing deductions in the US is the secret.
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Old Jul 20th 2020, 5:29 pm
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Default Re: Question on USA/UK tax treaty

If he has not done so already, the OP should complete Form US-Individual 2002 to recover UK tax already paid and avoid UK tax for the future:
https://www.gov.uk/government/public...ndividual-2002
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Old Jul 20th 2020, 5:52 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by MidAtlantic View Post
If he has not done so already, the OP should complete Form US-Individual 2002 to recover UK tax already paid and avoid UK tax for the future:
https://www.gov.uk/government/public...ndividual-2002
+1

When I did this it took a few weeks but the 2 months of taxes I had paid HMRC through PAYE were refunded on my next pension payment.
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Old Jul 20th 2020, 7:17 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by lansbury View Post
When I became a US citizen in December 2009, I had to pay US tax on my UK government pension for the whole of 2009. I got back what had been already paid to HMRC. Not sure why you say the tax treaty doesn't apply favorably, I paid 20% to HMRC, and on part of my UK income 40%, and now at most 15% to the IRS. Maximizing deductions in the US is the secret.
Thanks for your reply Lansbury and confirming that I have to pay tax on the whole year. I could not find the relevant information in the tax treaty itself, although I am sure it is there somewhere. What I meant about the tax treaty and it no longer being favorable, was simply that the $8000 I received from the TPS was less than my UK tax allowance and therefore was not subject to any UK tax. However, now I have become a US citizen it is taxed as income within the IRS normal US tax brackets.
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Old Jul 20th 2020, 7:29 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by MidAtlantic View Post
If he has not done so already, the OP should complete Form US-Individual 2002 to recover UK tax already paid and avoid UK tax for the future:
https://www.gov.uk/government/public...ndividual-2002
I can't remember exactly what paperwork I filled out at the time, but no UK tax is taken out at source by the TPS. Now I am a citizen, I pay quarterly estimated IRS tax payments on my UK TPS pension. I think that is all I have to do from now on?

I shall probably buy 1 more year of my UK state pension, then allow it to grow until I turn 70. Then I presume when I actually apply for that pension, I will have to complete the form you mentioned above? Anyway, that is my plan.
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Old Jul 20th 2020, 7:49 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by imacd View Post
Thanks for your reply Lansbury and confirming that I have to pay tax on the whole year. I could not find the relevant information in the tax treaty itself, although I am sure it is there somewhere. What I meant about the tax treaty and it no longer being favorable, was simply that the $8000 I received from the TPS was less than my UK tax allowance and therefore was not subject to any UK tax. However, now I have become a US citizen it is taxed as income within the IRS normal US tax brackets.
Unfortunately for amounts less then the UK personal allowance it isn't a level playing field. Guess those that negotiated the treaty didn't think of that.
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Old Jul 20th 2020, 10:14 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by imacd View Post
Thanks for your reply Lansbury and confirming that I have to pay tax on the whole year. I could not find the relevant information in the tax treaty itself, although I am sure it is there somewhere. What I meant about the tax treaty and it no longer being favorable, was simply that the $8000 I received from the TPS was less than my UK tax allowance and therefore was not subject to any UK tax. However, now I have become a US citizen it is taxed as income within the IRS normal US tax brackets.
The US also has the standard deduction of $12k for single so if that’s your only income you would also not pay tax on it here. The idea of the tax treaty is to avoid double taxation not to provide you with 2 separate tax allowances that others don’t have.
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Old Jul 20th 2020, 10:18 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by tht View Post
The US also has the standard deduction of $12k for single so if that’s your only income you would also not pay tax on it here. The idea of the tax treaty is to avoid double taxation not to provide you with 2 separate tax allowances that others don’t have.
Exactly! A consequence of ensuring that you're only taxed once is that you only get one allowance/ deduction.
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Old Jul 20th 2020, 11:07 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by tht View Post
The US also has the standard deduction of $12k for single so if that’s your only income you would also not pay tax on it here. The idea of the tax treaty is to avoid double taxation not to provide you with 2 separate tax allowances that others don’t have.
Yes, I understand the purpose of the tax treaty, I guess I was just lamenting the financial decision of becoming a US citizen, compared to remaining a legal resident. Overall though, I am still glad I became a US citizen.
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Old Jul 21st 2020, 5:18 am
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Default Re: Question on USA/UK tax treaty

Originally Posted by tht View Post
The US also has the standard deduction of $12k for single so if that’s your only income you would also not pay tax on it here. The idea of the tax treaty is to avoid double taxation not to provide you with 2 separate tax allowances that others don’t have.
But if you remain an LPR with a UK government pension the tax treaty does indeed allow you to claim two allowances.
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Old Jul 23rd 2020, 7:29 am
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Default Re: Question on USA/UK tax treaty

I am interested in this topic, despite being far from retirement age, and found this article from 2018 by a tax attorney that suggests that UK 25% pension lump sums can be made exempt from Federal tax if you get a tax attorney to file specific information with your Federal return. I have no idea if this also applies to states that tax income, but I guess that if the amount was large enough, one could perhaps become a resident of an income tax free state during the time of distribution.

https://www.castroandco.com/blog/201...distributions/

Under the U.S.-U.K. Income Tax Treaty, however, there is an opportunity to lawfully avoid U.S. taxation on the 25% Pension Commencement Lump Sum (PCLS) portion under Article 17, Paragraph 1(b) of the U.S.-U.K. Income Tax Treaty. Article 17(1)(b) is referred to as the "reciprocal pension exemption." It basically holds that, if a particular type of pension distribution would be exempt from tax by Country A, then Country B is legally bound to recognize that exemption. Thus, for example, the UK exempts the first 25% lump withdrawal, so the U.S. is legally obligated to recognize that exemption. Likewise, distributions from a U.S. Roth Individual Retirement Account is exempt from tax in the U.S., so the U.K. is legally obligated to recognize the exemption.
Considering that a 25% pension lump sum could be worth many, many tens of thousands of pounds to some people, it could be worth investigating this more.

Also, it's very interesting to read that the UK won't tax Roth distributions either, if, for example, a US resident was to move to the UK to retire.

Last edited by cautiousjon; Jul 23rd 2020 at 7:35 am.
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Old Jul 23rd 2020, 12:39 pm
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Default Re: Question on USA/UK tax treaty

I can confirm from experience that a USC living in the U.K. can take distributions from his Roth with no tax in either the U.K. or USA.
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Old Jul 23rd 2020, 2:53 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by durham_lad View Post
I can confirm from experience that a USC living in the U.K. can take distributions from his Roth with no tax in either the U.K. or USA.
Very cool. Did you have to file anything with HMRC or the Roth broker to enable that?
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Old Jul 23rd 2020, 4:27 pm
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Default Re: Question on USA/UK tax treaty

Originally Posted by cautiousjon View Post
Very cool. Did you have to file anything with HMRC or the Roth broker to enable that?
Nothing to file. In the HMRC Self Assessment each year the Roth withdrawal amount is stated along with a reference to the tax treaty in the other information, section 19.
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