Pensions

That's a 'perpetual' can of worms.
No rabbit holes, just trying to determine if you have a basis in the pension for US purposes.
The stumbling block is the definition of a lump sum as it pertains to the US/UK Treaty. To quote Cook_County in the BE thread "Under US domestic law an LSD is a complete distribution. Anything else is arguably periodic." Note the use of arguably. The question is does the US definition apply to the definition for use in the tax treaty? You can find answers for both alternatives (taxable, not taxable) depending on which expert you consult.

The US can determine whichever definition it chooses for the taxation of USCs, and whether the saving clause applies or not.

Again, sorry if I'm going over 'perpetual' old ground, but the DTC refers to a lump sum only once, in Article 17(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."

My lump sum payment would be derived from a pension scheme established in a Contracting State (the UK, for me) but it is NOT beneficially owned by a resident of the other Contracting State (the US).  I'm a resident of the Contracting State (UK), not the other Contracting State (US).  Thus Article 17(2) and reference to a lump sum seems irrelevant in my case, no matter how one interprets the definition of a lump sum.

Whether the IRS applies the saving clause seems to be a separate issue.  Which gets back to my query above.  The IRS has the right to apply the saving clause (except for 17(1)(b), 3 and 5), but does it regularly do this despite Article 17?

Again, sorry if I'm going over 'perpetual' old ground, but the DTC refers to a lump sum only once, in Article 17(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."

As you note later in your post, Article 17(2) is subject to the saving clause. The saving clause means the US does not to need honour anything contained in the entire treaty for a USC unless it is listed in Article 1(5). The US is the only country (generally) to have a saving clause contained in all of its treaties. This is due to the fact the US is the only country to have CBT (Citizenship based taxation). All other countries (not counting Eritrea) have RBT (Residence based taxation) and have no need of a saving clause.

It's there for a reason.

The stumbling block is the definition of a lump sum as it pertains to the US/UK Treaty. To quote Cook_County in the BE thread "Under US domestic law an LSD is a complete distribution. Anything else is arguably periodic." Note the use of arguably. The question is does the US definition apply to the definition for use in the tax treaty? You can find answers for both alternatives (taxable, not taxable) depending on which expert you consult.

The US can determine whichever definition it chooses for the taxation of USCs, and whether the saving clause applies or not.

Retirement income can be periodic or non-periodic. Examples of periodic income would be a classic lifetime pension or annuity, RMDs and a series of payments from an IRA set up under 72t substantially equal payments rules or a periodic plan that you set up with the pension administrator...adhoc withdrawals are not periodic.

As you note later in your post, Article 17(2) is subject to the saving clause. The saving clause means the US does not to need honour anything contained in the entire treaty for a USC unless it is listed in Article 1(5). The US is the only country (generally) to have a saving clause contained in all of its treaties. This is due to the fact the US is the only country to have CBT (Citizenship based taxation). All other countries (not counting Eritrea) have RBT (Residence based taxation) and have no need of a saving clause.

It's there for a reason.

All known and understood, but that doesn't address my query.

With what frequency does the IRS employ the saving clause to get its own way despite the terms of Article 17?

I suspect that no one knows the answer to this.  It's possible that the IRS only invokes the saving clause to avoid protracted arguments with those it thinks are trying to cheat the system.  At least that's what I'd like to think is the case.

For the UK, my tax coding confirms HMRC see the entire pension as taxable (obviously, allowing for a personal allowance). I chose not to have the 25% tax free option, an unheard of action for 99.9% of those taking a UK pension. Thank you, America.

For the US, I've established my basis (declared on past returns as income for US purposes) in the pension and declare the remainder. The basis is under 25% if I remember correctly.

I'm confused. If you decided not to take the 25% tax free lump sum as cash and left it in your pension surely you have a 25% tax free basis.

All known and understood, but that doesn't address my query.

With what frequency does the IRS employ the saving clause to get its own way despite the terms of Article 17?

I suspect that no one knows the answer to this.  It's possible that the IRS only invokes the saving clause to avoid protracted arguments with those it thinks are trying cheat the system.  At least that's what I'd like to think is the case.

And that's why you may file your return taking any reasonable stance you feel is applicable. Will the IRS refuse your stance? That's to be determined. Does the IRS really care, and is the review of returns sent to Austin really a crap shoot?   

That's why filing a US tax return contains individually based decisions, and no one can tell another how to file (within reason). There is a great deal of reporting from abroad that is 'interpretation' based.   

I'm confused. If you decided not to take the 25% tax free lump sum as cash and left it in your pension surely you have a 25% tax free basis.

Now I'm confused too.

For the UK, there is no basis. Remember, this was 10 years ago and the rules were the old rules which, once selected, apply forever more (like my State pension at 44ths). At least I was able to retire early.

For the US, what would be this '25% tax free basis' and where would it come from?

All known and understood, but that doesn't address my query.

With what frequency does the IRS employ the saving clause to get its own way despite the terms of Article 17?

I suspect that no one knows the answer to this.  It's possible that the IRS only invokes the saving clause to avoid protracted arguments with those it thinks are trying cheat the system.  At least that's what I'd like to think is the case.

The IRS default is domestic law so the savings clause is moot. It is up to the tax payer to invoke the treaty.

Now I'm confused too.

For the UK, there is no basis. Remember, this was 10 years ago and the rules were the old rules which, once selected, apply forever more (like my State pension at 44ths). At least I was able to retire early.

For the US, what would be this '25% tax free basis' and where would it come from?

I'm talking about a 25% UK tax free basis in any pension that was purchased with the 25% tax free amount rather than talking the cash. That was my assumption anyway......

edit

Ah "commutation" now I understand. Not taking the tax free lump sum leads to a larger pension that is still fully taxable.

Ah "commutation" now I understand. Not taking the tax free lump sum leads to a larger pension that is still fully taxable.

Sorry, yes, that's correct. I receive a larger pension by not taking the 25% lump sum although the monthly/yearly pension payment difference between the full pension amount, at the beginning, and the reduced amount is (much) less than 25%. Enter growth over XX years, stage right.

That's a 'perpetual' can of worms.

I'm still researching the can of worms.

This may be a dumb question, but say in the case of distributions from a UK personal pension plan to a UK/US dual citizen living in the UK, these appear to be treated as earned income by the HMRC. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/how-is-my-pension-taxed

As for the IRS, periodic payments from a UK personal pension plan would likely be exclused under 17.1(a).  Failing that, one could exclude tax via FTC (Form 1116).  But would I be correct in assuming that one could NOT claim FEIE (Form 2555) because the IRS does not include pension payments (or annuities or SS benefits) as foreign earned income?
https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

This may be a dumb question, but say in the case of distributions from a UK personal pension plan to a UK/US dual citizen living in the UK, these appear to be treated as earned income by the HMRC. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/how-is-my-pension-taxed

There are no dumb questions where foreign pensions for a USC are concerned.

Yes, UK pensions paid to a UK resident (a USC in this case) are taxable by HMRC. There are variations in the types of pensions available in the UK and I would think 'how the distribution is taxed by HMRC' is dependent on the type of distribution.

As for the IRS, periodic payments from a UK personal pension plan would likely be exclused under 17.1(a).

IMHO, incorrect. The distribution would be declared on a US return. Even if a treaty exclusion could somehow be allowed, the distribution would be declared on the US return, an adjustment would be declared, and an 8833 attached. Basis in the pension still generally requires the amount to be declared.

Failing that, one could exclude tax via FTC (Form 1116).

If the UK tax has been paid and is of a type allowable to the IRS, but in the appropriate 'basket' only.

But would I be correct in assuming that one could NOT claim FEIE (Form 2555) because the IRS does not include pension payments (or annuities or SS benefits) as foreign earned income?
https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

Correct.

Since all of this has to do with foreign pensions to the US, I could well be incorrect on any comment.

IMHO, incorrect. The distribution would be declared on a US return. Even if a treaty exclusion could somehow be allowed, the distribution would be declared on the US return, an adjustment would be declared, and an 8833 attached. Basis in the pension still generally requires the amount to be declared.

I understand that it would still be declared on a US return and 8833 attached, but if it is regular periodic distributions, why wouldn't the IRS recognise this as under Article 17.1(a)?  [I know the saving clause allows the IRS to ignor 17.1(a), but why would it?]

An another dumb question.  What exactly is meant by "basis" in the pension?

I understand that it would still be declared on a US return and 8833 attached, but if it is regular periodic distributions, why wouldn't the IRS recognise this as under Article 17.1(a)?  [I know the saving clause allows the IRS to ignor 17.1(a), but why would it?]

Not to be difficult, but why should it? The saving clause means the Article doesn't apply to USCs, and therefore the IRS has the right to tax. As we've said before, the saving clause is there for a purpose: the US retains the right to tax USCs as it wants under the rules of Citizenship Based Taxation.

There are circumstances when the IRS may be somewhat slack in enforcing correct reporting. They also lack the resources to go into depth on every return filed. But if the return has an obvious 'red flag', or the return is audited, the IRS will expect everything within the return to adhere to the rules. At this point, there is no 'slackness', only IRS discretion.

I feel like I'm bursting a bubble here, but IRS agents, and more importantly -  IRS computers, enforce the Code. If the revenue the taxpayer declares or reimburses is beyond the amount required, I would suggest the taxpayer may not see a refund. If the over-declaration were due to a simple mathematical mistake on the form, then the taxpayer may see a refund.

The IRS is there to make money for the US Government. Period. Form 8833 will alert them that a stance was taken by the taxpayer. If they agree, fine. If not, they will send a bill (with penalties and interest). But, charity, good will, and logic (from the US expat point of view) are not in the Code or the agents manual. Discretion is. What about your particular return may make them forego following the rules as laid down in the Code?   

An another dumb question.  What exactly is meant by "basis" in the pension?

It's the amount the taxpayer (or other) has paid into the pension, if the amount has been declared on a previous return as taxable income.

You, the US taxpayer, contribute £1,000/year to a pension for 20 years. You declare and pay US tax on the contributions, yearly. Depending on calculations, and if your contributions were the only contributions, you have a 'basis' of £20,000. BUT, there was also 'growth' in the fund throughout those 20 years, so your basis may be far, far less than 100% (or a full basis). Therefore, upon retirement, you may calculate a deduction for your contributions (a basis), but you will still have to declare some amount on a US return which will be taxable if the growth for each year was not declared previously on a US return as income and taxed accordingly in that year. There are specific IRS worksheets required for those calculations.

Again, I could be wrong.

I understand that it would still be declared on a US return and 8833 attached, but if it is regular periodic distributions, why wouldn't the IRS recognise this as under Article 17.1(a)?  [I know the saving clause allows the IRS to ignor 17.1(a), but why would it?]

An another dumb question.  What exactly is meant by "basis" in the pension?

If the pension payments were periodic they would fall under Article 17.1......so any UK tax free amount would also be US tax free. The income would have to be entered on your 1040 and the tax treaty adjustment claimed.

A "basis" is an amount.....so "tax free basis" is the tax free amount in an account.