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UK SATR but large refund on US tax return (re IRA)

UK tax return - but client had a large refund on US tax return after large IRA distribution

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I do the UK tax return for an american person who has lived in UK for many years. Normally it is fairly straightforward as their total income and capital gains have been in the basic tax range in UK.

This year however they took a large distribution from their IRA in the US which takes them into UK higher rate taxes.

Among other things their December 2019 US tax return includes the IRA distribution of $65,000 and shows $19,500 federal tax was witheld (on 1042 - S). However when the US accountant finalised the US tax return it showed that a refund of just over $12,000 was due and was repaid.

When I finalise their UK tax return is it correct to deduct the net figure for foreign tax deducted of $7,500 ($19,500 less $12,000 repaid) (approx net UK figure £5,800) rather than the gross figure of $19,500?


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By Tim Vane
10th Jun 2020 18:36

Assuming that the IRA is chargeable to UK income tax (which I don't think it would be if it was paid as a lump sum), the figure of foreign tax credit to use will be the lower of the US tax charged on the income and the UK tax charged on the income. You will need to identify if the repayment was due on the income in question or for some other reason. However, as mentioned, you need to confirm whether it is taxable in the UK at all.

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By soundadvice
12th Jun 2020 09:56

Thank you Tim.

I have had a look at the UK/UK tax treaty and s17 (2) indicates that a lump
payment derived from a pension scheme established in a Contracting State (ie the IRA in USA) and beneficially owned by a resident of the other Contracting State (ie UK) shall be taxable only in the first-mentioned State (ie the USA).

Looking at the US tax return. The IRS withdrawal was included in Gross income (there was a small amount of other income in the US) then total tax due was calculated, WHT (the $19,500) was then deducted resulting in the refund of $12,000 in the US

So it looks like the lump sum was indeed taxed in the US so does not need to be taxed in the UK according to the treaty.

Should I just leave it off the UK tax return completely?

There was about $180,000 in the IRA pot before the withdrawal of $65,000)

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