theOAP

https://www.irs.gov/pub/irs-wd/08-0024.pdf

Steve_I

So the Inland Revenue says it's not taxable, but the IRS says it is, regardless of citizenship! Not sure I want to test it either Our enquiry would have been from around 5 years ago. I'll look to see if I still have the paperwork from H&R Block amd post a copy here.

theOAP

More very recent opinions (Dec. 2017) adding to the confusion:

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

https://www.tax-charts.com/charts/89...axation_uk.pdf

Steve_I

I found two references that they had given me in our 2012 tax return. The one from the Tax Institute at H&R Block concluded that "Because the client was both a US citizen and residing in the in the United States at the time of the distribution, her lump sum payment in 2012 is taxable only in the United States". The other references they gave me were essentially from that 2008 IRS document. I'd rather not challenge it as a PR at the moment!

nun

File an US Individual 2002 with HMRC through the IRS. This will set things in the UK so that no tax is due or withheld at source.....assuming this isn't a Government pension.
Now you just have to worry about US tax. If you take the UK 25% tax free sum all at once then that and your other income from the pension might be all taxable in the US, but
if you structure the payments as periodic distributions then you can argue that 25% is free of US tax. If you can take the 25% UK tax free amount as regular income rather than a one time payment that might in anyway look like a lump sum (whatever that means) then under the treaty it could be tax free in the US to the extent it is tax free
in the UK. Whether you can make that argument for state tax will depend on whether your state recognizes the US/UK tax treaty.

Steve_I

We did that last year, so both of our tax codes in the UK are now NT. I didn't opt for any lump sums with my pensions and I'll just declare all income on our tax returns next year. Because these are old style company (index linked) pensions, I'm not sure there's any way to pick and choose how they're paid. They're just lump sum or no lump sum and fixed monthly income after that.

nun

OK you seem to be describing a final salary/defined benefit company pension where you get a lifetime income. If so then you can use the treaty to claim that 25% is tax free in the US....so you'll only pay US tax on 75% of it.