Author Topic: Claim treaty credit in US, or claim treaty credit in UK  (Read 269 times)

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Offline Nan D.

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Claim treaty credit in US, or claim treaty credit in UK
« on: December 22, 2017, 06:41:33 PM »
Ok, hypothetically, let's say I owe the dollar equivalent of 2,900 pounds to the IRS for the 2017 USA tax year for the 8 months (only) that overlap the UK tax year during which I was living in the UK.  And probably around 3900 pounds to the HMRC for the entire 2017/18 tax year.

I am aware that there is the tax treaty that eliminates double taxation. So, since I have to file my IRS taxes first, can I claim the 2,900 pound equivalent paid to the IRS against the 3,900 that is due to the HMRC when that time comes for their 2017/18 tax year? And then the following year take all paid to the HMRC above that off my IRS taxes due going forward?

Or is there a better way to do this?

Also, are 401K distributions considered for the scheme where you can get part of your pension pot tax free? Or treated as ordinary income?

Thanks.
« Last Edit: December 22, 2017, 06:42:35 PM by Nan D. »

Offline vadio

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #1 on: December 22, 2017, 06:53:03 PM »
Need a bit more info Nan. W/R/T the hypothetical tax owed to the US, is this income you received BEFORE the move? And have you worked in the UK SINCE the move.

Generally, we pay the UK first, then take a credit to offset any US tax that might be due. Income you earned in the US BEFORE you became UK resident is not UK taxable or reportable. So, how are you doing these theoretical calculations? (Make sure you aren't reporting income to the UK that isn't reportable.)

Another point - for 2017, if you are SURE you will owe US tax, it needs to be PAID by April 15th, but you don't actually need to file a tax return until a few months later with the automatic extension. If you ten find you overpaid, you will get a refund just as you would have in the US.

Again, need a bit more info to (hopefully) point you in the right direction.

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Offline Nan D.

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #2 on: December 22, 2017, 08:54:10 PM »
Need a bit more info Nan. W/R/T the hypothetical tax owed to the US, is this income you received BEFORE the move? And have you worked in the UK SINCE the move.

Generally, we pay the UK first, then take a credit to offset any US tax that might be due. Income you earned in the US BEFORE you became UK resident is not UK taxable or reportable. So, how are you doing these theoretical calculations? (Make sure you aren't reporting income to the UK that isn't reportable.)

Another point - for 2017, if you are SURE you will owe US tax, it needs to be PAID by April 15th, but you don't actually need to file a tax return until a few months later with the automatic extension. If you ten find you overpaid, you will get a refund just as you would have in the US.

Again, need a bit more info to (hopefully) point you in the right direction.

I only counted income for months I was in the UK. I arrived on April 30 this year, so I counted from May 1 forward. Not sure how they are going to count it, but I was on paid vacation for all of May, off the payroll in June, and officially retired as of July 1. In my calculations I assumed that the May vacation pay was going to be considered taxable income by HMRC.

I had no income for June or July. Beginning 1 August of this year I now receive pension payments. I also took about $11,000 out of a 401K to pay off USA credit cards I ran up in June and July, plus the earlier cost of the actual household move. I have not done any paid work in the UK.

I will be taxed in the US, that's a given; however, the payers withheld approximately $7,200 from my Jan-May salary, my pension, and the 401K disbursement (at 20% of the disbursement). So I believe I'll be getting a refund from the IRS (and my ex-state). If all goes well, the refunds will be enough to cover the difference in the HMRC and IRS taxes due to HMRC for that period of time.

Since I won't have paid HMRC anything before the end of 2017, I can't claim a credit against 2017 USA taxes for the relevant months of 2017, right? I was thinking that for this first filing I'd take a credit against HMRC for USA taxes paid, but in subsequent years be taking the credit for HMRC paid against USA taxes owed.  Otherwise, I'll end up paying taxes to the USA for calendar year 2017, and then overlapping taxes for the May-Dec of 2017 to HMRC.

It's all in how to handle this first year.


Offline guya

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #3 on: December 22, 2017, 08:55:26 PM »
The treaty does not eliminate double taxation. This is a myth.  The resourcing Article can be used to claim foreign tax credits on some specific kinds of income if you are on the arising basis in the UK.

Offline guya

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #4 on: December 22, 2017, 08:57:38 PM »
If you owe UK tax on the 401(k) and pension income, you will want to pay that tax to HMRC by 31 December 2017 and then claim it as a foreign tax credit on the treaty resourced Form 1116. 

Offline Nan D.

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #5 on: December 22, 2017, 09:04:02 PM »
If you owe UK tax on the 401(k) and pension income, you will want to pay that tax to HMRC by 31 December 2017 and then claim it as a foreign tax credit on the treaty resourced Form 1116.

I don't see how that is going to be possible, since I've not registered for a self-assessment yet and actually don't know if I'm going to owe tax on any of the income I received while in the UK. 

Is the 401K income even taxable?  I wrote to HMRC to find out if it would be treated as taxable only in the USA, or treated like a pension here where you can get 25% out as a lump sum without being taxed, or regular income in the UK. No response yet.

I am also waiting to hear from HMRC (a few months now) if the pension, which is arguably a state pension and possibly taxable only in the state paying it, is actually thus or if it's going to be taxed in the UK as well. I have one letter from HMRC from two years ago saying it would not be taxed in the UK, but I want something more recent.

So, rather than "we usually" I need to know if it's possible to do the original plan - take USA credits against HMRC for the first year, or not?

https://www.gov.uk/tax-foreign-income/taxed-twice 
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/604126/sa106-notes-2017.pdf

seem to indicate I can do that?


Thanks.
« Last Edit: December 22, 2017, 09:12:59 PM by Nan D. »

Offline Nan D.

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #6 on: December 22, 2017, 09:33:59 PM »
Sorry to keep flogging this, but the tax treaty says (regarding the 401K, I believe)

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.


So I'm thinking that the two lump sums I took out of the 401k (which was less in aggregate than 25% of the total balance)  are taxable only in the USA, right?

And re-reading 1a. it seems to say that my pension would only be taxable in the UK???

Continuing with the treaty, it would appear that my SS, when I eventually file for it next Summer, will be taxable only in the UK. At least THAT is straight forward!

3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State.
« Last Edit: December 22, 2017, 10:05:24 PM by Nan D. »

Offline Nan D.

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #7 on: December 23, 2017, 02:33:12 AM »
And one final question:  Is the flowchart at the following URL accurate?

https://www.tax-charts.com/charts/894_pension_taxation_uk.pdf

Offline guya

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #8 on: December 23, 2017, 08:00:14 AM »
Sorry to keep flogging this, but the tax treaty says (regarding the 401K, I believe)

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.


So I'm thinking that the two lump sums I took out of the 401k (which was less in aggregate than 25% of the total balance)  are taxable only in the USA, right?

And re-reading 1a. it seems to say that my pension would only be taxable in the UK???

Continuing with the treaty, it would appear that my SS, when I eventually file for it next Summer, will be taxable only in the UK. At least THAT is straight forward!

3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in that other State.
A lump sum is a complete distribution of the plan.  The fact that you took lumpy distributions will not make them lump sums. You do of course not have to elect into the treaty at all if that gives you a better result.

Offline guya

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Re: Claim treaty credit in US, or claim treaty credit in UK
« Reply #9 on: December 23, 2017, 08:03:32 AM »
I don't see how that is going to be possible, since I've not registered for a self-assessment yet and actually don't know if I'm going to owe tax on any of the income I received while in the UK. 

Is the 401K income even taxable?  I wrote to HMRC to find out if it would be treated as taxable only in the USA, or treated like a pension here where you can get 25% out as a lump sum without being taxed, or regular income in the UK. No response yet.

I am also waiting to hear from HMRC (a few months now) if the pension, which is arguably a state pension and possibly taxable only in the state paying it, is actually thus or if it's going to be taxed in the UK as well. I have one letter from HMRC from two years ago saying it would not be taxed in the UK, but I want something more recent.

So, rather than "we usually" I need to know if it's possible to do the original plan - take USA credits against HMRC for the first year, or not?

https://www.gov.uk/tax-foreign-income/taxed-twice 
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/604126/sa106-notes-2017.pdf

seem to indicate I can do that?


Thanks.
The UK has a self-assessment system. It is up to you to self-assess your liability. If you are a UK resident on the arising basis, the UK has the primary right to charge tax. Article 24 is a relieving mechanism.  The 25% is only available for a PCLS or an UFPLS.