1040NR for 401K (again)

(I've posted about this before, but a long time ago, so starting a new topic with an update.)

I'm a UK citizen who worked in the US for four years a while back. Last year I took all the cash from my 401k. Except that Fidelity, the provider, deducted 30% tax. That, I understand, is what they have to do.

I then filed a 1040NR using H&R Block's expat services. My expectation was that I could claim a refund, because this was my only source of US income in 2022, and 30% is far more than I would be taxed as a US citizen on that amount, based on their graduated rates.

After far too long a time spent trying to get a straight answer out of H&R Block (I do not recommend them), they are now telling me that no refund is due: that under the US/UK tax treaty, 30% is what the US takes, and that is that.

Are they right?

The return described appears to be incorrect unless there were zero contributions to the 401(k), which I suspect is impossible.

Thanks Swami. But I'm not sure what you mean by "the return". Do you mean the advice from H&R Block?

I regularly contributed to the 401k (as did my company) for the 4 years I worked for them. But Fidelity never provided me with contribution information. Certainly, the 1040NR wasn't interested in any such breakdown.

Thanks Swami. But I'm not sure what you mean by "the return". Do you mean the advice from H&R Block?

I regularly contributed to the 401k (as did my company) for the 4 years I worked for them. But Fidelity never provided me with contribution information. Certainly, the 1040NR wasn't interested in any such breakdown.

“The return” refers to the IRS tax return as reported on the 1040NR above.

Usually all contributions to a 401k are before tax so all of the 401k is taxable when withdrawals are paid but some 401ks, like mine was, contain both before tax and after tax contributions so that not all the 401k is taxable, so then contributions information is needed. Suppose you contributed $10k into a 401k of after tax money and when you came to make withdrawals it was worth $50k and you withdrew $10k of that $50k. One fifth of that withdrawal would be tax free because you can’t just withdraw your contributions.

Thanks. Fidelity just told me "we're taxing everything at 30%". Did your fund provider/holder do something different?

And how did your breakdown get communicated to the IRS - on a 1040NR?

Regardless of how much I was taxed at the time I withdrew the lump sum, surely there's at least a question of whether I'm due a refund, given that it was my only income. H&R Block are saying "no" to that.

Thanks. Fidelity just told me "we're taxing everything at 30%". Did your fund provider/holder do something different?

And how did your breakdown get communicated to the IRS - on a 1040NR?

Regardless of how much I was taxed at the time I withdrew the lump sum, surely there's at least a question of whether I'm due a refund, given that it was my only income. H&R Block are saying "no" to that.

Yes, Vanguard also do withholdings on IRA and 401k withdrawals for those who live overseas. I have to recover the money when I file my IRS return each year. What ticks me off is that they also make the withholding on Roth IRA withdrawals which, by nature, are tax free but despite my protestations they say the IRS rules are what they are.

Thanks - and sorry to keep on but it's the details that I need to know if I'm going to be able to sort this out. In my 1040NR, H&R Block put:

Pension and Annuity: X (the total gross lump sum)

Tax at 30%: Y (30% of X).

They repeat these figures in various places in the form. And the "Refund" section they leave blank.

If this was a UK return, there would be a tax calculation along the lines of "personal allowance: P", "amount taxed at 20%: Q", "amount taxed at 40%: R", "Total tax due: S". But H&R Block haven't done that.

Is your 1040NR different? I thought maybe the IRS would do this calculation when they processed the return - but I suspect that is over-optimistic.

Thanks - and sorry to keep on but it's the details that I need to know if I'm going to be able to sort this out. In my 1040NR, H&R Block put:

Pension and Annuity: X (the total gross lump sum)

Tax at 30%: Y (30% of X).

They repeat these figures in various places in the form. And the "Refund" section they leave blank.

If this was a UK return, there would be a tax calculation along the lines of "personal allowance: P", "amount taxed at 20%: Q", "amount taxed at 40%: R", "Total tax due: S". But H&R Block haven't done that.

Is your 1040NR different? I thought maybe the IRS would do this calculation when they processed the return - but I suspect that is over-optimistic.

Form 1040-NR includes a self-assessed calculation. The Form 1040-NR prepared by H & R Block is incorrect. The 30% withheld was merely a deposit against the final tax which will be calculated when the return is prepared correctly. You may wish to ask your selected accountant to revise the return they have prepared incorrectly.

Thanks Guya. That is what I thought. H&R Block are telling me that the US-UK tax treaty dictates that there is no refund! I'm pretty sure that that treaty only determines where tax is paid - not how much should be paid.

Thanks - and sorry to keep on but it's the details that I need to know if I'm going to be able to sort this out. In my 1040NR, H&R Block put:

Pension and Annuity: X (the total gross lump sum)

Tax at 30%: Y (30% of X).

They repeat these figures in various places in the form. And the "Refund" section they leave blank.

If this was a UK return, there would be a tax calculation along the lines of "personal allowance: P", "amount taxed at 20%: Q", "amount taxed at 40%: R", "Total tax due: S". But H&R Block haven't done that.

Is your 1040NR different? I thought maybe the IRS would do this calculation when they processed the return - but I suspect that is over-optimistic.

I don't file using using a 1040NR since I am a dual USC/UK citizen so I file a regular 1040.  Even so I would think you would enter your 401k distribution on line 4 which is labeled IRA distributions rather than line 5 labeled Pensions and Annuities.

Did you receive a 1099-R because the distributions reported on my 1099-R IRA forms go on line 4, however I have never had a 401k distribution because I rolled my 401k into an IRA once I'd finished work because the brokerage I rolled it to had a lot more choices of funds and had much lower fees.

Maybe a 401k distribution is reported on line 5 as a pension or annuity, I don't know.

If the tax treaty states that it is only taxable in the USA then I would expect you would get the usual tax free allowances and then pay tax on the rest, which will be way lower than 30%.

Thanks Guya. That is what I thought. H&R Block are telling me that the US-UK tax treaty dictates that there is no refund! I'm pretty sure that that treaty only determines where tax is paid - not how much should be paid.

That is what I would have thought also.

Thanks again for the reply. Your situation does sound pretty different from mine. I received a 1042-S from Fidelity, which just states the total of my lump sum, and that they deducted 30%. That's what H&R Block asked for.

I'm waiting for yet another response to my objections from H&R Block, who say: "We have discussed your case with our senior tax advisors. Once we get a clarification we will be able to answer all your questions get back to you." LOL. How is my case anything more than routine for an outfit that supposedly deals with nothing but non-resident tax?!

I'll post again here if/when I have an update, in case it's useful to someone else in my situation.

Thanks again for the reply. Your situation does sound pretty different from mine. I received a 1042-S from Fidelity, which just states the total of my lump sum, and that they deducted 30%. That's what H&R Block asked for.

I'm waiting for yet another response to my objections from H&R Block, who say: "We have discussed your case with our senior tax advisors. Once we get a clarification we will be able to answer all your questions get back to you." LOL. How is my case anything more than routine for an outfit that supposedly deals with nothing but non-resident tax?!

I'll post again here if/when I have an update, in case it's useful to someone else in my situation.

Good luck with your endeavors, please do let us know how you get on. 

Amazing, after more than two months of trying to get some sense out of them, H&R Block have just sent me an amended return with a proper tax calculation and a claim for a refund . Thanks for your support in this forum. I hope this helps someone else in a similar situation.

Amazing, after more than two months of trying to get some sense out of them, H&R Block have just sent me an amended return with a proper tax calculation and a claim for a refund . Thanks for your support in this forum. I hope this helps someone else in a similar situation.

Excellent, and thanks for updating us.