Investing in the UK

But of course the ISA interest sits in the Passive basket Form 1116 which is only rarely where individuals have any excess foreign tax credits.  So the return that is received is typically free of UK tax but subject to US tax.

For the younger investor:
If you put £5,340 in an ISA, and £5,340 into a regular account, the UK tax on the regular account will generally cover the tax due to the US on the ISA.

If you file 2555, and it covers all your income, you still have the standard deduction plus your exemption to offset the tax due on the ISA.

For retirees:
It's ALL passive income.  

For the younger investor:
If you put £5,340 in an ISA, and £5,340 into a regular account, the UK tax on the regular account will generally cover the tax due to the US on the ISA.

If you file 2555, and it covers all your income, you still have the standard deduction plus your exemption to offset the tax due on the ISA.

For retirees:
It's ALL passive income.  

Sadly that is not quite what the law says in the Internal Revenue Code.

Interest is passive. Pension income is not passive under any circumstances.

For a UK higher rate taxpayer UK interest income is "kicked out" into the non-passive basket Form 1116. So a UK basic rate taxpayer could have excess foreign tax credits in the passive basket to eliminate US tax becoming due on ISA interest.

A "retiree" might well still be a higher rate taxpayer and have to put non-ISA interest in the general basket.

Pension income is not passive under any circumstances.

Well done! You've completely shocked me with this statement. Could you cite code or a publication where this explained so I can read further?

I assume you are speaking of 'high-taxed income', where the 'foreign' tax exceeds the highest US tax rate.

Sadly that is not quite what the law says in the Internal Revenue Code.

Interest is passive. Pension income is not passive under any circumstances.

For a UK higher rate taxpayer UK interest income is "kicked out" into the non-passive basket Form 1116. So a UK basic rate taxpayer could have excess foreign tax credits in the passive basket to eliminate US tax becoming due on ISA interest.

A "retiree" might well still be a higher rate taxpayer and have to put non-ISA interest in the general basket.

I always thought pension income, interest, rent etc was passive income, ie income you can get just sitting in the chair doing nothing.

Anyway as the OAP says "KISS", this discussion just emphasizes that as a US/UK dual national in the UK I'll only have cash and savings accounts in the UK and get as much of my retirement money into ROTHs before I make the move from the US.

My approach is to minimize tax by minimizing my taxable income.....so buy somewhere to live so that there's no mortgage or rent money needed. I have to do the numbers, but I can see myself just taking enough taxable income to fill up the UK personal allowance and making up the rest of my needs with cash and ROTH income, so no tax in the UK and a small US bill. Spending the ROTH before other retirement income isn't conventional wisdom, but it might be good here.

The "problem" comes when SS and US state pensions begin as my UK taxable income will go way up and then RMD will take me even higher......but it's a good problem to have.

Who said logic has anything to do with tax?

Under I.R.C. §§ 904(d) "The term''passive income'' means any income received or accrued by any person which is of a kind which would be foreign personal holding company income (as defined in section 954(c))."

A foreign personal holding company cannot receive child benefit, pension income or various other kinds of income that only individuals (but not corporate entities) would be capable of receiving.

At most I'll be in the 20% UK tax band.....so a poor church mouse.

My general question would be is it necessary or required to include income from ROTHs, US SS and UK state pensions on the 1116 as there is not tax due on them in the US (or the UK by Treaty on the ROTH), can you even claim a tax credit for UK tax paid when there is no tax due in the US, again by Tax treaty after you've filled 8833.

I was going to include my US pensions and retirement income in the "Resourced by Treaty" income section. UK interest income from ISA etc as passive income.

US SS and UK state pension, tricky, I'll use the 8833 to resource the the US SS to the UK, so does the US SS go in the "Resourced by Treaty" bucket and the UK state pension in the passive or the general bucket or do you just not include them!

At most I'll be in the 20% UK tax band.....so a poor church mouse.

My general question would be is it necessary or required to include income from ROTHs, US SS and UK state pensions on the 1116 as there is not tax due on them in the US (or the UK by Treaty on the ROTH), can you even claim a tax credit for UK tax paid when there is no tax due in the US, again by Tax treaty after you've filled 8833.

I was going to include my US pensions and retirement income in the "Resourced by Treaty" income section. UK interest income from ISA etc as passive income.

US SS and UK state pension, tricky, I'll use the 8833 to resource the the US SS to the UK, so does the US SS go in the "Resourced by Treaty" bucket and the UK state pension in the passive or the general bucket or do you just not include them!

I am confused by the question. A treaty can exempt income, modify the treatment or change the rate.

Here you are talking of filing on the arising basis in the UK and therefore paying UK tax on 90% of the US social security and electing to exempt it from US tax. It is therefore not doubly taxed so why would at feature as taxable income at all of any kid on a US Federal tax return?

I suggest professional advice from a dual US/UK qualified tax adviser, at least for the first year.

Here you are talking of filing on the arising basis in the UK and therefore paying UK tax on 90% of the US social security and electing to exempt it from US tax. It is therefore not doubly taxed so why would at feature as taxable income at all of any kid on a US Federal tax return?

I plan to get professional advice for the first year and when there are any significant changes to my situation.

Thanks, that's what I thought too. As a US/UK citizen resident in the UK the US SS and UK state pension are not taxable in the US so my initial thought was to enter my US SS on the 1040 line 20a and then enter 0 on line 20b as I'll resource it to the UK on 8833. As for the UK state pension should I just leave it off the US return apart from claiming the treaty exemption on 8833?

There is a danger of confusing other readers of this forum by taking of sections of the IRS code and Conventions that govern the interpretation of other treaties.

In a broad sense "resourcing" is not in point at all and the UK state pension is not exempted from US tax for a UK resident under the current UK/US treaty. Confusion may be creeping in here.

Retirement issues are some of the most complicated areas of tax to address - so it is prudent to take professional advice.

There is a danger of confusing other readers of this forum by taking of sections of the IRS code and Conventions that govern the interpretation of other treaties.

In a broad sense "resourcing" is not in point at all and the UK state pension is not exempted from US tax for a UK resident under the current UK/US treaty. Confusion may be creeping in here.

Retirement issues are some of the most complicated areas of tax to address - so it is prudent to take professional advice.

Well confusing forum readers is the last thing I want to do. So by posting about these issues I hope that people will gain some knowledge of them so that they can go to a professional advisor and understand the tax return that he/she will produce in their name.

If you feel I've cause confusion could you explain?