Steerpike

The article discusses the specific issues relating to partial and complete lump sum distributions. Is there a simple answer to "what is the tax situation regarding regular monthly pension payments?"

durham_lad

The article believes strongly that if it is a tax free pension payment in one country then it should be tax free in other. It gives Roth distributions as an example so by extension if you have tax free monthly payments in the UK then they should be tax free in the USA. Is there such a beast?

Anne Elliot

I have operated under the premise that my UK 25% tax-free lump sum was taxable in the USA. I declared it as taxable income on our MFJ return in 2019. Is everyone else here doing the same? I don't think I am prepared to take the risk of the IRS audit and possible 20% penalty for unpaid taxes - and live with that hanging over us. Did I think it was 'fair' - not really, but taxes aren't fair, we just have to arrange our affairs to do the best we can under the circumstances.

MidAtlantic

Take a look at this thread, and especially post #97, where you will find someone in exactly your situation who amended his return and successfully recovered the taxes he had paid on a 25% partial distribution.

UK Pensions related to UK/US Tax Treaty

Steerpike

This does highlight the potential value of getting your taxes prepared by a professional - as long as you get a good one who knows this area of the tax law. I had my own company for a few years and had to have my taxes done professionally (too complicated for me). Now that my tax situation is much simplified, I'm tempted to ditch the accountant but - she still gives me a lot of advice on strategies for retirement like IRA distributions vs long-term-capital gains (maximizing the tax trade-off between the various rates and thresholds). I'm going to see what she charges me for 2020 taxes (she only just completed them!) and decide whether to go 'turbo tax' exclusively next year.

Minty

The tax refund has to be done within 3 years I believe.

Glasgow Girl

The vast majority of tax professionals strongly believe the 25% tax free lump sum is taxable in the USA whether you take it as a lump sum, regular payments or as a drawdown. There are a handful who argue it is not taxable depending upon your circumstances. So, it comes down to are you are willing to live with the risk of being audited by the IRS and found to be non compliant on paying tax on foreign income. That is not a good place to be.

Stating that HMRC says it is not taxable, or internet advice is that it is not taxable, or that someone else reported getting a rebate of the tax paid would not cut mustard with the IRS. If you use a tax professional who is willing to put their recommendation that it is tax free and why in writing (to you specifically, not a generic statement) then you have some cover with the IRS but I think you will find anyone willing to do that is going to be very expensive for obvious reasons.

There is an argument to be made that the lump sum is not taxable, but you have to weigh up the cost of getting that recommendation in writing from a tax professional and the consequences of the IRS not agreeing with that position, or making your own decision with no cover from a tax professional and assuming you will never be audited and if you are you will win the argument with the IRS.

Anne Elliot

Precisely, you put it better than me... thank you

Minty

I hear what you say about the "vast majority" but seems to me the treaty is pretty clear. 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. There is even an IRS form - 8833 - to include with your tax return to state the Treaty being applied. Just saying!

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CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS

ARTICLE 17 - Pensions, Social Security, Annuities, Alimony, and Child Support

1. a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.

b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State.

2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.

durham_lad

I'm pleased that I avoided any of the UK lump sum taxability questions by not choosing a lump sum from my 2 UK defined benefit schemes.

I do take Roth distributions while living in the UK and they are not taxed in either country as per the treaty.

Rowen123

Hi,

Maybe you can clear this up for me as you have gone through the process, I apologize as I am dyslexic.
I am a dual British/American citizen as of 2021. I am in the process of applying for my Scottish Widows pension, stakeholders pension.
I have received my 6166 certificate from the IRS and am filling out the application at the source from UK income tax form. I am now confused as to the order of when I should be applying.
Is the relief form sent to the IRS who then sends to HM Revenue AFTER I receive my pension - then the taxes taken are repayed- or prior to receiving my pension?
Scottish Widows fund could not advise on any of this, but logic would say after I receive I send in the form. I am also not sure what category on the form I fall into but I would be taking a lump sum.
Thank you for any information you can give

durham_lad

It has been 15 years since I went through this and if memory serves me right, after receiving my certificate from the IRS I sent it to HMRC who then changed my UK tax code to NT0 so that my UK pension provider stopped withholding any tax and refunded the previous 2 payments. I was new to this and applied after I had started receiving my UK pension.

Rowen123

Thank you for replying so quickly, that has really clarified things!

celticgrid

In my more recent experience a small change to the process...The IRS send the necessary paperwork to the Inland Revenue (copy to you) directly. I did not need to receive a certificate from the IRS and then send it to HMRC.

durham_lad

That is what I understand these days. Sounds like a simpler process.

I just checked my files from 2007 and I did send an IRS 6166 directly to HMRC using their form to request relief at source from taxation under the double taxation agreement. I had earlier requested 6166 forms from the IRS and paid the appropriate fee.