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

The US can’t tax the UK State Pension because it’s already been fully taxed by the UK.  If a US citizen reports it as taxable, and doesn’t claim credit for the UK tax that they’ve already paid, that’s an unfortunate mistake.

So it doesn’t really matter whether you think the wording of 17.3 is correct or the Technical Explanation is correct: the US can’t tax it, whether you report it as taxable and claim credit, or exclude it from taxation.

OK, I’ve an extra hour today and I’m bored anyway, so I’ll play the silly games.

First, if the UK SP is to be exempt, it must still be reported on the 1040 somewhere, and, as you propose, it’s to be exempted by an 8833. (US SS, although exempt from US tax, the gross amount received is still declared on line 20a of the 1040/2017 version.) What treaty article are you going to claim which states the UK SP is exempt from US taxation by the treaty and what are you going to give for an explanation (cite) on line 6?

Second, let’s consider Jane,  a USC resident in the UK who has a £4,000/yr. UK State Pension in addition to an £9,000/yr. UK company pension which she began claiming several years ago (Jane is less than 65 years of age but UK rules were different at that time). Jane has no other income, worldwide, from any sources. The UK State Pension is taxed through the UK company pension, as normal.

Since there are no 2018 IRS tax tables available yet, we’ll use 2017. Jane’s 2017 UK personal Allowance is £11,375 (computed for the US tax year 25% 16/17 and 75% 17/18) and therefore £1,625 of Jane’s income will be taxed at 20%, or £325, which equates at 2017 IRS rates (1.24) to $403 to use as foreign tax credits on 1116.

Jane’s gross UK income of £13,000 equates to $16,120 at 2017 rates. The 2017 standard deduction equals to $6,350 and the personal exemption is $4,050, which totals to $10,410 and leaves a US taxable income of $5,710. At MFS and using the 2017 tax tables, this equates to $573 US tax due.

$573 US tax due minus $403 UK tax credits on 1116 leaves Jane owing $170 to the IRS.

Even at the 2018 increased std. deduction ($12,000 MFS and no allowable exemptions) but using the 2017 tax table since it’s all that’s available, Jane would still owe the IRS $10.

NOW, if, as you claim, no US tax can ever be due since the UK SP was fully taxed,  where does the $170 IRS tax due come from since the UK SP contributed, along with the company pension, to the total amount of taxable income in both countries?

For interest, here’s HMRC’s take on the treatment of social security benefits under the UK-US DTT:

https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876

For HMRC nothing did change (2003). Both the UK SP and the US SS are taxable in the resident country - the UK.

OK, I’ve an extra hour today and I’m bored anyway, so I’ll play the silly games.

I don’t think there’s any call for speaking to me in that way.  It’s not a silly game, it’s a discussion.

First, if the UK SP is to be exempt, it must still be reported on the 1040 somewhere, and, as you propose, it’s to be exempted by an 8833. (US SS, although exempt from US tax, the gross amount received is still declared on line 20a of the 1040/2017 version.) What treaty article are you going to claim which states the UK SP is exempt from US taxation by the treaty and what are you going to give for an explanation (cite) on line 6?

17.3, obviously.  Or since reporting is waived, not file 8833.

Jane’s 2017 UK personal Allowance is £11,375

Not if Jane is receiving a UK State Pension.  HMRC taxes the State Pension by reducing the Personal Allowance, thus changing the tax code.

For HMRC nothing did change (2003). Both the UK SP and the US SS are taxable in the resident country - the UK.

Did you read this bit?

Article 17(3) now specifically provides for exclusive residence-country taxation of social security benefits.

I don’t think there’s any call for speaking to me in that way.  It’s not a silly game, it’s a discussion.

Easy, nothing personal. This isn't the politics forum. It's a silly game for me to put together all those figures.

17.3, obviously.

And what wording contained in 17.3 are you going to use?

Or since reporting is waived, not file 8833.

Are you saying not to report the UK SP anywhere on the 1040? I'll give you a little help, 8833 may be waived for US SS if a totalisation agreement exists, as in the UK/US. It's up to the individual, but the treaty article applying may still be noted on 1040 on the line (probably 21) where the UK SP would be declared as having $0 taxable income.

Not if Jane is receiving a UK State Pension.  HMRC taxes the State Pension by reducing the Personal Allowance, thus changing the tax code.

Refer to the HMRC calculations for the UK tax year. I think you'll find HMRC list total UK income, and then subtracts the full PA for the tax year. Yes, the tax code is changed, but that is to allow the tax on the UK SP to be taken by the provider of and from the UK company pension (or any other separate UK income, if it exists).

Did you read this bit?

Yes.

Are you saying not to report the UK SP anywhere on the 1040?

It’s not me that says it, it’s the IRS:

Foreign-Source Income
You must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty.

I'll give you a little help, 8833 may be waived for US SS if a totalisation agreement exists, as in the UK/US. It's up to the individual, but the treaty article applying may still be noted on 1040 on the line (probably 21) where the UK SP would be declared as having $0 taxable income.

There you go, then.  Note away, if that’s your preference.

Refer to the HMRC calculations for the UK tax year. I think you'll find HMRC list total UK income, and then subtracts the full PA for the tax year. Yes, the tax code is changed, but that is to allow the tax on the UK SP to be taken by the provider of and from the UK company pension (or any other separate UK income, if it exists).

Sigh.  Yes.  Because the tax code has been changed by HMRC in order to take the tax due on the State Pension through the PAYE system.

if, as you claim, no US tax can ever be due since the UK SP was fully taxed, 

This is rather an important point; it’s not just something that “I claim.”

If you’ve already been fully taxed on a pension or other item of UK-source income, you’re done.  You claim the tax credits and don’t pay any further tax to the US. 

If you haven’t been fully taxed on the pension or whatever, you claim the tax credits for the tax you’ve paid (if any), and may owe additional tax to the US.

Otherwise, it would be double taxation (as defined by the treaty).  The treaty doesn’t allow double taxation (as defined by the treaty).  That’s why it’s called a Double Taxation Treaty.

That’s why US citizens living in high-tax countries like the UK very often end up not actually owing any US tax at all, year after year - even if none of their income is exempt by treaty.

In the case of the UK State Pension, the UK concedes its primary right to tax the pension, if the pension is being paid to a resident of the US (regardless of the taxpayer’s nationality).  The UK does not concede its primary right to tax the pension, if the pension is being paid to a resident of the UK.

In the case of the US SS, the US concedes its primary right to tax the pension, if the pension is being paid to a resident of the UK (regardless of the taxpayer’s nationality).  The US does not concede its primary right to tax the pension, if the pension is being paid to a resident of the US.

theOAP said: Are you saying not to report the UK SP anywhere on the 1040?
underfall said: It’s not me that says it, it’s the IRS: Foreign-Source Income
You must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty

Which, from the instructions for 8833, means an 8833 may not be required. But I asked about reporting the UK SP on the 1040, not the 8833.



Sorry, I'm trying to listen to the Mexican Grand Prix at the same time I'm responding.

This is rather an important point; it’s not just something that “I claim.”

If you’ve already been fully taxed on a pension or other item of UK-source income, you’re done.  You claim the tax credits and don’t pay any further tax to the US.

Generally, yes, you may not owe any US tax attributable to those particular items, but that's a bold statement to make for all returns and all situations (as displayed by Jane's situation in the post above).   

Otherwise, it would be double taxation (as defined by the treaty).  The treaty doesn’t allow double taxation (as defined by the treaty).  That’s why it’s called a Double Taxation Treaty.

I'm afraid I have some very bad news for you. Double Taxation can, and does, exist for some filers. It all depends on the individual situations.

In the case of the UK State Pension, the UK concedes its primary right to tax the pension, if the pension is being paid to a resident of the US (regardless of the taxpayer’s nationality).  The UK does not concede its primary right to tax the pension, if the pension is being paid to a resident of the UK.

In the case of the US SS, the US concedes its primary right to tax the pension, if the pension is being paid to a resident of the UK (regardless of the taxpayer’s nationality).  The US does not concede its primary right to tax the pension, if the pension is being paid to a resident of the US.

Yes, and.......?

I asked about reporting the UK SP on the 1040, not the 8833.

As per 1040 instructions, quoted above, you’re not required to report foreign-source income that’s exempt by law or treaty.

you may not owe any US tax attributable to those particular items, but that's a bold statement to make for all returns and all situations

It’s a general principle: the aim of a double taxation treaty is to avoid double taxation; usually, by agreement as to which country will tax, and which will give relief, in the various circumstances specified in the treaty.  If a taxpayer believes he is being double-taxed, he is entitled to request assistance from the Competent Authority, who, if it considers double-taxation as defined by the treaty may be happening, will confer with the Competent Authority of the other country.  The taxpayer plays no part, and has no right of appeal, yet the procedures have indeed been known to result in a Protocol changing the treaty.
(https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19939zd)

I’m afraid I have some very bad news for you. Double Taxation can, and does, exist for some filers. It all depends on the individual situations.

Undoubtedly there are situations which feel like double taxation; but don’t count as double taxation as defined by the treaty.  Very unfair, I agree.

Yes, and.......?

Since in the case of the UK State Pension the UK both retains and fully exercises its right to tax the State Pension it pays out of public funds to UK residents, the US doesn’t get a look-in.

For interest, here’s HMRC’s take on the treatment of social security benefits under the UK-US DTT:

https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876

Thanks.  I thought I’d read it somewhere.  So without 17.3 (or similar provision), some UK residents receiving US SS might need to claim UK tax relief for US tax withheld.

SS is paid to me directly to my UK bank account. The government (US) does not withhold any tax. There is an IRS brochure, sorry I can't remember which one, that states the UK is one of the countries where this is the case. When I was doing my research on IRS things, a treaty statement was not required for this income. Possibly it might be taxed if going to a US bank account, not sure - but when I registered for SS I registered my address as living in the UK, which I would think would be the deciding factor on it being taxed by the IRS or not.

As I've mentioned previously in this thread, this is a common topic on this and other expat forums where strong arguments are made for all viewpoints, on both topics - US taxation of the UK State Pension for USCs resident in the UK as well as the debate on UK lump sums being taxable in the US. Both topics can be found on forums for professional tax preparers, and even there consensus can not always be reached.

It's very normal for everyone to agree to disagree no matter which forum, punters or pros.

SS is paid to me directly to my UK bank account. The government (US) does not withhold any tax.

No - my mistake.  Apologies. The US concedes its taxing rights when SS is paid to a UK resident.

There is an IRS brochure, sorry I can't remember which one, that states the UK is one of the countries where this is the case. When I was doing my research on IRS things, a treaty statement was not required for this income.

No.  It’s the same as with the UK State Pension paid to a US resident: the source country stops withholding, so no need to claim relief.

Possibly it might be taxed if going to a US bank account, not sure - but when I registered for SS I registered my address as living in the UK, which I would think would be the deciding factor on it being taxed by the IRS or not.

That, plus the fact that it gets paid into a UK bank account, I suppose.  (Edit - what I mean is, maybe it takes both factors - UK address and UK bank account)