# Lump-sum distribution



## byline (Dec 5, 2011)

From what I understand, the IRS treats the lump-sum distribution from a U.S. traditional IRA (Individual Retirement Account) as "income" for a surviving beneficiary. Correct?

Does the CRA also treat this U.S. lump-sum distribution as income, making it taxable in Canada?


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## byline (Dec 5, 2011)

I found the answer here. Yes, to both of my questions:
_
When an IRA is inherited by a beneficiary living in Canada, the amount paid from the IRA to the individual is typically taxable in Canada—in addition to being subject to U.S. tax. When filing a tax return in Canada, you must include the distribution from the IRA with your income. This will allow you to claim a foreign tax credit for the taxes paid to the U.S, including any U.S estate taxes paid on the IRA._

And, I see now that I should have had 15 percent withheld, not the 12 percent I selected. Oh well, now I still owe 3 percent. And I have to fill out an extra form (IRS Form W-8BEN) to reduce it from 30 to 15 percent income tax withholding.


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## byline (Dec 5, 2011)

Well, sadly, upon reading the actual form, it looks like it is not something I submit to the IRS, but was supposed to have submitted to the withholding agent or payer, presumably prior to them giving me the lump-sum distribution. I didn't know about this. So now, instead of owing 15 percent, I will owe 30 percent because I didn't submit this form to the withholding agent/payer?


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## byline (Dec 5, 2011)

OK, now I'm confused. FORM W-8 BEN says, "Do NOT use this form if:

• You are a U.S. citizen or other U.S. person, including a resident alien individual

I'm a U.S. citizen living in Canada. It says to use Form W-9 instead. That form is a Request for Taxpayer Identification Number and Certification. I don't need an identification number because I already have a Social Security Number. So, how do I report this on my U.S. income tax return? And do I owe 30 percent in income tax on this inherited IRA?

I guess I shouldn't be surprised that this is so confusing. It always is.


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## Bevdeforges (Nov 16, 2007)

byline said:


> I'm a U.S. citizen living in Canada. It says to use Form W-9 instead. That form is a Request for Taxpayer Identification Number and Certification.


Both the W-9 form and the W-8 BEN are forms asking for your "Taxpayer Identification Number" and certification of your status for the financial institution that holds your retirement fund. As a US Citizen, you should return a W-9 form to the financial institution paying out your lump sum, giving them your US SS (which IS your Taxpayer Identification Number) and certifying if any of the other conditions mentioned on the form are valid. (Leave the various sections blank if you're not into claiming any special circumstances.)

They then use the information you have given them to properly declare the transaction to the IRS so that they can send you a 1099, which should give you the information you need to declare the transaction on your US tax returns. The W-9 is a CYA document for the financial institution so that they can "show" the IRS (if asked) that they did contact you about getting the information required to properly record the transaction. If they withhold the incorrect amount from your payout, you can claim back the excess withholding on your tax return.


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## byline (Dec 5, 2011)

Bevdeforges said:


> Both the W-9 form and the W-8 BEN are forms asking for your "Taxpayer Identification Number" and certification of your status for the financial institution that holds your retirement fund. As a US Citizen, you should return a W-9 form to the financial institution paying out your lump sum, giving them your US SS (which IS your Taxpayer Identification Number) and certifying if any of the other conditions mentioned on the form are valid. (Leave the various sections blank if you're not into claiming any special circumstances.)
> 
> They then use the information you have given them to properly declare the transaction to the IRS so that they can send you a 1099, which should give you the information you need to declare the transaction on your US tax returns. The W-9 is a CYA document for the financial institution so that they can "show" the IRS (if asked) that they did contact you about getting the information required to properly record the transaction. If they withhold the incorrect amount from your payout, you can claim back the excess withholding on your tax return.


Thanks, Bev. Here's the problem: The payout has already taken place, back in August. I was not aware of this form, and neither it nor the 30 percent flat income tax rate were mentioned in the paperwork sent to me. (In July I contacted the tax professional who handled my back tax returns in 2011 to get me in compliance, and asked him how I should proceed with this. He did not mention the form or the 30 percent flat income tax rate, but rather said the tax rate would be based on my total income. He said I would simply report it on the IRA distributions line on Form 1040.) I elected to have 12 percent withheld, erroneously basing my withholding on the U.S. income tax bracket.

Should I send the credit union (who handled the inherited IRA) this form retroactively? Or is there any point now? And how do I report this on my U.S. tax return? I assume I will have to pay the difference between the 12 percent I had withheld and the 30 percent flat income tax rate.


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## Bevdeforges (Nov 16, 2007)

If you're a US citizen, there should be no 30% tax - just your normal tax rate. What you do, in any event, is to simply report the distribution on your tax return and include the amount of the tax withheld (you should get a 1099 of some variety for the transaction) on whatever line it is where you report tax already paid. If they over withheld, you'll get the difference back. If they didn't withhold enough, you pony up the difference when you file your taxes.

But the 30% flat tax only applies to non-resident aliens. If you're a US citizen, you pay the normal rates based on your income. Basically, what the tax guy told you is correct. The tax rate will depend on your total income and you just report the income on the IRA distributions line, and offset the amount of taxes withheld per the 1099 you receive from the Credit Union. (Most financial institutions will withhold 30% on all distributions sent outside the US - UNLESS they have a W8-BEN or a W-9 on file for you.)


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## byline (Dec 5, 2011)

Bevdeforges said:


> If you're a US citizen, there should be no 30% tax - just your normal tax rate. What you do, in any event, is to simply report the distribution on your tax return and include the amount of the tax withheld (you should get a 1099 of some variety for the transaction) on whatever line it is where you report tax already paid. If they over withheld, you'll get the difference back. If they didn't withhold enough, you pony up the difference when you file your taxes.
> 
> But the 30% flat tax only applies to non-resident aliens. If you're a US citizen, you pay the normal rates based on your income. Basically, what the tax guy told you is correct. The tax rate will depend on your total income and you just report the income on the IRA distributions line, and offset the amount of taxes withheld per the 1099 you receive from the Credit Union. (Most financial institutions will withhold 30% on all distributions sent outside the US - UNLESS they have a W8-BEN or a W-9 on file for you.)


Ah, thank you so much, Bev! So, what he told me was correct.

The credit union sent me a form asking me to specify how much I wanted to withhold from the gross withdrawal amount. They didn't seem to be aware of withholding 30 percent for me, a U.S. citizen living in Canada. I chose 12 percent federal withholding.

I _think_ my calculation for what to withhold was correct. Because my wages are not taxable on the U.S. side, courtesy of the U.S./Canada Tax Treaty and the subsequent foreign earned income exclusion, I only calculated the income tax owing on the IRA, itself, based on the U.S. income tax bracket. But maybe I calculated this wrong. Should I have included my Canadian wage income in the calculation?

On the Canadian side, I will owe taxes, but I can claim a foreign tax credit for the U.S. income taxes I paid.


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