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emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3170
Experience:  IRS licensed Enrolled Agent and tax instructor
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I have a defined benefit and a defined contribution pension

Customer Question

I have a defined benefit and a defined contribution pension plan from working in the UK. I understand that I can take a 25% lump sum payout that is non taxable in the UK and am trying to determine whether these distributions will be taxable in the US. The Double Taxation agreement between the US and UK governments implies that these distributions will not be taxable. Is this correct?
Submitted: 2 years ago.
Category: Tax
Customer: replied 2 years ago.
I am a UK and US citizen and have lived in the US since 1988.
Expert:  emc011075 replied 2 years ago.

Hi. My name is ***** ***** I will be happy to help you.

As US citizen you are required to declare your worldwide income. Foreign pension is included in your taxable income and taxed according to domestic law in the country you reside.

According to tax treaty between US and UK, pension is taxed only in one country. If you’ve been given exemption status from the foreign jurisdiction you’ll need to report the pension income on your US return.

Sorry if this is not the answer you were hoping for. Let me know if you have any questions.

Expert:  emc011075 replied 2 years ago.

I see you read my respond. Do you have any questions? Is there anything else I can help you with today?

Customer: replied 2 years ago.
I understand that I have to report the lump sum distribution as US income, but since the UK government allows 25% of the cash value of a pension to be taken without UK tax implications and the US/UK DTT states that income not subject to tax in the UK should also not be subject to tax in the US, does this not imply that the UK non taxable distribution is also not subject to tax in the US?
Expert:  emc011075 replied 2 years ago.

First, there's no double taxation if the income is excluded from tax in UK and only taxed in US.

According to treaty: "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."

But there's a difference between tax exempt and tax excluded. Tax exempt is income that is exempt from taxes by the law, like government bonds, welfare, inheritance/gifts, distribution from Roth IRA/401K or VA benefits. Tax excluded is income that would normally be taxed but under certain circumstances is not included in taxable income, like nontaxable portion of social security income, foreign income or capital gains from the sale of your principle residence (if you qualify) My understanding here is that the pension would have been taxed if you didn't opt out for the lump sum but instead you would take monthly/regular distribution. Lump sum option is excluded from the income, not exempt. Pension income, by its nature, is taxable income.

I still believe the entire amount is taxable in US, the treaty clearly talks about tax exempt, not tax excluded income.

Expert:  emc011075 replied 2 years ago.

I see you read my respond. Any questions?