Tax question, 72t and form 1116

Hello,
I wonder if you can help me with a tax question, (and I hope in doing so, it will help someone else too!)

I spent many years in the US and became a citizen.  I moved back to the UK in 2012.  I prepared my own taxes for that year, as my daughter and I lived off savings and child support.  In 2013 my circumstances changed:

1)  I was able to draw a lump sum - 72t distribution - from my roth IRA
2)  I started part time work

For the 2013 tax year, I used a company to work out my taxes for me - at a cost of about $2,000 - it seemed too complicated to do it myself because I had mutual funds which I rolled over into the IRA which is managed by a financial advisor.  The company determined that I would be better off paying taxes, as a bona fide resident, to the HMRC rather than the IRS - until I am 59 1/2, at which time I will pay tax on the IRA to the IRS.  The company filed the following forms for me:

1)  1040
2)  2555
3)  8833
4)  1116
5)  4852 - in lieu of a W2 - but for 2014 I have a 1099R
6)  6251
7)  Fbar

This year I decided to file myself.  I keep my finances very simple and after doing the homework, I definitely won't be filing an Fbar next year, though I will have to for 2014! I do not have to file a FATCA. I have one US bank account and one UK bank account.  I am not claiming my daughter as a dependent.

I am using Turbo Tax this year and am confused about the FEIE - from what I understand, I can't claim Foreign Tax Credits if I claim the FEIE, yet the company filed both for me last year.

Regarding Form 1116, part 1, line 1a, isn't that supposed to be my total gross income for the year from the UK?  The figure reported last year was much, much lower than my total gross income for 2013 - I have no idea how they came up with the figure.



Many thanks,
Robyn

I have a couple of questions about what you are doing.

1) A 72t distribution is by it's nature NOT a lump sum. It is a stream of payments calculated according to IRS actuarial tables and declared interest rates.

2) Have you investigated the possibility of taking a qualified distribution from your ROTH before age 59.5 and so not needing 72t?

What is your filing status in the UK and are you a UK/US dual citizen, are you a resident and taxed on an arising basis? Unless you can qualify and pay to be taxed on the remittance basis you will be taxed by the UK and the US on your worldwide income so you have to pay tax to HMRC on your IRA distributions and then use the DTA and resourcing to get FTC for those payments on your US taxes......if you are taking ROTH distributions there should be no tax in the US or the UK.

Hi there,
Many thanks for replying.  I am a bit confused now - I received a lump sum last year from my IRA - it's listed on my 1099R as a gross distribution.  The work sheet for form 1040 which the tax company prepared for me refers to it as a 72T.  If I remember rightly, I was advised that I would incur 40% tax on this if paying taxes to the IRS, which is why they worked out that it's better to pay my taxes in the UK. I believe there was talk about getting the distributions instead but that somewhere along the line I would have to pay taxes on it anyway? 
I am a dual citizen and a UK  Bona Fide resident and I got FTC last year - I paid 20% tax on my lump sum to the HMRC.  I am filing single with no dependents.  Thank you:)

Hi there,
Many thanks for replying.  I am a bit confused now - I received a lump sum last year from my IRA - it's listed on my 1099R as a gross distribution.  The work sheet for form 1040 which the tax company prepared for me refers to it as a 72T.  If I remember rightly, I was advised that I would incur 40% tax on this if paying taxes to the IRS, which is why they worked out that it's better to pay my taxes in the UK. I believe there was talk about getting the distributions instead but that somewhere along the line I would have to pay taxes on it anyway?  
I am a dual citizen and a UK  Bona Fide resident and I got FTC last year - I paid 20% tax on my lump sum to the HMRC.  I am filing single with no dependents.  Thank you:)

You don't get to choose who you pay tax to......it depends on your residency, citizenship and the DTA. As a US/UK dual citizen living in the UK your tax bill is going to be the higher of the UK or the US tax.

You seem to have a basic misunderstanding of 72T, it has to be a series of payments, not a lump sum distribution. What is the number in Box 7 of the 1099-R, it should be "2" if its a 72T distribution. Be careful with the use of "lump sum" term as they are taxed differently than periodic income, which is what a 72t distribution will be. In your situation you will pay income tax to the UK and then claim a FTC on your US taxes by "resourcing by treaty" the 72t income. Also make sure you claim credit for any US tax withheld by the administrator.

Thank you, yes, it's a 72T - now I understand the difference between a lump sum and the distribution.  I think I need to do more homework.  Thank you

I am trying really, really, really hard to understand how to fill out form 1116 which was my original question - I know I referred to the 72T as a lump sum; I know it's not and why it's not. The jargon is flooring me.  I have tried reading the IRS instructions on how to fill out the form and much of it is gibberish to me.  Am I the only one?  I looked at my last years return and have made headway understanding how the 1116 is completed, but I am filing my taxes using TurboTax and the smartcheck at the end is asking me two questions which I don't understand:

1) "Explanation Statement: explanation - 1 must be completed.  Enter your explanation here to complete the statement.  It must show the foreign reduction computation for line 12." What I take that to mean is the taxes I accrued on my UK income.  Does it also mean I include the tax I paid to the HMRC for my IRA distribution last year?  Or do I fill out an additional 1116 for that?  How do I actually answer the question - are they after a written paragraph? 

2)  Turbo tax is prompting me to fill in the "Tax and Interest Deduction Worksheet Line 1b (1) -1 must be entered"  to say which state I lived in from 1/1/14 to 12/3/14 but I didn't live in the states last year - how can I possibly fill this out? What it is showing to the left of the screen on every page is MD taxes, $0.  I have never lived in Maryland!

Why has turbotax not asked for info on untaxed income such as child benefit and employer pension contributions? The total of those amounts was shown on the F1116 for my 2013 return in part 1 line 1a "Gross income from sources within country shown above and of the type checked above."

Thanks, and apologize in advance for being totally thick.

UK tax paid on IRA distributions belongs in the treaty resourced basket 1116.

I have never used TurboTax, but US taxes are really, really simple worldwide on everything forever. Bear this in mind and report everything, plus any appropriate information returns.

You may want to consider having the 2014 US return professionally prepared here in the UK and have the same firm prepare your UK return; as these issues are invariably complicated.

Yes, I know it does, thank you. I am trying to answer the questions on TurboTax - I have more or less worked out how to fill in the F1116, but the form itself doesn't come up on TT - it's just the worksheet, asking me the questions I listed below that I am unsure how to answer. If I am unable to claim the tax credits through my own inability to complete the F1116 and I end up being double taxed, I will owe less than $1500 in tax to the US, which is about $500 less than I paid a company last year to prepare both my US and UK taxes. I am really close to filling this form out and am loathe to pay a company that much to do this for me. Is there anyone out there who has prepared their own F1116 and is in a similar position to me?

The IRS instructions to Form 1116 are well written and worth reading if any points are unclear. 

You have in any case at least until 15 June to figure this out and file the return...but if you feel a moral duty to donate $1,500 to the US government when you owe nothing, the IRS will not stop you.  You will of course then be doubly taxed as you would still have to pay UK tax on the income, so this would be a very conservative position to take.

Thank you.

Yes, I know it does, thank you. I am trying to answer the questions on TurboTax - I have more or less worked out how to fill in the F1116, but the form itself doesn't come up on TT - it's just the worksheet, asking me the questions I listed below that I am unsure how to answer. If I am unable to claim the tax credits through my own inability to complete the F1116 and I end up being double taxed, I will owe less than $1500 in tax to the US, which is about $500 less than I paid a company last year to prepare both my US and UK taxes. I am really close to filling this form out and am loathe to pay a company that much to do this for me. Is there anyone out there who has prepared their own F1116 and is in a similar position to me?

I haven't yet moved back to the UK but I experimented with form 1116 this year using TurboTax and I found it easier to go into forms mode and open a new form 1116. Then you can follow the instructions from the IRS website and enter your data directly into the form without need of the worksheet.

 

I think you need to fully understand what has happened with your withdrawal from your roth IRA.

If you took a 72t distribution - this is supposed to occur every year until you are 59.5.  You are in trouble if you do not do that and will be liable for penalties and extra tax.  If you intended to do yearly withdrawls using 72t then fair enough.  However you could have take a withdrawal of your original contributions tax and penalty free anytime from a ROTH. (And from rollovers into the roth if you leave them in for 5 years).  

I'm not sure how you can fix that if you did a 72t in error and I imagine you'll need to hire someone to help you.    

Durhamlad and jjface - thanks for the helpful (and not sarcastic) advice.  I did get a company to file my taxes for me last year, and they advised me to take the 72T - I will be making yearly withdrawals.  I trust the advice they gave me.  I will go into forms mode on TT and have another look at the F1116.  Otherwise, I may end up asking the company to prepare my taxes again at least just for this year.  To be honest I have to say they earned their money with me last year
On the positive side, I am definitely more knowledgeable about my taxes now than I was a few weeks ago (not difficult, ha, ha!) but maybe not enough that I feel confident about filing myself yet... I'll let you know how it goes. 

Robyn,
You actually don't need a 1116 for ROTH distributions as they are tax free in the US and the UK. I'm still a bit puzzled about you using the 72T mechanism as there are other ways to get qualified early distributions from a ROTH. Anyway your 1099-R for the ROTH should show a taxable amount of 0 in Box 2a. Under the treaty you pay no tax in the UK and obviously no tax in the US.

If you have a regular IRA then UK tax would be due and a 1116 would be required.