distribution & income tax withholding

[eilano]

Employee with a green card was working here in the U.S. and was a participant in his employer’s retirement plan. He terminated employment and is back in the UK. His account balance is less than $5,000 and he plans on taking a lump sum distribution. He claims that the 20% mandatory withholding does not apply since he lives in the UK. Is this correct?

[GBurns]

I think that it is up to him to provide the basis and support for his reasoning, not for you to go find out.

If he had earned the related income etc while in the UK, I could see where his exclusion amount on foreign earned income could apply, but he earned and contributed as a Resident Alien while in the U.S and therefore should be subject to the 20% withholding unless he can provide proof for other treatment.

[Guest Harry O]

You need to look at the new US-UK tax treaty that became effective a couple of months ago. There are very specific rules on the taxation of pensions. If he is entitled to a treaty benefit, he will need to provide you with appropriate documentation.

[mbozek]

There is an IRS publication on tax treaties, including taxation of retirement benefits. Generally the new tax treaties provide that only the nation of domicile will tax retirement benefits. In the absence of a tax treaty there is 30% withholding of retirement benefits under IRC 1441.

[david rigby]

This might have some relevant information: http://www.irs.gov/pub/irs-pdf/p515.pdf

There is a reference to graduated withholding tables in Circular A or Circular E, but I could not locate a link for those.

[Appleby]

Because the employee is a green-card holder, it appears that he cannot be exempted from withholding. Only non-resident aliens can be exempted from withholding ( depending on the treaty rate) by providing the payor with the appropriate forms, certifying that he/she is not an expatriate trying to avoid taxation. A non-resident alien and a green-card holder are mutually exclusive.

[Harwood]

Circular E is the Employer's Tax Guide, Publication 15

http://www.irs.ustreas.gov/pub/irs-pdf/p15.pdf

[Appleby]

Note too that he could be subject to expatriation tax if he is found to have tax avoidance as a principal purpose

See http://www.irs.gov/businesses/small/intern...d=97245,00.html

[Guest Harry O]

There was a nice little scam for UK residents before the new tax treaty put it to an end. A UK resident who worked in the US would surrender his green card, return to the UK, elect a lump sum from his US retirement plan, avoid US withholding tax by virtue of the treaty, and avoid UK tax on the payments since the UK exempts many lump sum pension payments from tax. I understand this loophole has been closed by the new treaty.