Form 1116

Hello,

We resorted to managing US and UK tax returns ourselves when the recommended advisor having first said they would help, didn't respond to our emails or messages.

So, my wife receives UK PAYE income and in the UK tax year 2020-21 also took her full lump-sum payout from her 401K (as deposit on house in UK). She also receives a small pension of 91 dollars a month.

We had been told that the small pension and social security payments which she'll be able to claim from next summer, would be taxable in UK and the lump-sum pension taxable in US.

When she took the 401K payment about 10,000 dollars was withheld in the US

She filed her US return for 2020 in May and we were told we would receive 5000 dollars refund from the 10,000 withheld (still waiting for this).

Then in August we completed UK tax return for 2020-21 expecting to have no tax in UK on the lump-sum due to USA claim on this.

We spoke to the specialist technician who showed us the treaty on double taxation online which appears to say all pension income is taxable in the country of residence not country of origin.

This means we owe £9,300 in UK (so a lot more than the US tax was)

Firstly, can anyone reassure us that we do now have the correct information and we owe HMRC UK not IRS USA?

Secondly, is the 1116 form the correct form to submit to get the remainder of the US tax paid, refunded.

Thirdly, is it ok to send the 1116 form now on its own months after the original IRS tax return was submitted?

Fourthly, we think we have found confirmation that the relevant section is 'income re-sourced by treaty' (line 30) but we're confused about the other sections of the form. It also says one form per amount, so should we do one for the small monthly pension and one for the 401K?

Very sorry if this is covered elsewhere. I have been trying to read through, but struggling to follow all the different scenarios, and the amounts we stand to lose with mistake are scary.

Many thanks,
Emily

I'm not a tax expert but I believed that a lump sum from a US pension scheme such as a 401k was taxable only in the USA. (see article 17.2 below)

My wife and I are dual US/UK citizens living in the UK. I have 2 US private pensions that are paid monthly and for these payments they are definitely taxed in both countries with HMRC being the primary taxation authority. This means that each year we file forms 1116 to claim back the UK taxes paid and you are correct that the box "Resourced By Treaty" needs to be checked.

I would think to retrospectively file 1116 for US tax year 2020 you would need to file an amended tax return, 1040-X,  but I've never done that myself. Hopefully someone will come along shortly with better knowledge than myself. Below are some of the links I found about when Googling the question.

https://www.taxesforexpats.com/expat-tax-advice/file-amended-return-from-abroad.html

https://turbotax.intuit.com/tax-tips/amend-return/how-to-file-an-amended-return-with-the-irs/L6kO691J8

https://www.irs.gov/newsroom/top-10-tax-tips-about-filing-an-amended-tax-return





US/UK DTA Extracts
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.

Hi Durhamlad,

Ooh, I was so hoping you might say that because obviously it makes a huge difference. It's also what I am almost 100% sure the tax advisor told me on the phone before I was unable to contact him again.

I will study all your links and keep hopeful then and keep an eye on here.

Thanks for the speedy reply.

Many thanks,
Emily

PS after all these years of seeing your name written, I've only just understood that it probably means Lad from Durham - I'm slow on the uptake

PS after all these years of seeing your name written, I've only just understood that it probably means Lad from Durham - I'm slow on the uptake

Yep, I grew up in a County Durham pit village.

US/UK DTA Extracts
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.

I retraced the document that the HMRC specialist technician directed us to,

It was digest of double taxation April 2018. And the wording he said related was 'Trivial commutation lump-sum' I did question that as 'trivial' suggested small, but he assuredly said no it was all pension income, so we accepted what he said. I can now see there are numbers under the headings in the digest and although I can't see anywhere on the document that says what those numbers are, the number 17 is included under other Pensions so may be a cross reference to article 17.

Anyway it seems to me that what the technician showed us is ambiguous, but the wording in Article 17 is clear. I was also certain that is what the tax advisor had told me on the phone before he became uncontactable.

Thanks again for your help.

Emily

I retraced the document that the HMRC specialist technician directed us to,

It was digest of double taxation April 2018. And the wording he said related was 'Trivial commutation lump-sum' I did question that as 'trivial' suggested small, but he assuredly said no it was all pension income, so we accepted what he said. I can now see there are numbers under the headings in the digest and although I can't see anywhere on the document that says what those numbers are, the number 17 is included under other Pensions so may be a cross reference to article 17.

Anyway it seems to me that what the technician showed us is ambiguous, but the wording in Article 17 is clear. I was also certain that is what the tax advisor had told me on the phone before he became uncontactable.

Thanks again for your help.

Emily

Good luck on your research.  Taxes for Expats May be worth asking this question of.

https://www.taxesforexpats.com/

Good luck on your research.  Taxes for Expats May be worth asking this question of.

https://www.taxesforexpats.com/

Thank you. I checked with their online chat and they showed the definition for lump sum on IRS site and confirmed that what I quoted from article 17 alongside that definition seemed to make sense. So we're going to go back with those sources to confirm with hmrc technician and then amend our UK return accordingly. 

Thank you. I checked with their online chat and they showed the definition for lump sum on IRS site and confirmed that what I quoted from article 17 alongside that definition seemed to make sense. So we're going to go back with those sources to confirm with hmrc technician and then amend our UK return accordingly. 

Good luck, do let us know how you get on.

Good luck, do let us know how you get on.

Just to update,  we checked with tax help for older people about the wording when submitting amended/ corrected UK tax return and then amended removing the 401K lump-sum payment and adding explanation at the end of the return for the amendment in relation to article 17 of the treaty. The tax owed is now what we had originally expected, so the financial shock and worry has been resolved. Thanks ever so much for your clear signposting and help.

Just to update,  we checked with tax help for older people about the wording when submitting amended/ corrected UK tax return and then amended removing the 401K lump-sum payment and adding explanation at the end of the return for the amendment in relation to article 17 of the treaty. The tax owed is now what we had originally expected, so the financial shock and worry has been resolved. Thanks ever so much for your clear signposting and help.

Good news - we’ll done.