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American tax implications of the 25% tax-free lump sum element of a UK pension
My client is a US citizen who has lived in the UK for many years and has British citizenship. She files a US tax return every year because the US asserts worldwide taxing rights over its citizens for ever.
However she never has a tax liability because she only has some earned income in the UK (for which there is a US exemption) and some interest (covered by allowances and double tax relief).
She is near the age when she can draw her pension. The 25% lump sum will be tax-free in the UK but is apparently taxable in the US. It will not be covered by the foreign earnings exemption and there will be no UK tax so there is no double tax relief.
I am struggling to understand the double tax agreement. Article 1(4) appears to allow the US to ignore the terms of the treaty...
