British citizen with a US IRA account
I have a client that lived here under a Green Card and created an IRA account. She was married to a US citizen she was still a British citizen. After her husbands death (6 years ago), she has since moved back to the UK (in 2010) She has given up her Green Card. She still has the IRA account in the US.
Does she need to pay taxes on withdrawals (likely yes) and how does she do this?
Permalink Submitted by Peter Lingane on Wed, 2011-09-14 16:24
Review the US/UK income tax treaty which can be found at http://www.irs.gov.
Determine whether your client is a resident of the US or UK or a dual resident. The residency criteria are set out in Article 1. Since she has given up her green card, you are likely to conclude that she is a UK resident and a US nonresident.
Articles 17 of the treaty says that a lump sum distributed from a US pension to a UK resident is taxed by the US while a regular payment from a US pension to a UK resident is taxed by the UK. Article 18 says that pension income is not recognized until the pension is actually paid to the participant.
Thus it would appear that there is a flat 30% US tax (no deductions) if the IRA is distributed before annuitization or before the onset of required distributions and that required or annuitized distributions are taxed at graduated UK rates.
The IRA custodian is responsible for withholding 30% US tax but withholding is not required on distributions which are exempt from tax under the treaty.
I suggest that you confirm this interpretation with someone knowledgeable in international taxation, preferably someone who is also familiar with your client’s UK tax situation, and I’d appreciate feedback if this interpretation is not correct.
Permalink Submitted by Peter Lingane on Wed, 2011-09-14 18:22
The residency criteria are in Article 4 of the treaty.