msnapz

Hi Guys,

Tried to find this in the forums but no luck!

I am a us and uk citizen now living in England. I have a lump sum pension distribution from my previous company coming in April and about to fill in the form. On the form it asks what state I am a tax resident of. As I dont live in America any more not sure on this question. Basically for taking a lump sum payment I am subject to the 20 percent federal tax penalty for taking the money before the age of 55 1/2.

My question is as I am no longer resident in the US do you know if this 20 percent penalty still applies? Will I have to pay any tax on it at all in England or America?

Thanks for any help you can offer I appreciate it.

nun

The early withdrawal penalty is 10% and you will pay that.

As the lump sum is from a US pension the US can tax that lump sum as per the IRS tax code and Article 17.2. If HMRC does not apply the savings clause then there will be no UK tax to pay.

Zeplachick

The money will be going into my American bank account as it'll be an American check if that makes a difference on the U.K. Savings clause?

nun

Without knowing your citizenship and residency that question can't be answered.

msnapz

us and uk citizen residing in England!

Nutmegger

That is you, the OP -- but who is Zeplachick?

Pulaski

Depending on which state you were resident in immediately before you moved, you may still be on the hook for state income tax in the last state you lived. You must also have severed all links to that state, such as property ownership, vehicle registration, and anything else that could be construed to indicate a continued connection to that state.

I have heard of people who lived in a state that continues to tax people who lwave the US, moving temporarily to a state that doesn't tax people who leave the US so as to sever the link before moving overseas.

Russet

As Nun says if you take money out of a US retirement account early you will be hit with a 10% early withdrawal penalty, which you will have to pay.

The form will also ask you about withholding federal and state tax to meet your future tax liabilities. This is why they ask what state you live in. It is normal to withhold 20% federal and 5% state, and is an option so that you are not hit with a large tax bill at the end of the year. Unlike the 10% penalty it is not money you lose but it goes to IRS to offset your future tax bill. In certain circumstances this withholding is mandatory i.e nra's it is 30% - maybe the 20% is a mandatory withholding based upon your circumstances?

Sorry i don't know about how all this is reported for taxes but hope it helps with the form.

Cook_County

You are obviously still US resident for US tax purposes as you are a US citizen. If it is a lump sum you will owe US tax at your US marginal tax rate for 2017.

Russet

You also didn't explain why you were getting an early lump sum distribution from your US pension prior to normal retirement. If you don't need the lump sum is there not an option to rollover the distribution into an IRA? You would not be hit by the 10% penalty or the tax on the lump sum. Once you reach 59 1/2 you can take withdrawals each year, there would be no penalty and the tax liability could be spread over multiple years, hopefully at a lower marginal rate.

Rete

Actually, I believe the penalty occurs when there is a withdrawal before the age of 59-1/2 and then it is a 10% penalty. This is the first I've heard of a penalty of 20% if withdrawn before age 55-1/2.

"
Regular income taxes are assessed on all withdrawals. A withdrawal before age 59½ is considered an early distribution and subject to a 10% penalty unless the money is used for one of the following: First-time home purchase (up to $10,000)



BALANCE: Rules for Early Withdrawal from a Retirement Fund



https://www.balancepro.net/education/publications/earlywithdrawal.html"

msnapz

unfortunately I do need the lump sum as there were some unexpected bills at the house otherwise i would put it in to an ira. So it sounds like the ten percent penalty is for withdrawing before the age of 59 1/2 and the 20 percent federal tax will be taken out as it is taxed as income but I think as this will be the only income for 2017 the 20 percent can be claimed back from what I understand? Thanks for all your help guys its a land mine of information out there.

Cook_County

So you will not have a penny of UK income throughout the whole of 2017????

Pulaski

The 20% is available as a credit against income tax due - think of it as a prepayment of income tax. If you have zero other income it is possible that you might get some back at the year end, but if you have other income you may well have more tax to pay.

msnapz

Yes there will be uk income but from my understanding there is the foreign earned income exclusion that comes in to affect also so anything up to 90 something thousand can be earned tax free.