Author Topic: UK tax on US pension  (Read 485 times)

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Offline EmilyUK

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Re: UK tax on US pension
« Reply #15 on: February 01, 2018, 07:14:27 PM »
She can file “Married filing single” which will keep you out of the loop if that makes sense for your situation.

Thank you :)
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Online F4mandolin

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Re: UK tax on US pension
« Reply #16 on: February 01, 2018, 07:19:41 PM »
Unless you have a complicated tax situation.....you should be able to do the taxes yourself. I've been doing it and I just don't retain things like this. I don't know if my situation/plan will help you....but....I'm a retired American with UK wife. I am currently in the process of draining down my Govt retirement account which will take almost 4 more years. At that time I should be about 64, wife 61. I am currently filling out my US taxes married/joint so I can take advantage of the higher tax brackets for two people. Once the account has been drained I will take my wife off of my US taxes since I will only have my pension (about $15,000 a year) coming in that will be taxed in the US. US social security will only be taxed in the UK because of the US/UK treaty. My wife can then start taking her pensions without the US trying to tax it.
Fred

Offline Nan D.

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Re: UK tax on US pension
« Reply #17 on: February 01, 2018, 07:21:28 PM »

As for the 401k it can be left where it is until she starts to take distributions at which point it becomes taxable in the UK. What we have done and what my son did last year was to roll the 401k directly into an IRA and that action has zero taxes in either country but does give the possibility of converting it to a Roth IRA in a lump sum transfer that will only be taxed in the USA, and then future withdrawals are tax free in both the US and UK. That decision is very much dependant on your tax situation in both countries. For myself, then at age 70.5 when I will have to start taking withdrawals I will also be drawing SS and the UK OAP and will then be in the 40% tax bracket so it was worth my while to do the conversion to a Roth. (I am age 63 so age 70.5 now doesn't look to be so far away)


So, I'm curious. I will probably not be up in the 40% bracket when eventually drawing mandatory distributions, and my 403B balance is not huge (about $30,000).  If I rolled it to an IRA, it would be tax free to roll in both countries. If I then roll it to a Roth, it'd be at whatever tax bracket getting that extra $30K threw me into for USA tax on it. After that point, there would be no tax on disbursements in either country? (Would have to crunch the numbers to see if it's worth doing that.)  How are we escaping UK tax on the rollover to the Roth?

IF I did that, would the Daughter then have access to the money tax-free if I kick the bucket unexpectedly?

« Last Edit: February 01, 2018, 07:26:13 PM by Nan D. »

Offline theOAP

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Re: UK tax on US pension
« Reply #18 on: February 01, 2018, 07:44:26 PM »
Oh man.....you had to bring me down.  :\\\'(
Sorry Fred, ....I'd never want to bring you down!

It's a common problem and depends on the definition and context of "state". The statement you are remembering probably was in reference to a UK State pension. Services rendered to the "state" are the key.

For State in the terminology of international sovereign countries, and pensions not awarded for services rendered but as part of an old age social benefit, the tax treaty reference is Article 17.3. Example: The UK State Pension to which we all contribute through NICs. Pensions awarded by the UK government or the US government for services rendered to those governments, are covered under Article 19.

For State in an American colloquial sense, pensions from States such as California, Illinois, Iowa, etc., awarded for services rendered to that State, are covered by Government Service, Article 19 of the treaty. (Local, not national, jurisdictions.)

Local jurisdictions can also include jurisdictions such as, for example, Cook County, Illinois, LA County in California, the City of New York, or the Warwickshire County Council in the UK; or the military, certain publicly funded educational establishments, State and local police, etc.. (Article 19)

So iffffff I read the comment from Nun above correctly......My US Fed Gov pension is taxed only in the US as it currently does. But....iif I were to take UK citizenship as well in a few years like I had been pondering.....it would get taxed in both places. If so.....it would definitely not be to my benefit to get UK citizenship. Jeez.....and here I am trying to quit drinking beer....
The answer is in Article 19, paragraph 2, subparagraph b. The following is from the "Technical Explanation" (page 69), and was written by the US (the UK may not agree).

"Paragraph 2
Paragraph 2 deals with the taxation of pensions paid by, or out of funds created by, one of the States, or a political subdivision or a local authority thereof, to an individual in respect of services rendered to that State or subdivision or authority. Subparagraph (a) provides that such pensions are taxable only in that State. Subparagraph (b) provides an exception under which such pensions are taxable only in the other State if the individual is a resident of, and a national of, that other State."

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

The UK will want to tax a US government pension paid to a UK resident UK citizen (national) as required by the treaty. The US agency providing the pension, regardless of the treaty, may still want to inflict withholding of US tax if the individual is also (or remains) a US citizen, even if notified of the treaty position of the individual. In this case, the individual would file a form 1116 to the IRS using the "resourced by treaty" basket to reclaim the withholding for this specific pension from the US. This could be in addition other forms 1116 filed for additional General and Passive income.




 
« Last Edit: February 01, 2018, 07:53:41 PM by theOAP »

Offline durhamlad

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Re: UK tax on US pension
« Reply #19 on: February 01, 2018, 07:46:43 PM »

So, I'm curious. I will probably not be up in the 40% bracket when eventually drawing mandatory distributions, and my 403B balance is not huge (about $30,000).  If I rolled it to an IRA, it would be tax free to roll in both countries. If I then roll it to a Roth, it'd be at whatever tax bracket getting that extra $30K threw me into for USA tax on it. After that point, there would be no tax on disbursements in either country? (Would have to crunch the numbers to see if it's worth doing that.)  How are we escaping UK tax on the rollover to the Roth?

IF I did that, would the Daughter then have access to the money tax-free if I kick the bucket unexpectedly?

Converting the whole of your $30k IRA to a Roth is a lump sum distribution taxed only in the USA according to the DTA. I’m sure someone can quote the relevant section but I believe it is article 17 that covers lump sums from retirement accounts.

Yes your daughter will have access to the Roth tax free after you die. She will inherit the IRA whether or not it is a rollover IRA or a Roth IRA assuming you have her set up as the beneficiary. If she does not have a US brokerage account to receive it I would think it will be cashed out and sent to her. Your estate will pay any due taxes if it is a rollover IRA or no taxes if it is a Roth. 
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Online F4mandolin

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Re: UK tax on US pension
« Reply #20 on: February 01, 2018, 08:02:47 PM »

Paragraph 2
Paragraph 2 deals with the taxation of pensions paid by, or out of funds created by, one of the States, or a political subdivision or a local authority thereof, to an individual in respect of services rendered to that State or subdivision or authority. Subparagraph (a) provides that such pensions are taxable only in that State. Subparagraph (b) provides an exception under which such pensions are taxable only in the other State if the individual is a resident of, and a national of, that other State.

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

The UK will want to tax a US government pension paid to a UK resident UK citizen (national) as required by the treaty. The US agency providing the pension, regardless of the treaty, may still want to inflict withholding of US tax if the individual is also (or remains) a US citizen, even if notified of the treaty position of the individual. In this case, the individual would file a form 1116 to the IRS using the "resourced by treaty" basket to reclaim the withholding for this specific pension from the US. This could be in addition other forms 1116 filed for additional General and Passive income.

Which kind of gets me back to what I was trying to do in my own situation. In 4 years time if things work like I am planning.....
1. My pension will be the only thing being taxed in the US, except for some minor bank interest here in the UK. It's only about $15K a year, so the taxes are low.
2. My US social security will only be taxed in the UK....which should just go over the no tax limit by a little bit....so the UK taxes will be low.

At this point.....hopefully.....my taxes are simple and easy to do. 
Fred

Offline theOAP

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Re: UK tax on US pension
« Reply #21 on: February 01, 2018, 09:59:58 PM »
The UK will want to tax a US government pension paid to a UK resident UK citizen (national) as required by the treaty. The US agency providing the pension, regardless of the treaty, may still want to inflict withholding of US tax if the individual is also (or remains) a US citizen, even if notified of the treaty position of the individual. In this case, the individual would file a form 1116 to the IRS using the "resourced by treaty" basket to reclaim the withholding for this specific pension from the US. This could be in addition other forms 1116 filed for additional General and Passive income.

Oops, just re-read this and realised Article 19(2)(b) is not an exception to the saving clause, so attempting to reclaim the double taxation would be by a normal 1116, passive, not by resourced by treaty.

Offline Nan D.

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Re: UK tax on US pension
« Reply #22 on: February 01, 2018, 10:24:26 PM »
Converting the whole of your $30k IRA to a Roth is a lump sum distribution taxed only in the USA according to the DTA. I’m sure someone can quote the relevant section but I believe it is article 17 that covers lump sums from retirement accounts.

Yes your daughter will have access to the Roth tax free after you die. She will inherit the IRA whether or not it is a rollover IRA or a Roth IRA assuming you have her set up as the beneficiary. If she does not have a US brokerage account to receive it I would think it will be cashed out and sent to her. Your estate will pay any due taxes if it is a rollover IRA or no taxes if it is a Roth.

Ah. So, I pay about 15% of it to Uncle Sugar when rolled to a Roth and then no more. Assuming I then live many more years to make up the hit it would take in taxes, anything it earned in the Roth IRA would be tax free when disbursed. Hmmmm.  8)

Hmm, I'm well under the limit for estate taxes to kick in in Scotland.

Hmmmm again. I do have a second account, with only about $12K in it, that I could hypothetically roll and owe very little tax on, assuming all my other income was resourced to the UK. (I think the standard deduction/replacement personal exemption next year changes to about $12K.) And in a couple of years I'll have some banked credit for taxes paid to the UK that are more than taxes in the US, so I could use them to pay for the rollover tax.  I think I should do that, but will talk to Fidelity to see what the advisor thinks. I need to keep some pot of money available for emergency relocation, if Brexit stuff goes down the tubes (or Putin declares war, or the space station crashes on my flat, etc.). So I don't want to tie it all up for 5 years (or face a penalty to get to it).
« Last Edit: February 02, 2018, 08:18:10 PM by Nan D. »

Offline durhamlad

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Re: UK tax on US pension
« Reply #23 on: February 01, 2018, 10:45:14 PM »
Ah. So, I pay about 15% of it to Uncle Sugar when rolled to a Roth and then no more. Assuming I then live many more years to make up the hit it would take in taxes, anything it earned in the Roth IRA would be tax free when disbursed. Hmmmm.  8)

What I did was to request no withholding when I did the conversions, paying the tax from my after tax savings. It is a way to actually put more money into the Roth to grow tax free.
« Last Edit: February 01, 2018, 10:46:22 PM by durhamlad »
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Offline EmilyUK

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Re: UK tax on US pension
« Reply #24 on: February 02, 2018, 08:10:54 PM »
Unless you have a complicated tax situation.....you should be able to do the taxes yourself. I've been doing it and I just don't retain things like this. I don't know if my situation/plan will help you....but....I'm a retired American with UK wife. I am currently in the process of draining down my Govt retirement account which will take almost 4 more years. At that time I should be about 64, wife 61. I am currently filling out my US taxes married/joint so I can take advantage of the higher tax brackets for two people. Once the account has been drained I will take my wife off of my US taxes since I will only have my pension (about $15,000 a year) coming in that will be taxed in the US. US social security will only be taxed in the UK because of the US/UK treaty. My wife can then start taking her pensions without the US trying to tax it.

Thank you. I think I get in a bit of a panic with it all. I have a reasonable grasp of UK finances, but bit lost with US side of things and my wife is also confused. Neither of us will be in 40% tax bracket here. She's 57, I'm 46 so she'll be semi retired then retiring quite a bit before me. I was bought out of previous house and we'll buy again when in secure enough position, so I guess a joint US tax return would mean that the house money (which is also doubling up as leave to remain eligibility fund) might get taxed by US but only on interest? She has around $40000 dollars in 401K so that sounds like something we might want to roll over into Roth from what ppl are saying here. I don't understand what withholding means - is it not paying tax at point of receiving money, but paying after return is filed? I also don't understand what gets taxed from 401k if left where it is - amounts drawn after pension age? In both US and in UK? I can't get hold of what kinds of percentages or actual  amounts we might be talking about, so how big the consequences of different  actions might be. This forum is such an extraordinary resource. Thanks to everyone who helps each other.
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Offline Nan D.

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Re: UK tax on US pension
« Reply #25 on: February 02, 2018, 08:20:05 PM »
Hi. You pay taxes on the 401K when it is disbursed. They usually withhold 20% for US citizens and 30% for others, I believe. You then report that on your taxes, and if the taxes on any other income you have have been paid such that you've overpaid with the 20 or 30%, you get a refund.

Offline EmilyUK

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Re: UK tax on US pension
« Reply #26 on: February 02, 2018, 08:22:33 PM »
Hi. You pay taxes on the 401K when it is disbursed. They usually withhold 20% for US citizens and 30% for others, I believe. You then report that on your taxes, and if the taxes on any other income you have have been paid such that you've overpaid with the 20 or 30%, you get a refund.

Thank you! :)
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