# UK Lifetime ISA and US Tax obligations



## the_mighty_tim (Jan 10, 2014)

Hi all

I recently discovered that the UK government offer up something called a Lifetime ISA (https://www.gov.uk/lifetime-isa), primarily designed for those buying their first house or saving for their retirement. Since I'm still under 40 (for another couple of years anyway!), I figured I might investigate this further.

However, as a filer of US taxes, it's not clear to me how this would work when filling out a tax return. The regular interest I assume would fall under "passive income" (indeed, that's how I've been reporting the interest from my other savings accounts, rightly or wrongly). But I'm not sure whether the 25% government bonus would fall under general or passive income (or if there's some weird third category for this).

The reason I ask is that I've got plenty of general category tax credits saved up through the filing of Form 1116s, however I've exhausted my passive tax credits (as in the UK, I don't pay tax on the first £1000 of interest, meaning I end up with a small tax bill to the US every year [I have tried to zero it down but to no avail, unless there's something I'm doing wrong, but anyway]). 

Any advice, recommendations, stories of experience would be appreciated


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## Jca1 (Aug 7, 2019)

I think accountants and the IRS would probably categorize this government bonus as passive income for foreign tax credit purposes. I don't know of a test case to compare against, but maybe someone else here does. The IRS treats both domestic bank bonuses and foreign government benefits as unearned or passive income, so I would be surprised if they'd state otherwise about a foreign government bank bonus. I don't think there is anything in the tax treaty that would help you either.

This type of account is probably not reported to the IRS. ISAs are exempt from the bank side of FATCA reporting (not the taxpayer FBAR/8938 side), but we don't have access to the actual information HMRC sends to the IRS.

From an investing perspective, I'm not sure the Lifetime ISA makes sense for a compliant US taxpayer unless you plan to hold the money in cash to withdraw for a home purchase within a couple years or speculate on individual non-PFIC stocks. Otherwise you're trapping the money in a low-return account long-term, or getting into PFIC problems.


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## the_mighty_tim (Jan 10, 2014)

Thanks for the advice and information. I bought my first house last year (sadly before I discovered the existence of these things) so I was planning on using it as a retirement fund, but from what you're saying, that's probably not a good idea for me (unfortunate, since it looked like quite a good idea!)


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