# Questions on US tax for UK resident



## arlekin

Hello fellow slaves of the US tax system (fellow Americans)

I am US citizen currently living in the UK. As most of us, I am very confused by the US tax code and spend thousands of $$$ and hours of my time every year on the subject. I am obviously not a fan of the US tax system and am considering renunciation as I believe I am unfairly taxed by the US government – I live outside the US more than 10 years, rarely visit the country (maybe once every two years for 2 weeks to see some friends), yet I still need to file and (most annoyingly) pay taxes to the US government. I consider this extortion, yet this is not a subject of my message. I believe many of us share the same boat and hope that someday the US government stops penalising us for choosing to live abroad. 

There are several questions which I am trying to understand and clarify for myself. I spent a lot of time on the tax code and the UK/US double tax treaty; however, the language in both is extremely confusing (on purpose?) and I was not successful to find any good analysis of the treaty anywhere online. 

I still do not understand on what basis the US federal government taxes its citizens on their worldwide income and considers its citizens who are not residents as residents for tax purposes? Is there a clause in the Constitution for this? Any law passed by our beloved Congress (anyone has a link to the specific clause)? Are there any Supreme Court rulings on the subject? I could not find anything.

I am US citizen living in the UK. I am a resident of the UK and am not a resident of the US (for many years). I have a residence permit in the UK and do not have any intention to return to the US. I am employed by non-US company and do not have any US source income. I am compensated fairly well (above FEIE which again I believe should be adjusted based on location, same as housing exclusion - $100,000 in Sri Lanka is definitely the same $100,000 in the UK) and have both defined contribution (to which both my employer and I contribute with employer matching) and defined benefit (a lump sum which I will receive once I separate from the employer) plans.

There are four questions which I am trying to clarify: 

1.	Income: according to the article 14(1) of the UK/US treaty, income (such as wages) is taxable only in the country where one is a resident. Why is it then still taxable for the US purposes - even if the US considers me a resident (which I am not), I cannot be a resident of both countries at the same time? I am aware of FEIE and foreign tax credits; however, the UK/US treaty clearly states that wages are only taxable in the country of residence. For instance, if the income is exempt from the UK tax (for whatever reason) while I live in the UK, why is it still taxable in the US? Why doesn't the treaty apply?

2.	Pensions: let’s say I leave my employer this year and will be entitled to receive X amount of money for Y years of service under the defined benefit plan. This is a lump sum. According to articles 17(1)(a) and 17(2) of the treaty, “pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State”. Let’s say calculated tax for the UK is $10,000 and for the US is $15,000 – why do I need to pay the difference of $5,000 to the US if, according to this clause 17(1), it is taxable only in the state of residence? What happens if this lump sum is tax exempt in the UK – do I have to pay $15,000 to the US even with the UK/US treaty? What specific clause applies to the US citizens?

3.	Lump sum payment: let’s say I am made redundant and am paid a severance payment, which is tax exempt in the UK. Will I be fully liable for the US taxes on this amount? What happens if it is a mutual voluntary separation with a lump sum payment? 

4.	Employer contributions to the pension schemes: for the defined contribution plan, my employer matches my contribution. Let’s say we each contribute $10,000 per year. This is not a qualified US plan (such as 401k), but is not taxed in the UK. How does the treaty protect me from US taxation or does it? This is covered in article 18; however, the language is very confusing. Do I include my contribution as income for the US tax purposes? Do I include the employer’s contribution as income as well ?

I will really appreciate any ideas/thoughts on the above. If you have a good UK/US tax expert who charges reasonable fees, I will really appreciate contacts. 

Many thanks.


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## Nononymous

Move any assets from the US to the UK, stop filing US taxes, stop paying US taxes, get UK citizenship and renounce US citizenship so that your UK bank won't close your account, ignore any letters you receive from the IRS. They won't send a black helicopter to hunt you down.


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## iota2014

arlekin said:


> There are several questions which I am trying to understand and clarify for myself. I spent a lot of time on the tax code and the UK/US double tax treaty; however, the language in both is extremely confusing (on purpose?) and I was not successful to find any good analysis of the treaty anywhere online.


The "Technical Explanation" (https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf) often gives some insight into what it is the IRS is hoping you'll do.

In particular, at the end of the commentary for each Article of the Treaty, the T.E. has some comments on the interactions between that Article and other Articles of the Treaty. This usually boils down to explaining which bits don't apply for US citizens.



> I am US citizen living in the UK. I am a resident of the UK and am not a resident of the US (for many years). I have a residence permit in the UK and do not have any intention to return to the US.


If you want to renounce your US citizenship, you'll need citizenship of the UK or some other country, otherwise you'll be stateless.



> There are four questions which I am trying to clarify:
> 
> 1.	Income: according to the article 14(1) of the UK/US treaty, income (such as wages) is taxable only in the country where one is a resident. Why is it then still taxable for the US purposes - even if the US considers me a resident (which I am not), I cannot be a resident of both countries at the same time? I am aware of FEIE and foreign tax credits; however, the UK/US treaty clearly states that wages are only taxable in the country of residence. For instance, if the income is exempt from the UK tax (for whatever reason) while I live in the UK, why is it still taxable in the US? Why doesn't the treaty apply?


Most treaty benefits aren't available to US citizens. See Article 1, Paragraph 4 (otherwise known as the Saving Clause). See also Paragraph 5 for the exceptions (benefits which USCs can claim).



> 2.	Pensions: let’s say I leave my employer this year and will be entitled to receive X amount of money for Y years of service under the defined benefit plan. This is a lump sum. According to articles 17(1)(a) and 17(2) of the treaty, “pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State”. Let’s say calculated tax for the UK is $10,000 and for the US is $15,000 – why do I need to pay the difference of $5,000 to the US if, according to this clause 17(1), it is taxable only in the state of residence?


 If I recall correctly, 17(1) doesn't apply for USCs due to the Saving Clause. Check the treaty and the T.E.



> What happens if this lump sum is tax exempt in the UK – do I have to pay $15,000 to the US even with the UK/US treaty?


IIRC, 17.2 does apply for USCs. Check treaty and T.E.

My personal view: the renunciation fee, outrageous as it is, nevertheless is much better value than paying money every year for assistance in completing US tax forms.


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## arlekin

Nononymous said:


> Move any assets from the US to the UK, stop filing US taxes, stop paying US taxes, get UK citizenship and renounce US citizenship so that your UK bank won't close your account, ignore any letters you receive from the IRS. They won't send a black helicopter to hunt you down.


It is sad that the above scenario is the only realistic option for many people to avoid extortion. Very sad what they do to own citizens.


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## arlekin

Iota, many thanks for the technical explanation. This is indeed what I was looking for (explanation/analysis of the treaty in normal language). However, based on your response, the treaty is mostly worthless for the US citizens, except for para 5 only  how ironic - UK citizens get all sort of breaks, yet US citizens are again screwed. 

I wonder if they have been supreme court rulings on the matter.


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## Nononymous

arlekin said:


> It is sad that the above scenario is the only realistic option for many people to avoid extortion. Very sad what they do to own citizens.


It's only sad if you value the US citizenship. 

The big issue is access to banking services in your country of residence. The rest of it, filing and paying taxes, you can basically ignore if you have a second citizenship, and no US assets or other financial ties.


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## arlekin

Nononymous said:


> It's only sad if you value the US citizenship.
> 
> The big issue is access to banking services in your country of residence. The rest of it, filing and paying taxes, you can basically ignore if you have a second citizenship, and no US assets or other financial ties.


I will really appreciate if someone can recommend a good UK/US tax expert as I need professional advice on these issues, particularly on the defined benefit plan and lump sum separation payment.


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## iota2014

arlekin said:


> I wonder if they have been supreme court rulings on the matter.


Cook v. Tait, 1925, upheld constitutionality of citizenship-based taxation.

(Interesting article on Cook v. Tait - unfortunately only available via JStor as far as I know:

https://www.jstor.org/stable/1065765?seq=1#page_scan_tab_contents)

There are no SCOTUS rulings on the Saving Clause, as far as I know. Perhaps not really a SCOTUS matter as the treaty deals with benefits, not rights. The purpose of the Saving Clause is to discourage USCs from investing abroad and "encourage" them to invest in the US instead.


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## arlekin

iota2014 said:


> Cook v. Tait, 1925, upheld constitutionality of citizenship-based taxation.
> 
> (Interesting article on Cook v. Tait - unfortunately only available via JStor as far as I know:
> 
> https://www.jstor.org/stable/1065765?seq=1#page_scan_tab_contents)
> 
> There are no SCOTUS rulings on the Saving Clause, as far as I know. Perhaps not really a SCOTUS matter as the treaty deals with benefits, not rights. The purpose of the Saving Clause is to discourage USCs from investing abroad and "encourage" them to invest in the US instead.


The way I see it, the purpose is to punish subjects for leaving their master... You can leave, but you will pay me for the rest of your life. The way I see it this is clearly a penalty on emigration. Thanks for the links - will read tonight.


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## iota2014

arlekin said:


> The way I see it, the purpose is to punish subjects for leaving their master... You can leave, but you will pay me for the rest of your life.


Not so. You have the option to renounce, or you can just not file. The UK has no collection agreement with the US. 

CBT and FATCA are certainly a pain but minor compared to things some governments inflict on their citizens. 



> The way I see it this is clearly a penalty on emigration.


Ah, perhaps you haven't yet read up on the exit tax. *That* is the US tax on emigration.


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## celticweb

arlekin said:


> I will really appreciate if someone can recommend a good UK/US tax expert as I need professional advice on these issues, particularly on the defined benefit plan and lump sum separation payment.


Unless you have very complicated affairs, stay clear from consulting a tax advisor. With maybe a few exceptions, they are not going to be on your side and will create a mess that you can't untangle. Interpret the rules as you see fit within the obscure language that exists and if you must file, file yourself.

However I recommend only two courses of actions that are realistically workable, don't file and ignore it or file with the intention of renouncing. I have found that these are the only two options that work. Those that enter the tax system will find it difficult to continue to maintain compliance. it's just not possible anymore. I tried but it was going to interfere with too many aspects of my life, like even taking up a directorship which was the straw that broke the camel's back for me. plus of course pressure from my non US citizen spouse to get out of the system and inheriting off each other without having to set up complicated trusts. 

Before all this, US citizenship was just something dormant in my life that might come in handy someday. Sadly that was not the case anymore. 

Wait to see what happens in the next few months before making any compliance efforts. unless you are already in the system, then i would just try filing yourself and submit reasonable looking returns without over complicating things.


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## arlekin

iota2014 said:


> Not so. You have the option to renounce, or you can just not file. The UK has no collection agreement with the US.
> 
> CBT and FATCA are certainly a pain but minor compared to things some governments inflict on their citizens.
> 
> 
> 
> Ah, perhaps you haven't yet read up on the exit tax. *That* is the US tax on emigration.





celticweb said:


> Unless you have very complicated affairs, stay clear from consulting a tax advisor. With maybe a few exceptions, they are not going to be on your side and will create a mess that you can't untangle. Interpret the rules as you see fit within the obscure language that exists and if you must file, file yourself.
> 
> However I recommend only two courses of actions that are realistically workable, don't file and ignore it or file with the intention of renouncing. I have found that these are the only two options that work. Those that enter the tax system will find it difficult to continue to maintain compliance. it's just not possible anymore. I tried but it was going to interfere with too many aspects of my life, like even taking up a directorship which was the straw that broke the camel's back for me. plus of course pressure from my non US citizen spouse to get out of the system and inheriting off each other without having to set up complicated trusts.
> 
> Before all this, US citizenship was just something dormant in my life that might come in handy someday. Sadly that was not the case anymore.
> 
> Wait to see what happens in the next few months before making any compliance efforts. unless you are already in the system, then i would just try filing yourself and submit reasonable looking returns without over complicating things.


I have very specific issues such as possible redundancy (either voluntary or not voluntary) in the coming months and need to understand what IRS will do to my income. If I am made redundant and get my pension benefit in the same year, I am automatically in a very high bracket which will eat significant part of this. I have not lived in the US for more than a decade, yet I may pay a lot. Not sure why.


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## Nononymous

If you don't have assets in the US, stop paying.


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## arlekin

Nononymous said:


> If you don't have assets in the US, stop paying.



This is not an option. I want to remain compliant, but I want to minimise tax and take advantage of the tax treaty, if possible. As long as I am USC, I want to remain compliant (I do not like it, but it is a law).


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## Nononymous

arlekin said:


> This is not an option. I want to remain compliant, but I want to minimise tax and take advantage of the tax treaty, if possible. As long as I am USC, I want to remain compliant (I do not like it, but it is a law).


That is your choice. It will be painful and expensive, but follow the law if you must. 

Most don't.


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## arlekin

Nononymous said:


> That is your choice. It will be painful and expensive, but follow the law if you must.
> 
> Most don't.


i do not have other options. I am not accidental and I do not yet have a citizenship of another country. I suffer though this, but I do not believe there are any other options.


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## Nononymous

You do have an option but it assumes some risk: stop paying and acquire UK citizenship as quickly as possible.

I'm feeling particularly militant today.


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## celticweb

arlekin said:


> I have very specific issues such as possible redundancy (either voluntary or not voluntary) in the coming months and need to understand what IRS will do to my income. If I am made redundant and get my pension benefit in the same year, I am automatically in a very high bracket which will eat significant part of this. I have not lived in the US for more than a decade, yet I may pay a lot. Not sure why.


The redundancy was discussed quite recently and severance pay counts toward the FEIE. However it seems you may be over the amount but for reference, it is written on the IRS website see below copied.
"It also may include severance pay, sick leave pay and vacation pay. Foreign earned income can also include noncash income such as the fair market value of lodging, a car, or employer provided meals. "

This is where you might be given conflicting advise by a tax advisor but it is written in black and white there. try to use the word severance pay not redundancy if having to speak to an advisor. If you are above the FEIE you can still take tax credits, i would be very surprised if any tax was due. You would be paying ample tax on a higher than FEIE salary, just lump it all together and use the tax credits.

For the pension part, i don't know but I interpret the law as being that pensions are only taxed in the UK for UK residents, i have used form 8833, article 18 , IRC section 402(b) to cancel out my employer contributions. 
The UK pensions treaty is quite comprehensive in regards to the US, one of the better treaties I was told so I would do some research there. 

I understand the need for compliance for some but being compliant doesn't mean you have to take the word of a so called "tax expert" when no such ruling exists in black and white.


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## celticweb

Also regarding the FEIE, try to cancel your salary out using the FEIE and then do the calculations for the tax credits for the remainder of your salary. i saw a complicated calculation thing somewhere of how it's done. one can take the FEIE and tax credits in the same year I think. Try that scenario and the just straight forward tax credit scenario and see what works best. 

You maybe don't want to revoke the FEIE if you think it might come in handy next year for the new job.
and as stated previously, use the word severance (redundancy is not a term in the US) when speaking to an advisor and severance pay is wages and goes under wages and counts toward the FEiE and is clearly stated as such on the IRS website.


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## Bevdeforges

arlekin said:


> This is not an option. I want to remain compliant, but I want to minimise tax and take advantage of the tax treaty, if possible. As long as I am USC, I want to remain compliant (I do not like it, but it is a law).


There is no law against tax avoidance - i.e. doing everything you can to minimize your tax bill. What's illegal is tax evasion.

But be aware, too, that tax law (as all US law) is subject to interpretation. There are the laws and there are the regulations, and they don't have quite the same weight. When I worked for one of the big accountancy firms, they encouraged the taking of "an aggressive tax stance" on items where the regs left a certain amount of "wiggle room." Unless there are blatant red flags or strange things on your return, these very often go through without a problem.

And, as has already been said, you can certainly take both the FEIE and the FTC on the same return. The FTC goes against the earned income that exceeds the FEIE limit. Makes for a slightly more complicated calculation, but perfectly legal and normal.

I'm just getting into the Wonderful World of Pensions - and even there you have considerable difference of opinion. Turns out the UK treaty works kind of "backward" on US Social Security (at least to several of the other treaties I'm familiar with) - in that the UK claims the right to tax the benefits. But this is actually explained rather well in the IRS publication on Social Security. (They have a listing of those countries where the US doesn't have first dibs on taxing your benefits.)

There is always the approach of "selective compliance" - what I used to call "render unto Caesar" - which seems to work for lots of overseas filers. Just keep in mind what income streams and resources the IRS is aware of (i.e. gets specific reports on) and which are not so visible back in the US. And make sure you keep your country of residence tax folks happy.
Cheers,
Bev


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## arlekin

Nononymous said:


> You do have an option but it assumes some risk: stop paying and acquire UK citizenship as quickly as possible.
> 
> I'm feeling particularly militant today.


Thank you for your advice, but I still want to explore the legal ways to minimise the bill. I wish I could do it, but I think the risk is just too high for me.


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## arlekin

celticweb said:


> The redundancy was discussed quite recently and severance pay counts toward the FEIE. However it seems you may be over the amount but for reference, it is written on the IRS website see below copied.
> "It also may include severance pay, sick leave pay and vacation pay. Foreign earned income can also include noncash income such as the fair market value of lodging, a car, or employer provided meals. "
> .


Thank you for reference. I found it and am clear if it is a redundancy (forced). What if it is a mutual voluntary separation?


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## arlekin

celticweb said:


> For the pension part, i don't know but I interpret the law as being that pensions are only taxed in the UK for UK residents, i have used form 8833, article 18 , IRC section 402(b) to cancel out my employer contributions.
> The UK pensions treaty is quite comprehensive in regards to the US, one of the better treaties I was told so I would do some research there.


It is a very good treaty until I realise there is a saving clause (as mentioned by Iota2014 yesterday) which basically makes 99% of the treaty benefits not applicable to US citizens. :shocked:


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## arlekin

Bevdeforges said:


> Just keep in mind what income streams and resources the IRS is aware of (i.e. gets specific reports on) and which are not so visible back in the US. And make sure you keep your country of residence tax folks happy.
> Cheers,
> Bev


They are not aware of anything. I do not have US source income or US employer. No W2. But there is FATCA , FBAR and potentially tax audit. It is very easy for them to become aware, if they choose.


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## Bevdeforges

arlekin said:


> They are not aware of anything. I do not have US source income or US employer. No W2. But there is FATCA , FBAR and potentially tax audit. It is very easy for them to become aware, if they choose.


Depends on how much tax you would be "avoiding." You only report the "high balance" on your FBAR statements - which very often involves considerable double counting of balances. The financial institution side of FATCA only reports year-end balances.

You can spend lots of time getting upset, angry and hurt over the unfairness of the US tax laws. Or you can take a stance as to how you're going to comply (i.e. to what degree). There is no single "correct" way to fill out your tax forms based on your particular circumstances. Choose your options carefully.
Cheers,
Bev


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## arlekin

Partial compliance is dangerous. If they audit you, you are just screwed.


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## Bevdeforges

arlekin said:


> Partial compliance is dangerous. If they audit you, you are just screwed.


You need to consider for what reason they might audit you. If your returns are "reasonable" the chance of audit is very slim. Plus, if you have a rationale behind any "choices" you have made on your returns, you can always show your "good will." Example, your concern about your severance. The term used in just about every instruction I've seen is "severance" - whether paid due to being let go or by mutual agreement, it's still a severance payment and eligible for the FEIE by most reading of the instructions.
Cheers,
Bev


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## arlekin

I have now reviewed the technical analysis paper to which Iota2014 referred me yesterday. I am still extremely confused by the treaty. It seems some of the articles contradict each other. 

Article 17 (Pensions)

1. (a) Pensions and other similar remuneration beneficially owned by a
resident of a Contracting State shall be taxable only in that State. [It seems this clause does not apply to US citizens due to a saving clause 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. [It seems that the saving clause does apply to the US citizens]

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. [It seems this clause does not apply to US citizens due to a saving clause]

*So, if I get a lump sum distribution from my final salary and the full amount is not taxable in the UK - is it taxable in the US or not if I am UK resident? *

From the technical explanation:

Paragraph 2 is intended to deal with a particular type of double non-taxation that arose under the prior Convention because the United Kingdom does not tax lump-sum distributions from pension funds. Under the prior Convention, a lump-sum payment was treated in the same way as any other pension, and was taxable only in the country of residence of the beneficial owner. Accordingly, a person who anticipated receiving a lump-sum distribution from a U.S. pension scheme with respect to employment in the United States could avoid U.S. withholding tax on the distribution by establishing residence in the United Kingdom for the year in which he received the distribution. The person would not be subject to tax in either the United States or the United Kingdom with respect to the lump-sum distribution, resulting in a significant windfall.

Paragraph 2 prevents this unanticipated benefit by providing that, notwithstanding the exclusive residence-country taxation of paragraph 1, any lump-sum payment derived by a resident of a Contracting State from a pension scheme established in the other Contracting State shall be taxable in that other State.

Yet, there is no explanation what happens if US citizen is a resident of the UK and receives a lump sum from the UK pension plan which is not taxed by the UK. On what basis is it taxable by the US?:frusty:


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## iota2014

The only bits of Article 17 that apply to you are 17.1.2, 17.3, and 17.5. 

17.2 is about cross-border payments. Presumably your pension is established in the UK and your lump sum will not be paid cross-border.


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## arlekin

so, final salary payment is fully taxable then (even if untaxed by the UK?)


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## iota2014

You really need to work through the convoluted language of the treaty for yourself and decide on the interpretation you think is right. That's the only way you'll be able to answer any questions that arise. Though if you just treat everything you're not sure about as taxable, that will work too obviously.

It helps to replace all the "other Contracting State" / "first-mentioned Contracting State" gibberish with "US" or "UK" as appropriate.

By the way are you sure your payment will be completely untaxed by HMRC?


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## arlekin

Yes, it will be untaxed by the UK. Some of my colleagues (non US citizens) already had this payment and it was not taxed.


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## Bevdeforges

arlekin said:


> so, final salary payment is fully taxable then (even if untaxed by the UK?)


Oh, I was kind of wondering about your question. Yes, severance pay is considered "salary" in the US. The treaty sections that mention lump sum payments only refer to pension lump sum payments. 

You get something similar with the sale of your personal residence. If I understand correctly, any profit on the sale of a personal residence (primary residence perhaps) is tax free in the UK. In the US, only the first $250,000 (for a single person) or $500,000 (for a couple filing jointly) is tax-free. Ask Boris Johnson about this one - it's apparently where he got caught out. But then again, the $2350 renunciation fee was just pocket change for him.
Cheers,
Bev


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## iota2014

Oh. I also thought it was a pension distribution.

Anyway, if you _are_ expecting to receive a lump sum pension distribution, look again at the Technical Explanation (pp64-65):



> ... a U.S. citizen who receives a distribution from a pension scheme established in the United Kingdom will be taxable on only the portion of the pension distribution that is taxable in the United Kingdom.


Make of that what you will.


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## Nononymous

Possibly too late given your filing history, but by all means use an individual "interpretation" of the numbers to come up with a tax bill of zero. If you're worried about a severance payment being taxed by the US if it's not taxed by the UK, then don't report it - you didn't think it was taxable. It's not like the US has any way of checking, your UK employer is not submitting data to the IRS. They only have the information that you provide, nothing more. Unless you're getting well into seven-figure balances, it's not likely that FBAR or FATCA are going to raise red flags. You are, I assume, a minnow. They don't go after minnows.

I realize that this is easy for me to say, I'm cheerfully under the radar. But if I decided I was going to renounce and wanted to deal with the taxes as well, then if necessary I would choose "selective compliance" - file returns with some basis in reality that (1) work out to zero balance owing and (2) appear sufficiently unremarkable that they would not be audited. (I don't actually know if it would be necessary, I've not run the numbers.)

The way I now see it is, if a post-truth world of "alternative facts" is good enough for the White House, then it should be good enough for the IRS!


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## iota2014

Nononymous said:


> The way I now see it is, if a post-truth world of "alternative facts" is good enough for the White House, then it should be good enough for the IRS!


Hasn't he been under continuous audit for the past seven years?


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## Nononymous

iota2014 said:


> Hasn't he been under continuous audit for the past seven years?


Well he "believes" that he's under audit. The IRS won't confirm or deny.


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## arlekin

Bevdeforges said:


> Oh, I was kind of wondering about your question. Yes, severance pay is considered "salary" in the US. The treaty sections that mention lump sum payments only refer to pension lump sum payments.
> 
> You get something similar with the sale of your personal residence. If I understand correctly, any profit on the sale of a personal residence (primary residence perhaps) is tax free in the UK. In the US, only the first $250,000 (for a single person) or $500,000 (for a couple filing jointly) is tax-free. Ask Boris Johnson about this one - it's apparently where he got caught out. But then again, the $2350 renunciation fee was just pocket change for him.
> Cheers,
> Bev


There are two separate issues here:

1. severance payment which is a lump sum received due to separation 

2. defined benefit plan - final salary lump sum which is basically a pension


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## arlekin

iota2014 said:


> Oh. I also thought it was a pension distribution.
> 
> Anyway, if you _are_ expecting to receive a lump sum pension distribution, look again at the Technical Explanation (pp64-65):
> 
> 
> 
> Make of that what you will.



The way I read it, it should not be taxed by the US as it is a pension distribution. :fish:


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## arlekin

Nononymous said:


> Possibly too late given your filing history, but by all means use an individual "interpretation" of the numbers to come up with a tax bill of zero. If you're worried about a severance payment being taxed by the US if it's not taxed by the UK, then don't report it - you didn't think it was taxable. It's not like the US has any way of checking, your UK employer is not submitting data to the IRS. They only have the information that you provide, nothing more. Unless you're getting well into seven-figure balances, it's not likely that FBAR or FATCA are going to raise red flags. You are, I assume, a minnow. They don't go after minnows.
> 
> I realize that this is easy for me to say, I'm cheerfully under the radar. But if I decided I was going to renounce and wanted to deal with the taxes as well, then if necessary I would choose "selective compliance" - file returns with some basis in reality that (1) work out to zero balance owing and (2) appear sufficiently unremarkable that they would not be audited. (I don't actually know if it would be necessary, I've not run the numbers.)
> 
> The way I now see it is, if a post-truth world of "alternative facts" is good enough for the White House, then it should be good enough for the IRS!


 this is all very very messy.


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## iota2014

arlekin said:


> The way I read it, it should not be taxed by the US as it is a pension distribution. :fish:


Yep, that's exactly how I would read it.


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## Bevdeforges

arlekin said:


> The way I read it, it should not be taxed by the US as it is a pension distribution. :fish:


And that is called "taking a stance." Just make a note of it when you're preparing your taxes. You'll probably never need it, but if any questions ever come up, you can "show" the basis for why you did what you did. (But chances are, it will never come up.)
Cheers,
Bev


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## Bevdeforges

iota2014 said:


> Hasn't he been under continuous audit for the past seven years?


There are a few factors in his case that make it pretty much certain that he is (and will continue to be) under constant audit. His income level for one thing. And certain of the tax tricks he no doubt uses (since they're pretty much unique to real estate developers anyhow and highly dodgy).
Cheers,
Bev


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## iota2014

Bevdeforges said:


> There are a few factors in his case that make it pretty much certain that he is (and will continue to be) under constant audit. His income level for one thing. And certain of the tax tricks he no doubt uses (since they're pretty much unique to real estate developers anyhow and highly dodgy).
> Cheers,
> Bev


But *will* he continue to be?

One of the many unanswered questions.


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## Nononymous

Bevdeforges said:


> There are a few factors in his case that make it pretty much certain that he is (and will continue to be) under constant audit. His income level for one thing. And certain of the tax tricks he no doubt uses (since they're pretty much unique to real estate developers anyhow and highly dodgy).
> Cheers,
> Bev


Oh I'm sure he is, but the funny part is that you have have to take his word for it because the IRS won't confirm or deny, and the audit was his excuse for not releasing returns.


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## iota2014

> President-elect Donald Trump could face a decision that may affect whether his tax returns will continue to be audited throughout his four-year term of office.
> 
> IRS regulations call for annual audits of tax returns filed by U.S. presidents and vice presidents. But those rules, in place roughly 40 years, theoretically could be changed by the tax agency — whose current leader is under fire from Capitol Hill.
> 
> The rules are included in the Internal Revenue Service Manual, which guides actions by the nation's tax agency. It states that tax returns filed by the president and vice president "are subject to mandatory examinations," and should not get less-rigorous screening.
> 
> The protocol dates back to the Watergate era and President Richard Nixon. He refused to release his 1971 and 1972 tax returns, said they had been audited and initially opposed any re-check.
> 
> Under mounting public pressure, Nixon subsequently invited an examination by the congressional Joint Committee on Internal Revenue Taxation. The panel's review concluded that Nixon owed the federal government more than $476,000 in unpaid taxes and accrued interest.
> 
> "The inclusion was made under the direction of career, non-partisan IRS compliance personnel," Matthew Leas, the IRS chief national spokesman, said of the audit regulation. "Since then, this provision has remained in place during both Republican and Democratic administrations, as well as under IRS commissioners appointed by both parties."
> 
> However, the protocol does not have the force of federal law, and could be changed — potentially through the appointment of a new IRS commissioner.


Trump faces potential decision on IRS (29/11/16)


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## celticweb

arlekin said:


> There are two separate issues here:
> 
> 1. severance payment which is a lump sum received due to separation
> 
> 2. defined benefit plan - final salary lump sum which is basically a pension


If it helps, these tax advisors also say severance pay counts toward the FEIE
"However - severance pay counts towards the Foreign Earned Income Exclusion, so you may not have to pay any U.S. tax on it anyway."

https://www.taxesforexpats.com/articles/expat-tax-rules/expat-taxes-after-losing-job.html

I think you are trying to read too much into things and worrying about consequences that are very unlikely. I stopped worrying about this stuff even before I renounced. Take a stand that is not farfetched and if they have questions, let them ask. 

Severance pay for losing your job counts toward the FEIE regardless of the reasons and I can't see anywhere where it says it doesn't. The only reason there is any confusion is because the tax accountants are creating the confusion. So it counts toward the FEIE but if you are over the FEIE with severance pay then of course it won't count and you have to rely on tax credits or doing FEIE with combination of tax credits.

The lump sum pension distribution other folks on here have given good advise and input. but i think the key is in how you take the distribution. Could you not take it over a number of years so it is treated as income rather than a lump sum? If the lump sum could be argued not to be a lump sum but income than I would think it would not be taxable in the US. 

Some more knowledgeable folks might come along though and say I am talking complete rubbish but I would feel confident taking this stance.


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## arlekin

celticweb said:


> If it helps, these tax advisors also say severance pay counts toward the FEIE
> "However - severance pay counts towards the Foreign Earned Income Exclusion, so you may not have to pay any U.S. tax on it anyway."
> 
> https://www.taxesforexpats.com/articles/expat-tax-rules/expat-taxes-after-losing-job.html
> 
> I think you are trying to read too much into things and worrying about consequences that are very unlikely. I stopped worrying about this stuff even before I renounced. Take a stand that is not farfetched and if they have questions, let them ask.
> 
> Severance pay for losing your job counts toward the FEIE regardless of the reasons and I can't see anywhere where it says it doesn't. The only reason there is any confusion is because the tax accountants are creating the confusion. So it counts toward the FEIE but if you are over the FEIE with severance pay then of course it won't count and you have to rely on tax credits or doing FEIE with combination of tax credits.
> 
> The lump sum pension distribution other folks on here have given good advise and input. but i think the key is in how you take the distribution. Could you not take it over a number of years so it is treated as income rather than a lump sum? If the lump sum could be argued not to be a lump sum but income than I would think it would not be taxable in the US.
> 
> Some more knowledgeable folks might come along though and say I am talking complete rubbish but I would feel confident taking this stance.


The amounts are quite significant for me (not in millions $$$ obviously, but not in thousands as well), so the tax bill might come up quite substantial. I am totally shocked by what the US government does to its citizens abroad - US has absolutely no business with my employment (I am not a resident of the US, no US source income, no foreign subsidiary of the US company, living abroad for many years). The only connection to the US is the passport. It is sad that the original reason for me moving abroad was being unable to find a job in the US at that time. Now, so many years later, they technically want to take away up to 1/3 of my pension and potentially a severance payment, both not taxable in my country of residence. How ironic.


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## arlekin

iota2014 said:


> The only bits of Article 17 that apply to you are 17.1.2, 17.3, and 17.5.
> 
> 17.2 is about cross-border payments. Presumably your pension is established in the UK and your lump sum will not be paid cross-border.


actually, it seems I need to move to the US in order for the pension plan distributions from the UK retirement plans not be taxable 

:shocked:


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## arlekin

Bevdeforges said:


> And that is called "taking a stance." Just make a note of it when you're preparing your taxes. You'll probably never need it, but if any questions ever come up, you can "show" the basis for why you did what you did. (But chances are, it will never come up.)
> Cheers,
> Bev


I was very surprised that the audit rate for US persons abroad is so much higher than for every other group. I mean, they audit ca. 1% of the returns, 2% of the returns with AGI above $100,000, yet almost 5% with 2555. Then again, many US residents who actually work abroad for US companies for 1-2 yrs and receive W2 might be in this 5%. You never know. But still, it seems IRS loves to audit the expat group.


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## Bevdeforges

Just out of curiosity, where are you getting your audit rate figures from? 

But remember, an audit can (theoretically, at least) go either way. People have occasionally been audited only to find that they were due a refund. In the current climate, the auditors are supposed to concentrate on those returns most likely to produce a return for the IRS. There are plenty of folks who mess up their 2555 forms and thus open themselves up to an audit - like by trying to claim capital gains or investment income under the FEIE. But if you've done a "good faith" job of preparing your forms, the chances are much, much reduced.

The Tax Foundation has some interesting information on audits: https://taxfoundation.org/irs-audited-12-million-households-2015
Cheers,
Bev


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## arlekin

celticweb said:


> The lump sum pension distribution other folks on here have given good advise and input. but i think the key is in how you take the distribution. Could you not take it over a number of years so it is treated as income rather than a lump sum? If the lump sum could be argued not to be a lump sum but income than I would think it would not be taxable in the US.
> .


There are several options:

I can take it out as a lump sum

I can roll over the defined benefit amount into my defined contribution plan and take it out in parts later. But again, one accountant told me that IRS might view IT as "constructively received" in the year of the rollover as UK plans are not US deferred qualified - another very grey area. 


Pensions, Social Security, Annuities, Alimony, and Child Support
1. a) Pensions and other similar remuneration beneficially owned by a resident of the US shall be taxable only in the US. [DOES NOT APPLY TO US CITIZENS]

b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such
pension or remuneration paid from a pension scheme established in the UK
that would be exempt from taxation in the UK if the beneficial owner were a resident
thereof shall be exempt from taxation in the US.[APPLIES TO US CITIZENS]

So, basically - if I live in the UK and have a pension plan established in the UK, but later move to the US and start withdrawing pension (not as lump sum, but say a few annual instalments) in the US - US cannot tax it if it is not taxed in the UK?


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## iota2014

arlekin said:


> actually, it seems I need to move to the US in order for the pension plan distributions from the UK retirement plans not be taxable
> 
> :shocked:


Think you've got that the wrong way round. A non-USC living in the US would indeed be exempt from US tax on lump sums paid from a UK-registered plan. (17.2)

A USC living in the US would not, as they would not be eligible for that treaty benefit.


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## arlekin

Bevdeforges said:


> Just out of curiosity, where are you getting your audit rate figures from?


From the IRS 2015 data book (https://www.irs.gov/pub/irs-soi/15databk.pdf), page 23 - there is a table with number of forms filed for some groups, including "international returns", which I assume are returns with international address (true expats permanently living abroad). According to 2014 data, 4.3% were audited - much higher than for any other group. However, I was very surprised that only 201,000 international returns were filed - unless I am missing something, the number is very low as even the US State Department estimates more than 5-9 million US persons living abroad.


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## arlekin

iota2014 said:


> Think you've got that the wrong way round. A non-USC living in the US would indeed be exempt from US tax on lump sums paid from a UK-registered plan. (17.2)
> 
> A USC living in the US would not, as they would not be eligible for that treaty benefit.


why? 17.2 is not applicable to the US citizens, but 17.1(b) is... As suggested, I changed the Contracting State rubbish to UK and US and this is what I got  unless there is another clause in the treaty which doesn't allow it, but the saving clause does not apply to 17.1(b)


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## iota2014

arlekin said:


> Pensions, Social Security, Annuities, Alimony, and Child Support
> 1. a) Pensions and other similar remuneration beneficially owned by a resident of the US shall be taxable only in the US. [DOES NOT APPLY TO US CITIZENS]


You're resident in the UK, so do it the other way round:



> 1. a) Pensions and other similar remuneration beneficially owned by a resident of the UK shall be taxable only in the UK.


(This is merely a statement of the obvious: the UK has primary taxing rights on UK source income paid to a UK resident; this is what would happen if the treaty did not exist.)



> b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the UK that would be exempt from taxation in the UK if the beneficial owner were a resident thereof shall be exempt from taxation in the US.


In your case, the beneficial owner is indeed a resident of the UK and the pension scheme is indeed established in the UK and this para is not subject to the Saving Clause. You're home and dry.

IMO. It's of course up to you to decide whether you agree with me.


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## arlekin

iota2014 said:


> You're resident in the UK, so do it the other way round:
> 
> 
> 
> (This is merely a statement of the obvious: the UK has primary taxing rights on UK source income paid to a UK resident; this is what would happen if the treaty did not exist.)
> 
> 
> 
> In your case, the beneficial owner is indeed a resident of the UK and the pension scheme is indeed established in the UK and this para is not subject to the Saving Clause. You're home and dry.
> 
> IMO. It's of course up to you to decide whether you agree with me.


Yes, this is clear now. However, just imagine a hypothetical situation. US citizen/UK resident moves back to the US and establishes residence in the US. He becomes US resident and starts withdrawing money from the UK pension. The amounts are tax exempt in the UK and 17.1(b) applies to US citizens. What clause prevents US citizen to argue that US cannot tax these payments? It is not my case, but just trying to understand the consequences.


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## iota2014

arlekin said:


> why? 17.2 is not applicable to the US citizens, but 17.1(b) is... As suggested, I changed the Contracting State rubbish to UK and US and this is what I got  unless there is another clause in the treaty which doesn't allow it, but the saving clause does not apply to 17.1(b)



17.2 is about CROSS-BORDER payments. It allows the US to tax lump sums paid from a UK established plan to a resident of the US who is also a US citizen. And, conversely, allows the UK to tax lump sums paid from US plans (such as IRAs) to residents of the UK.


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## arlekin

iota2014 said:


> 17.2 is about CROSS-BORDER payments. It allows the US to tax lump sums paid from a UK established plan to a resident of the US who is also a US citizen. And, conversely, allows the UK to tax lump sums paid from US plans (such as IRAs) to residents of the UK.


I am not talking about 17.2 - the clause is not applicable to the US citizens. I am talking about 17.1(b)!


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## iota2014

arlekin said:


> Yes, this is clear now. However, just imagine a hypothetical situation. US citizen/UK resident moves back to the US and establishes residence in the US. He becomes US resident and starts withdrawing money from the UK pension. The amounts are tax exempt in the UK and 17.1(b) applies to US citizens. What clause prevents US citizen to argue that US cannot tax these payments? It is not my case, but just trying to understand the consequences.


Those would be cross-border payments. They would be taxable by the UK if periodic, and by the US if lump sum.

These apparently irrational rules are all to do with the US trying to make sure nobody gets away with double-non-taxation on IRA withdrawals by moving to the UK where lump sums are exempt.


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## arlekin

iota2014 said:


> Those would be cross-border payments. They would be taxable by the UK if periodic, and by the US if lump sum.
> 
> These apparently irrational rules are all to do with the US trying to make sure nobody gets away with double-non-taxation on IRA withdrawals by moving to the UK where lump sums are exempt.


I disagree. The way I read it, the distributions from the UK pension plan (non lump sum) are not taxable by the US if US citizen resides in the US due to 17.1(b) if they are not taxable in the UK.


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## iota2014

arlekin said:


> I disagree. The way I read it, the distributions from the UK pension plan (non lump sum) are not taxable by the US if US citizen resides in the US due to 17.1(b) if they are not taxable in the UK.


I don't want you to think I'm trying to convince you that my interpretation is right. It's your tax return and you must go with what you think is correct. But to explain why I interpret it differently:



> (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 [the UK] that would be exempt from taxation in that other State [the UK] if the beneficial owner were a resident thereof [of the UK] shall be exempt from taxation in the first- mentioned State [the US, if you were to move to the US].


That would be a cross-border payment. See the word "Notwithstanding " in 17.2? The effect of that is to say that if it's a lump sum 17.1 does not apply and the US would tax you (a USC) on your cross-border lump sum pension payment. If the payments are periodical, they're taxable by the UK. If the payments are periodical AND you're a USC, AND you're resident in the US, they're supposedly taxable also by the US but in practice you could use tax credits.


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## Bevdeforges

arlekin said:


> From the IRS 2015 data book (https://www.irs.gov/pub/irs-soi/15databk.pdf), page 23 - there is a table with number of forms filed for some groups, including "international returns", which I assume are returns with international address (true expats permanently living abroad). According to 2014 data, 4.3% were audited - much higher than for any other group. However, I was very surprised that only 201,000 international returns were filed - unless I am missing something, the number is very low as even the US State Department estimates more than 5-9 million US persons living abroad.


Interesting. Thanks for sharing that source.

But I notice one thing - if you read the footnotes to the table you cite and then reference to the other tables in the publication, it seems that what they call "International" in those tables refers to filings of the following forms: 1040-C, 1040-NR, 1040-NR-EZ, 1040-PR and 1040-SS, which aren't the sorts of forms US citizen expats would file. (They mostly relate to non-resident aliens and US territories.)

In Table 3, they list returns by State, with the Other category as follows: Includes U.S. Territories other than Puerto Rico, U.S. Armed Service members overseas, and international. The Other category accounts for about 2.3 million returns - with about 1.5 million individual income tax returns. But unfortunately, there isn't any information about audits by filing address or by state or anything like that. 

I'm not sure we can draw any particular conclusions from the audit statistics there.
Cheers,
Bev


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## arlekin

iota2014 said:


> I don't want you to think I'm trying to convince you that my interpretation is right. It's your tax return and you must go with what you think is correct. But to explain why I interpret it differently:
> 
> 
> 
> That would be a cross-border payment. See the word "Notwithstanding " in 17.2? The effect of that is to say that if it's a lump sum 17.1 does not apply and the US would tax you (a USC) on your cross-border lump sum pension payment. If the payments are periodical, they're taxable by the UK. If the payments are periodical AND you're a USC, AND you're resident in the US, they're supposedly taxable also by the US but in practice you could use tax credits.



what if they are not taxable by the UK (for whatever reason)?


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## iota2014

arlekin said:


> what if they are not taxable by the UK (for whatever reason)?


Periodical payments, you mean? Periodical pension payments from registered UK pension plans *are* taxable by the UK, surely. Only lump sums are exempt.

But supposing there _was_ a way to receive UK-exempt periodical pensions as a USC resident in the US, I imagine the only practical difference would be that you wouldn't need to claim tax credits from the UK to offset your tax payments to the IRS.


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## arlekin

iota2014 said:


> Periodical payments, you mean? Periodical pension payments from registered UK pension plans *are* taxable by the UK, surely. Only lump sums are exempt.
> 
> But supposing there _was_ a way to receive UK-exempt periodical pensions as a USC resident in the US, I imagine the only practical difference would be that you wouldn't need to claim tax credits from the UK to offset your tax payments to the IRS.


I disagree on this. This is not what the treaty says. If they are tax exempt in the UK, they are no taxable in the US even for US resident. This is exactly what clause 17.1(b) says.


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## arlekin

Bevdeforges said:


> Interesting. Thanks for sharing that source.
> 
> But I notice one thing - if you read the footnotes to the table you cite and then reference to the other tables in the publication, it seems that what they call "International" in those tables refers to filings of the following forms: 1040-C, 1040-NR, 1040-NR-EZ, 1040-PR and 1040-SS, which aren't the sorts of forms US citizen expats would file. (They mostly relate to non-resident aliens and US territories.)
> 
> In Table 3, they list returns by State, with the Other category as follows: Includes U.S. Territories other than Puerto Rico, U.S. Armed Service members overseas, and international. The Other category accounts for about 2.3 million returns - with about 1.5 million individual income tax returns. But unfortunately, there isn't any information about audits by filing address or by state or anything like that.
> 
> I'm not sure we can draw any particular conclusions from the audit statistics there.
> Cheers,
> Bev


https://www.irs.gov/uac/soi-tax-stats-individual-foreign-earned-income-foreign-tax-credit

They publish data every 5 years on 2555/1116. The latest one is for 2011. According to the excel tables, there have been about 440,000 returns with 2555; however, many people do not file 2555 and file 1116 instead.

My estimate was that about 1m expats file returns - therefore was very surprised when the 2015 data book mentioned only around 200,000 in the audit table.


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## iota2014

arlekin said:


> I disagree on this. This is not what the treaty says. If they are tax exempt in the UK, they are no taxable in the US even for US resident. This is exactly what clause 17.1(b) says.


Because it is assumed, with good reason, that periodical income payments from registered pension schemes (i.e. based on untaxed contributions) will be taxed when distributed.

The whole purpose of a double taxation treaty is to prevent "double non-taxation" by providing ways to avoid double taxation. So I predict that the IRS is likely to have questions for you if you are living in the US, receiving regular payments from the UK, and not reporting them to the IRS as taxable income on your 1040 - regardless of whether you're a US citizen or not.


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## Bevdeforges

arlekin said:


> https://www.irs.gov/uac/soi-tax-stats-individual-foreign-earned-income-foreign-tax-credit
> 
> They publish data every 5 years on 2555/1116. The latest one is for 2011. According to the excel tables, there have been about 440,000 returns with 2555; however, many people do not file 2555 and file 1116 instead.
> 
> My estimate was that about 1m expats file returns - therefore was very surprised when the 2015 data book mentioned only around 200,000 in the audit table.


Yeah, that's the other complicating factor (and those are the tax stats tables I have seen in the past). Not everyone overseas files a 2555 or even a 1116. And then there are those who file both a 2555 and a 1116, who are perhaps double counted in the stats. Plus I would almost be willing to bet that the majority of 1116s filed could very well be US residents with foreign investments. 

Think of retirees (especially those receiving US Soc Sec benefits). Those ARE most often taxable in the US (with a few exceptions as noted in the IRS publication on social security) and therefore the only indication would be a foreign address. As it says in one of the footnotes to the tables you originally cited, some foreign filers may use an accountant's or attorney's address - or, perhaps even a US address they have been using for a mail drop.

Ultimately, I think the IRS hasn't a clue how many "overseas taxpayers" there are, nor how much they actually collect from taxpayers actually resident overseas. Plus, since the 4 international IRS offices were closed at the end of 2015, they have almost no staff located outside the US, so any audits would pretty much have to be "audits by correspondence" now anyhow.
Cheers,
Bev


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## arlekin

Well, audits by correspondence do not mean they will not request all the paperwork such as receipts, cancelled checks and bank statements.


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## Bevdeforges

arlekin said:


> Well, audits by correspondence do not mean they will not request all the paperwork such as receipts, cancelled checks and bank statements.


Which means, I suppose, that you feel you may be missing some parts of the necessary paperwork. That sort of thing should be filed together with your copy of your return until you're safely past the statute of limitations period.
Cheers,
Bev


----------

