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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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I inherited my uncles 401k in 2011 and this was disperesed

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I inherited my uncles 401k in 2011 and this was disperesed in a lumpsum. I'm a US non resident alien. The dispersals were made with no withholding tax when (W8BEN) tax overseas. IRS has asked for a tax return. Is this exempt from US tax throught the double taxation agreement?

Should this be recored in line 16 or 17 on form 1040NR?
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to Just Answer!
While inheritance itself is not taxable income in the US - the situation is different if you inherited a tax deferred retirement account.

Lev :

When funds are distributed out - that income is classified an income in respect of a decedent (IRD). Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent.
Because you received the distribution - it is taxable for you.
You are correct - there is an income tax treaty in effect between the US and UK - see here - http://www.irs.gov/pub/irs-trty/uk.pdf
See page 22 - ARTICLE 18 - Pensions


(1) Subject to the provisions of paragraph (2) of Article 19 (Government Service), any pension in consideration of past employment and an annuity paid to an individual who is resident of a Contracting State shall be taxed only in that State.
So - if your uncle was a resident of the US - that distribution is taxable for the US. Because income in respect of a decedent is taxable the same way as it were taxable for the decedent - it i subject of US income tax and not taxable for the UK.

Lev :

Distributions from 401k plans are reported on form 1040NR line 17a and 17b.

Customer:

so this means I've got a 30% tax bill for the full amount .

Lev :

That is correct.
However - If your uncle made any after tax contribution into that 401k account - that amount is distributed tax free. But if all contribution were made on pre-tax basis - the full amount is taxable.
Because you are a nonresident alien - it is taxed at 30% rate as non effectively connected income.
But according to the tax treaty - it is NOT taxable in UK.

Lev :

I am sorry if you expected differently.

Customer:

My uncle was over 70 when he died, does this effect matters?

Lev :

The only issue related with the age - if he was required to make distribution after the age of 70 1/2 - but since you took a full distribution shortly after the account was inherited - that really doesn't matter.
When your uncle and his employer made contributions into 401k plan - these contributions were not taxable - means - the tax liability was deferred.
It is deferred up to the year in which actual distribution is requested. So - when distributed - that amount becomes taxable.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22653
Experience: Taxes, Immigration, Labor Relations
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