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The UK currently has a pension (SIPP) contribution limit of up to 40,000 GBP per year (approx 60,000 USD at current exchange rates). 100% of this amount can be self-funded, in which case your contribution is treated as non-taxable income. But I'm a US citizen and have to file a US federal tax return, so I'm wondering how this size of contribution would need to be treated on a US tax return?

From my initial reading of the 2003 double-taxation tax treaty between the US/UK, a non-taxable income pension contribution in either country is treated by the other as the same non-taxable classification. (See http://www.hmrc.gov.uk/manuals/dtmanual/dt19939h.htm) Which means I'd be able to treat that 60k USD as non-taxable income on my US return too.

However, a co-worker (also in the same boat with respect to UK resident/US citizen) has asked his tax advisor about this situation, and been told that the US will limit the non-taxable portion to the 401k annual contribution limit. However, I'm aware that even professionals can make mistakes.

Given the large difference in tax involved, I'd like to be a bit more confident in how I handle this. Does anyone have any personal experience here, or perhaps have a recommendation on how to definitively find an answer?

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The 401(k) limit comes from this paragraph:

The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the other State to residents of that State for contributions to, or benefits accrued under, a pension scheme established in that State.

What it says, in your case, is the US would treat the pension contributions similarly to what it would treat similar contributions in the US, including the limits. "Similar", in this case, is the 401(k) plan.

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