Tax on IRA distributions for US citizens resident in UK?

I'm thinking of how to do my taxes when I take distributions from my IRA as a US/UK dual citizen residing in the UK. Here is what I've come up with, I'd love comments and critiques from anyone with actual experience of doing this and anyone who's just interested that can correct my errors.

The UK has primary jurisdiction over taxing retirement distributions because of the tax treaty Article 17, but as I'm a US citizen the US retains it's right to tax those distributions (Savings Clause), but lets me take a tax credit for any foreign tax paid (Relief from Double Taxation, Article 24). So the practical upshot of this is:

file a W-4P with my IRA provider and claim 10% US mandatory withholding. I don't have a US residence address so can't claim withholding exemption;

do the UK self assessment (SA-100 and SA-106) and pay whatever tax is due as a UK resident as if the IRA were UK sourced;

file US 1040, form 8833 to claim the treaty, and a foreign tax credit form 1116.

So if the US tax rate is 20%, and remembering that 10% has been withheld already, and the UK rate is 30% I'd be able to take a max tax credit of 20% on my US return making a total tax paid in the US of 30% and I'd get the excess 10% due to the withholding as a refund. So no tax paid to US and the total tax paid is the 30% UK rate as it is the higher of the 2 rates.

I will be interested in the informed responses as well, since this will come up for me in the next couple of years.

I will be interested in the informed responses as well, since this will come up for me in the next couple of years.

Me too. I would think that there would be a number of people already, or planning, to receive retirement income from US accounts.

I'm in the "fun" situation of one day having distributions from US SS, UK state pension, US company pension, IRAs, ROTH and 401(a), 403(b) and 457 accounts from Government service. I've pretty well sampled the entire tax code as far as retirement accounts go. Right now I'm looking at the Government retirement accounts and reading Article 19 is seems that as a US/UK dual citizen resident in the UK they will be taxed in a similar way to a regular IRA. Being a UK citizen and resident in the UK gives the UK the right to tax the US Government pension, but the Savings Clause kicks in again as I'm also a US citizen.

My goal is to fully understand the issues behind my tax situation before going to a professional and having them file for the first couple of years after which I'll file myself.

I'm in the "fun" situation of one day having distributions from US SS, UK state pension, US company pension, IRAs, ROTH and 401(a), 403(b) and 457 accounts from Government service. I've pretty well sampled the entire tax code ...

My goal is to fully understand the issues behind my tax situation before going to a professional and having them file for the first couple of years after which I'll file myself.

Me too.. except no 401K as neither my wife nor I have worked outside government, non-profit or education sectors!!

This is absolutely spot-on; "My goal is to fully understand the issues behind my tax situation before going to a professional and having them file for the first couple of years after which I'll file myself." 

So, just to raise another issue; what about receiving an American immediate annuity?  A good part of my accumulation is in the TIAA Traditional Fund, and the usual way forward with this is to convert this to a lifetime annuity at some point between the time of retirement and age 70. 
 

A good part of my accumulation is in the TIAA Traditional Fund, and the usual way forward with this is to convert this to a lifetime annuity at some point between the time of retirement and age 70. 
 

Yep, I have one of those too. The Government pension bit of the Treaty is pretty convoluted and then throw on top the IRS withholding issues etc and it gets complicate very quickly

I'm about to retire (in US) and we've been trying to get our heads around our options when I return to the UK. DH (in UK) has a works pension and will be eligible for the state pension in a few more months.  I did work in the UK for a while but have not claimed any state pension there.  I will have SS from US plus a TIAA annuity. No IRAs, etc.  Neither my CPA nor financial planner can shed much light -- so looking for an accountant with international expertise.

I will have SS from US plus a TIAA annuity. No IRAs, etc.  Neither my CPA nor financial planner can shed much light -- so looking for an accountant with international expertise.

The SS is easy, if you reside in the UK it's only taxable there. As a US citizen you won't have any tax withheld from your SS check and you can exclude it from US tax by submitting a Form 8833 and claiming the treaty exemption.

For other things like IRAs, 403b, and annuities it looks like the procedure I explains in my first post would work. I just wonder if it's possible to get around the mandatory withholding if there's no US tax due.

.....you can exclude it from US tax by submitting a Form 8833 and claiming the treaty exemption.

The hard part is knowing how to handle the exempt SS on the 1040 and 1116.

I just wonder if it's possible to get around the mandatory withholding if there's no US tax due.

You'll be a USC, resident in a foreign country. This causes discontent, and quite often, there's nothing you can do to solve the problem. You just live with it. 

The hard part is knowing how to handle the exempt SS on the 1040 and 1116.

I would probably send in the 8833 claiming the treaty exemption and just enter the SS I received on line 20a and enter 0 for the taxable amount on 20b. I wouldn't bother with the 1116 as the SS is only taxable in the UK so there's no credit to be taken.

You'll be a USC, resident in a foreign country. This causes discontent, and quite often, there's nothing you can do to solve the problem. You just live with it. 

Yes I'm coming to that conclusion. It looks like most retirements accounts have 20% mandatory withholding and IRAs are the odd ones as it's 10% for them. The backup withholding is mandatory for US citizens so the W-9 isn't appropriate. Just suck it up and wait for the refund I suppose.

Yes I'm coming to that conclusion. It looks like most retirements accounts have 20% mandatory withholding and IRAs are the odd ones as it's 10% for them. The backup withholding is mandatory for US citizens so the W-9 isn't appropriate. Just suck it up and wait for the refund I suppose.

I guess under FATCA this will all go up to 30% withholding unless you dealing with a participating FFI.

I would probably send in the 8833 claiming the treaty exemption and just enter the SS I received on line 20a and enter 0 for the taxable amount on 20b. I wouldn't bother with the 1116 as the SS is only taxable in the UK so there's no credit to be taken.

An excellent start. Don't forget the 'writing in pencil' above line 20b. (I was told to do this by the IRS!) An IRS agent (London Embassy) told me you can include the SS on line 1a of 1116 since you paid UK tax on the income. (Note: you can not include exempt income in the calculations for lines 3d and 3e.)  To be on the safe side (tinfoil hat?), I did not include it on line 1a, and apportioned the UK tax paid to subtract it in Part II. Again, if the net result is $0 tax due, you've only lost credits for future years.

Now, what about the new rules for 1116 for 2011? Is exempt US source SS income 'Income resourced by Treaty'? If it is, you can claim the UK tax paid in a separate basket.

I guess under FATCA this will all go up to 30% withholding unless you dealing with a participating FFI.

It could be even worse. My 403b provider will withhold 20% if I take a distribution and put it in my US based money market fund. Then under FATCA another 30% would be withheld if it was transferred to a FFI that wasn't FATCA compliant, or am I being too pessimistic?

An excellent start. Don't forget the 'writing in pencil' above line 20b. (I was told to do this by the IRS!) An IRS agent (London Embassy) told me you can include the SS on line 1a of 1116 since you paid UK tax on the income. (Note: you can not include exempt income in the calculations for lines 3d and 3e.)  To be on the safe side (tinfoil hat?), I did not include it on line 1a, and apportioned the UK tax paid to subtract it in Part II. Again, if the net result is $0 tax due, you've only lost credits for future years.

Now, what about the new rules for 1116 for 2011? Is exempt US source SS income 'Income resourced by Treaty'? If it is, you can claim the UK tax paid in a separate basket.

So US SS payments go on 1116, 1b, because you paid UK tax on them, but have to be excluded from 3d and 3e as they are exempt from US tax.

The rabbit hole gets deeper.

So US SS payments go on 1116, 1b, because you paid UK tax on them, but have to be excluded from 3d and 3e as they are exempt from US tax.

It's not a problem, the form still works. This year I'll have to get off my duff and get a second opinion.

What if you are under the UK tax threshold? I am not yet receiving SS, but likely ill start sometime in 2012 (I'm 64 and full retirement age is 66, but will likely start the benefits anyway).

DH (who is a dual national) gets a miniscule UK pension and tiny SS benefit, and in 2012will likely remain under the UK threshold, so no UK tax will be due. It all of the SS + UK pension still excluded on the 1116?

We arrived mid-year 2011, so essentially all of DH's income is from the US, and all of mine from self-employment was earned prior to the move. I'm assuming the US gets first dibs on all of mine, but perhaps only part of DH's pension?