# IRA Tax Withholding??



## Jimlad (Jun 14, 2016)

Hi guys,

Does anyone happen to know if my IRA Distributions have to have tax paid in the States by way of a withholding tax%?

Or can I include it as part of my UK tax Return? I just thought that as it is a tax deferred retirement plan that tax would have to be paid in the US regardless of my tax residency in the UK.

I'd really appreciate any help or advice.

Cheers

Jimlad


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## Bevdeforges (Nov 16, 2007)

Unless the UK tax treaty is significantly different from most of the others, you would normally wind up paying US income taxes (only) on any distributions. And many of the investment companies that hold IRA funds will arrange for the withholding at rates you determine. (Unless you're not a US citizen, in which case you will have to have withholding at 30%). 

I defer, however, to whoever has more knowledge regarding the US-UK tax treaty.
Cheers,
Bev


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## ForeignBody (Oct 20, 2011)

I am not claiming any expertise in this but my reading of the UK treaty is that it is taxable where the taxpayer resides. From the technical explanation:

_the State of residence of the beneficial owner has the exclusive right to tax pensions and other similar remuneration_

This is specifically about non government or social security pensions.


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## iota2014 (Jul 30, 2015)

You could try asking at US - UK Taxes


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## iota2014 (Jul 30, 2015)

ForeignBody said:


> I am not claiming any expertise in this but my reading of the UK treaty is that it is taxable where the taxpayer resides. From the technical explanation:
> 
> _the State of residence of the beneficial owner has the exclusive right to tax pensions and other similar remuneration_
> 
> This is specifically about non government or social security pensions.



The saving clause complicates things. The Technical Disexplanation says:



> Subparagraph 1(a) is subject to the saving clause of paragraph 4 of Article 1 (General Scope) while subparagraph 1(b) is not, by reason of the exception in subparagraph 5(a) of Article 1. Thus, a U.S. citizen who is a resident of the United Kingdom and receives a pension will be subject to U.S. tax on the payment, notwithstanding the rules in those paragraphs that give the State of residence of the recipient the exclusive taxing right.


So the US wants to tax it, but does the UK also want to tax it? If so, the OP may need to pay the UK and fob the US off with a UK tax credit. If the UK will give a tax credit - it generally won't, where the US is claiming taxation rights solely due to the Saving Clause.

If it was me, I'd ask on the other board, where there's probably going to be someone who knows, and has done it.


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## JustLurking (Mar 25, 2015)

iota2014 said:


> So the US wants to tax it, but does the UK also want to tax it? If so, the OP may need to pay the UK and fob the US off with a UK tax credit.


That one, I believe. The silver bullet here is Article 24, Relief from Double Taxation, and there is a (garbled!) example in the Technical Disexplanation you refer to. Article 24 is not negated by the saving clause.

The incantation required is to "re-source" US source income to the UK. (Put less technically, to pretend that a chunk of this IRA income is UK source, even though it patently is not.) Once it is re-sourced you can then claim a US foreign tax credit against the UK tax paid on IRA income.

Requires forms 8833 and 1116, and of course there is a potential AMT complication (after all, why do something once when twice will suffice?). And timing can be problematic due to offset tax years. So... fiddly, then, but can be worked around with care. It is likely, although not certain, that the credit for UK tax on this IRA income will wipe out all of its US tax liability.

The OP will want to be sure to take advantage of the special UK rule that allows 10% of foreign pension payments to be excluded from income for UK tax purposes.


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## BBCWatcher (Dec 28, 2012)

We're talking about Traditional IRAs here, I assume. Qualified withdrawals from a Roth IRA are U.S. tax free (but still subject to withholding if you're not a U.S. person).

I don't know why you'd even bother with the treaty if the treaty is as described. You can just pay the U.S. tax then take a foreign tax credit on the U.K. side.


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## iota2014 (Jul 30, 2015)

BBCWatcher said:


> We're talking about Traditional IRAs here, I assume. Qualified withdrawals from a Roth IRA are U.S. tax free (but still subject to withholding if you're not a U.S. person).
> 
> I don't know why you'd even bother with the treaty if the treaty is as described. You can just pay the U.S. tax then take a foreign tax credit on the U.K. side.


There is no option called "not bothering with the treaty", how could there be since both countries have a claim to tax the income - the US as source country, the UK as residence country. The treaty resolves the question, in the case of pensions, in favour of the residence country (the UK) - exclusively. 

And that would be that, if it weren't for America's wretched CBT confusion. A non-US-citizen, resident in the UK, could get a zero withholding rate on the IRA and pay HMRC its due and be done with it.

A US citizen can't get a zero withholding rate, and also can't claim the US withholding against the UK tax liability, since the treaty gives the UK the taxing rights. As so often, under CBT, the USC is faced with accepting the double taxation, or finding a way to claim a refund of the tax withheld by the US. 

Sounds like JustLurking has identified the way to do this, in the OP's case - "re-source" the income to the UK (i.e., pretend it's UK-source income), and then, on the basis of this pretence, claim credit against the US tax liability for the tax that has already been withheld by the US, thus generating - eventually - a refund, or partial refund, of the withheld tax.

All this, just to allow the US to keep up the pretence that it's not granting treaty benefits to a US citizen.


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## Bevdeforges (Nov 16, 2007)

BBCWatcher said:


> We're talking about Traditional IRAs here, I assume. Qualified withdrawals from a Roth IRA are U.S. tax free (but still subject to withholding if you're not a U.S. person).
> 
> I don't know why you'd even bother with the treaty if the treaty is as described. You can just pay the U.S. tax then take a foreign tax credit on the U.K. side.


Assuming that the UK allows foreign tax credits in a manner similar to the US. Not all countries do.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

iota2014 said:


> There is no option called "not bothering with the treaty"....


Generally there is, that tax filers can waive their treaty option. Which might make a heck of a lot of sense here, which is why I mentioned it.


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## JustLurking (Mar 25, 2015)

BBCWatcher said:


> We're talking about Traditional IRAs here, I assume. Qualified withdrawals from a Roth IRA are U.S. tax free (but still subject to withholding if you're not a U.S. person).


Not if modified by treaty. The UK treaty specifies 0% withholding on pension payments.



BBCWatcher said:


> I don't know why you'd even bother with the treaty if the treaty is as described. You can just pay the U.S. tax then take a foreign tax credit on the U.K. side.


Not correct. You are making dangerously wrong statements here. Iota2014 explains above.

The UK grants foreign tax credits in general, in the same way as does the US, for taxes that cannot otherwise be relieved, but to preserve primacy of tax to the country of residence it specifically is not required to give credits for US tax applied _solely due to the saving clause_. In this case the US must give the credit for UK tax. See Article 24 paragraph 6 of the US/UK tax treaty.

Unlike most of the rest of it, this part of the treaty seems weirdly clear to me, at least in intent if not in actual application. Or maybe I have just spent too long reading this type of stuff.


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## iota2014 (Jul 30, 2015)

BBCWatcher said:


> Generally there is, that tax filers can waive their treaty option. Which might make a heck of a lot of sense here, which is why I mentioned it.


I don't follow. What option are you thinking of?


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## JustLurking (Mar 25, 2015)

BBCWatcher said:


> Generally there is, that tax filers can waive their treaty option. Which might make a heck of a lot of sense here, which is why I mentioned it.


Nope, makes no sense at all. The result would be double tax on IRA payments.


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## BBCWatcher (Dec 28, 2012)

OK, I was referring to _general possibilities_ on the U.S. side. Looking at the U.K. side specifically, HMRC appears not to allow a foreign tax credit if there's a tax treaty that offers relief. If the U.S.-U.K. tax treaty offers relief on this Traditional IRA income _then_ the U.K. side (at least) means you're going to take the tax treaty benefit.

I'm OK with that, of course, but I'm merely looking at all possibilities. That possibility seems to be foreclosed on the U.K. side.


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## JustLurking (Mar 25, 2015)

BBCWatcher said:


> OK, I was referring to _general possibilities_ on the U.S. side. Looking at the U.K. side specifically, HMRC appears not to allow a foreign tax credit if there's a tax treaty that offers relief. If the U.S.-U.K. tax treaty offers relief on this Traditional IRA income _then_ the U.K. side (at least) means you're going to take the tax treaty benefit.


There are lots of _general_ possibilities, but they are irrelevant. The only _sensible_ possibility is to follow the route traced out by the tax treaty for precisely this situation. This flowchart shows the absurd complexity of how US/UK treaty works for pensions, CBT and the inevitable saving clause being most of the cause of this complexity.



BBCWatcher said:


> I'm OK with that, of course, but I'm merely looking at all possibilities. That possibility seems to be foreclosed on the U.K. side.


This is not a revelation, nor is it asymmetrical. If the situation were reversed, the US would also foreclose this option since the US limits foreign tax credits if you "do not exercise your available remedies to reduce the amount of foreign tax to what you legally owe."


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## iota2014 (Jul 30, 2015)

The re-sourcing rule isn't actually a treaty benefit. The treaty benefit (available to non-USC UK residents but not to USC UK residents) is exemption from source-country taxation. 

The re-sourcing rule is just a gimmick employed by the US to get round the US laws that would otherwise prevent the US tax agency from refunding the US tax that has been wrongly withheld. It really makes no sense at all for the US to grant a "foreign tax credit" against tax withheld by the US on US-source income, but that's CBT for you. 

The UK ignores the whole charade, and just charges the UK tax due.


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## iota2014 (Jul 30, 2015)

JustLurking said:


> This flowchart shows the absurd complexity of how US/UK treaty works for pensions, CBT and the inevitable saving clause being most of the cause of this complexity.


It's a good illustration of the complexity, but not to be relied on (IMO). That's the tax firm's interpretation of the treaty, it's not based on IRS rulings or tax court rulings. If I'd followed that tax chart, as I was advised to do, I would have ended up paying several thousand pounds in back taxes that in _my_ interpretation, were never due.


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