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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10841
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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If a US Citizen is a tax resident of another country with a

Customer Question

If a US Citizen is a tax resident of another country with a double tax treaty is a 401K withdrawal after age 60 taxable at marginal rates or just the 20% withholding?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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Withholding is just that... withholding ... not the tax itself ... Think of it at a prepayment of your tax (just as W-2 withholding agaist wages).

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Only when you calculate your taxes in april of the following year, will you know whether that withholding was enough to offset the actual tax liability created by that distribution being added to your other taxable income.

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You can approximate, of course. If, for example, you are in the 25% already because of the other income in your household, then the IRA distribution will be taxed at (at least) 25% unless some of the distribution goes into the next highest tax bracket.

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But yes, IRA distributions for any U.S.taxpayer is simply additional ordinary income.

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Let me know if you have questions...

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lane

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Customer: replied 1 year ago.
Thanks Lane. Apologies however I made a mistake in my question in that I said I was a US Citizen when I should have said I am neither a US Citizen or a tax resident. I am an Australian citizen and an Australian tax resident and was only taxed in the US when I worked there under a visa in the 1990's. Does this change your answer.
Expert:  Lane replied 1 year ago.

Hi,

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OK in that y case you need to speak with the retirement administrator.

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Normally a 30% withholding rate is required for non resident aliens mon 401(k) distributions.

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However a reduced rate applies for certain countries including Australia as provided for in the tax treaty. This rate under the US tax treaty is 15% on lump sums and zero withholding on pensions. To be able to claim the reduced rate normally requires a completed IRS Form W-8BEN to be lodged with the US retirement fund.

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Then if that is your ONLY US income you may be able to get a refund on some of that by filing a US return (1040-NR in this case) so that the exemptions and progressive tax rates are applied (starting at 10% after personal exemptions), thereby possibly reducing the actual tax owed below 15% so that you generate a refund by lodging that US return.

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ON the Australian side, The ATO ID confirms that assessable income of an Australian Tax Resident includes statutory income from all sources – whether in or out of Australia.

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HOWEVER, there is a credit for tax paid in the USA to avoid double taxation of income.

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Hope this helps

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Lane

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