Is tax free lump sum payment from UK pension subject to US tax

I am a UKC/USC resident in the UK for over 40 years. I am confused about treaties concerning double taxation of pensions. My pension was from Universities Superannuation Scheme (USS) and I had a 25% tax free lump sum payment when my pension started.
I would be grateful for any clarification as to whether I would be taxed on the lump sum payment by the IRS and by how much. I am hoping that it isn’t taxable.

https://www.gov.uk/government/publications/usa-tax-treaties

I'm not an accountant or an expert. But if you check articles 17 & 18 (pensions) perhaps you'll get your answer? (My reading is that if you are a UK resident, even if a citizen of the USA, and your pension is a UK pension, it gets taxed only in the UK.)

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 firstmentioned
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.
3. Notwithstanding the provisions of paragraph 1 of this Article, payments
made by a Contracting State under the provisions of the social security or similar
legislation of that State to a resident of the other Contracting State shall be taxable
only in that other State.
4. Any annuity derived and beneficially owned by an individual (“the
annuitant”) who is a resident of a Contracting State shall be taxable only in that State.
The term "annuity" as used in this paragraph means a stated sum paid periodically at
stated times during the life of the annuitant, or during a specified or ascertainable
period of time, under an obligation to make the payments in return for adequate and
full consideration (other than in return for services rendered).
5. Periodic payments, made pursuant to a written separation agreement or a
decree of divorce, separate maintenance, or compulsory support, including payments
for the support of a child, paid by a resident of a Contracting State to a resident of the
other Contracting State, shall be exempt from tax in both Contracting States, except
that, if the payer is entitled to relief from tax for such payments in the first-mentioned
State, such payments shall be taxable only in the other State.

https://www.gov.uk/government/publications/usa-tax-treaties

I'm not an accountant or an expert. But if you check articles 17 & 18 (pensions) perhaps you'll get your answer? (My reading is that if you are a UK resident, even if a citizen of the USA, and your pension is a UK pension, it gets taxed only in the UK.)

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 firstmentioned
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.
3. Notwithstanding the provisions of paragraph 1 of this Article, payments
made by a Contracting State under the provisions of the social security or similar
legislation of that State to a resident of the other Contracting State shall be taxable
only in that other State.
4. Any annuity derived and beneficially owned by an individual (“the
annuitant”) who is a resident of a Contracting State shall be taxable only in that State.
The term "annuity" as used in this paragraph means a stated sum paid periodically at
stated times during the life of the annuitant, or during a specified or ascertainable
period of time, under an obligation to make the payments in return for adequate and
full consideration (other than in return for services rendered).
5. Periodic payments, made pursuant to a written separation agreement or a
decree of divorce, separate maintenance, or compulsory support, including payments
for the support of a child, paid by a resident of a Contracting State to a resident of the
other Contracting State, shall be exempt from tax in both Contracting States, except
that, if the payer is entitled to relief from tax for such payments in the first-mentioned
State, such payments shall be taxable only in the other State.

Reading an Article from a treaty by itself can be highly risky.  This Article needs to be read in the context - at least - of the Saving Clause.

I am a UKC/USC resident in the UK for over 40 years. I am confused about treaties concerning double taxation of pensions. My pension was from Universities Superannuation Scheme (USS) and I had a 25% tax free lump sum payment when my pension started.
I would be grateful for any clarification as to whether I would be taxed on the lump sum payment by the IRS and by how much. I am hoping that it isn’t taxable.

Given how long you have been in the UK you should by now have accumulated a large "bank" of excess foreign tax credits. You can use all of these accumulated over the past 10 US tax years to offset any possible tax on the planned commencement lump sum from the USS.

Reading an Article from a treaty by itself can be highly risky.  This Article needs to be read in the context - at least - of the Saving Clause.

Doesn’t the saving clause apply to article 17, meaning UK pensions, including lump sums are taxable in the US.

I’ve never had a lump sum but my 2 UK private pensions are taxed in the US. I use FTC’s to offset those taxes.

No idea at all. Hence, the "I'm not an expert."

But why in the hell have a treaty that has all these clauses spelled out, with that "saving" clause that basically negates everything anyway?

No idea at all. Hence, the "I'm not an expert."

But why in the hell have a treaty that has all these clauses spelled out, with that "saving" clause that basically negates everything anyway?

The USA is king.

Do not get me started on that! 

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.
Void for US citizens by Art. 1.4 - Saving Clause.

(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.
Allowed for US citizens by Art. 1.5.


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.
Void for US citizens by Art. 1.4 - Saving Clause.

3. Notwithstanding the provisions of paragraph 1 of this Article, payments
made by a Contracting State under the provisions of the social security or similar
legislation of that State to a resident of the other Contracting State shall be taxable
only in that other State.
Allowed for US citizens by Art. 1.5.
(This is why US SS is only taxed in the UK.)

4. Any annuity derived and beneficially owned by an individual (“the
annuitant”) who is a resident of a Contracting State shall be taxable only in that State.
The term "annuity" as used in this paragraph means a stated sum paid periodically at
stated times during the life of the annuitant, or during a specified or ascertainable
period of time, under an obligation to make the payments in return for adequate and
full consideration (other than in return for services rendered).
Void for US citizens by Art. 1.4 - Saving Clause.

5. Periodic payments, made pursuant to a written separation agreement or a
decree of divorce, separate maintenance, or compulsory support, including payments
for the support of a child, paid by a resident of a Contracting State to a resident of the
other Contracting State, shall be exempt from tax in both Contracting States, except
that, if the payer is entitled to relief from tax for such payments in the first-mentioned
State, such payments shall be taxable only in the other State.
Allowed for US citizens by Art. 1.5.

But why in the hell have a treaty that has all these clauses spelled out, with that "saving" clause that basically negates everything anyway?

All US Treaties have the saving clause. I believe US Treaties are the only treaties in the world with such a specific saving clause. A USC, resident outside the US, will benefit very little from any US Treaty. The US is the only country in the universe with Citizenship Based Taxation. (Eritrea's 2% diaspora tax doesn't really count.)

Article 17 is perhaps one of the most generous to US citizens.

3. Notwithstanding the provisions of paragraph 1 of this Article, payments
made by a Contracting State under the provisions of the social security or similar
legislation of that State to a resident of the other Contracting State shall be taxable
only in that other State.
Allowed for US citizens by Art. 1.5.
(This is why US SS is only taxed in the UK.)

Does this mean that the UK OAP paid to a UK resident (and USC) is only taxable in the UK?

I am a UKC/USC resident in the UK for over 40 years. I am confused about treaties concerning double taxation of pensions. My pension was from Universities Superannuation Scheme (USS) and I had a 25% tax free lump sum payment when my pension started.
I would be grateful for any clarification as to whether I would be taxed on the lump sum payment by the IRS and by how much. I am hoping that it isn’t taxable.

The definition of 'pension' and the definition of 'lump sum' in the treaties has always raised issues. In years past, it was understood the one shot 25% 'lump sum' was fully taxable by the IRS. Recently, and thanks to changes in UK pension rules, a 25% lump sum spread over yearly 'periodic payments' (another definition from the treaty) may allow the lump sum to be IRS tax free.

Very grey area these days.

You've indicated you have already taken the 25% lump sum. Is this true? 

Does this mean that the UK OAP paid to a UK resident (and USC) is only taxable in the UK?

You are stirring the proverbial with this question.

Some say yes, some say no.

According to the 'Technical Explanation' of the Treaty, it appears the intention was to make the UK SP taxable only in the UK for a USC resident in the UK. Unfortunately, the wording of the 'real' Treaty, as written, defines the UK SP taxable in the US for a UK resident USC. I believe there are some on this site that have indicated they do not claim the income from a UK SP as 'taxable' income on a US return. Others abide by the strict wording of the Treaty and declare the UK SP income as taxable on a US return - and take advantage of the UK tax credits it would therefore offer (key, that bit).

Read 17.3 very carefully.

...why in the hell have a treaty that has all these clauses spelled out, with that "saving" clause that basically negates everything anyway?

I don’t think the treaty’s meant to help US citizens not get taxed by the US, unfortunately.  It’s there to make sure US citizens do get taxed, by one country or the other, at least as much as US citizens in the US get taxed.

That’s my opinion, anyway.

According to the 'Technical Explanation' of the Treaty, it appears the intention was to make the UK SP taxable only in the UK for a USC resident in the UK. Unfortunately, the wording of the 'real' Treaty, as written, defines the UK SP taxable in the US for a UK resident USC. I believe there are some on this site that have indicated they do not claim the income from a UK SP as 'taxable' income on a US return. Others abide by the strict wording of the Treaty and declare the UK SP income as taxable on a US return - and take advantage of the UK tax credits it would therefore offer (key, that bit).

How does that work then?

The UK State Pension gets taxed by reducing the personal allowance.  No scope for deducting credit from UK tax for foreign tax already paid.

You could perhaps re-source the UK State Pension as US-source, and claim credit from the US against US tax due, but isn’t that just going round the houses to accomplish the same end?  (i.e. the UK State Pension ends up getting taxed by the UK, and not by the US, as per the Technical Explanation).

Extremely confusing!