US-UK tax treaty, Article 22 (income from gambling) & saving clause

[IrishRose54]

Hello,
I'm a UK-born citizen & naturalised US citizen about to move back to the UK; I have no property/obligations/employer in the US.

I'm wondering whether the US-UK tax treaty, article 22, will allow me to live in the UK as a professional gambler and legally avoid US income tax on my winnings .

The original US-UK tax treaty doesn't specify 'Gambling' in article 22 ('other income', page 24 of https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf) but the subsequent technical explanation from the US Dept of the Treasury DOES (see page 74 of https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf).

I'm concerned the US will invoke article 1, paragraph 4 of the same treaty (the 'saving clause') and demand I pay US income tax on on my UK-sourced winnings .

Alternatively, if for some reason the technical explanation doesn't apply, I could move to Ireland, as the US IRS website lists a similar US-Ireland treaty document that does specifically mention Gambling as allowable income in Article 22.

Thank you very much for your time,
Rose

edit 1 - just to clarify, I am hoping I can simply file a US1040 plus form 8833 (invocation of treaty, if can invoke article 22) plus 8854 (expat statement), plus FBAR/FATCA. I want to specifically AVOID the FEIE route (assuming it could even be applied for gambling), given the nightmare of documenting tens of thousands of gambling losses; proving professional versus amateur status, and because my profits may be in excess of 100K; this would mean I would actually have to pay tax on profits over the ~$100k theshold which would be very considerable (fyi again, there is no taxation on gambling in the UK or Ireland and therefore no foreign tax credits). Why would the Department of the Treasury even specify gambling is allowed as 'other income' if it wasn't for this scenario?

 

[LdiJ]

What is the name of your state? NY

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Hello,
I'm a UK-born citizen & naturalised US citizen about to move back to the UK; I have no property/obligations/employer in the US.

I'm wondering whether the US-UK tax treaty, article 22, will allow me to live in the UK as a professional gambler and legally avoid US income tax on my winnings.

The original US-UK tax treaty doesn't specify 'Gambling' in article 22 ('other income') but the subsequent technical explanation from the US Dept of the Treasury does.

Or will the US invoke article 1, paragraph 4 of the same treaty (the 'saving clause') and demand I pay US income tax? Will the IRS use this clause to force me to pay US taxes on my UK-sourced winnings (even though the UK government doesn't tax such winnings)?

Alternatively, I could move to Ireland, as the US IRS website lists a similar US-Ireland treaty document that specifically mentions Gambling as allowable income.

Thank you very much for your time,
Rose

You do have to file a US income tax return. However, you get an income exclusion of about 100,000 USD before any tax kicks in, and then you get credit for any taxes paid to the UK, after that. Therefore, there is not much chance that you will get stuck with any more than minor double taxation. Particularly since income tax rates in the UK appear to be considerably higher than those in the US.

 

[IrishRose54]

You do have to file a US income tax return. However, you get an income exclusion of about 100,000 USD before any tax kicks in, and then you get credit for any taxes paid to the UK, after that. Therefore, there is not much chance that you will get stuck with any more than minor double taxation. Particularly since income tax rates in the UK appear to be considerably higher than those in the US.

Thank you for your suggestions. I've edited my original post to capture my concerns with your approach. Kind regards, Rose

 

[LdiJ]

Gambling income is normally "other income" and is taxable. You can normally only deduct expenses to the extent of your income. If you can prove that you are a professional gambler then you can use Schedule C and deduct all of your related expenses, and it's possible to have a loss.

Whether or not you can attempt to take a treaty position that the gambling income is not taxable in the US at all is something that I think that you need to pay a tax attorney to take a position for you on the subject. I believe its going to require case law research unless you happen upon one that is already expert on that particular area of tax law.

 

[IrishRose54]

Thank you for your reply. I do intend to see a tax attorney, but wanted to get all my ducks in a row first.

I did some research on case law and found the McManus (2014) case, in which this professional gambler sought relief from US taxes on his winnings, due to his domicile in Ireland, which has a clear tax treaty with the US. He invoked article 22 of the tax treaty, filing form 8833, as we hope to do.

Unfortunately, Mr. McManus was deemed to be in fact a tax resident of Switzerland at the time (even though he had a big property and was 'domiciled' in Ireland), so he lost the case. Here's a quote by Senior Judge Firestone:

"If Mr. McManus is a “resident” of Ireland he would not be subject to tax on his winnings in the United States. He would be subject to tax on his winnings in Ireland and it is not disputed that Ireland does not tax gambling winnings."
See https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2015cv0946-50-0

Thanks again for your time,

 

[LdiJ]

Thank you for your reply. I do intend to see a tax attorney, but wanted to get all my ducks in a row first.

I did some research on case law and found the McManus (2014) case, in which this professional gambler sought relief from US taxes on his winnings, due to his domicile in Ireland, which has a clear tax treaty with the US. He invoked article 22 of the tax treaty, filing form 8833, as we hope to do.

Unfortunately, Mr. McManus was deemed to be in fact a tax resident of Switzerland at the time (even though he had a big property and was 'domiciled' in Ireland), so he lost the case. Here's a quote by Senior Judge Firestone:

"If Mr. McManus is a “resident” of Ireland he would not be subject to tax on his winnings in the United States. He would be subject to tax on his winnings in Ireland and it is not disputed that Ireland does not tax gambling winnings."
See https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2015cv0946-50-0

Thanks again for your time,

Again, I am not prepared to give an opinion on this matter. I think that it requires a tax attorney whom you have paid to research the issue and formulate an opinion for you. You need someone who is firm enough about their opinion that they are willing to sign a tax return with that position, and are prepared to go to court with you if needed.

Unfortunately the penalties in a situation like yours are rather enormous if you lose, therefore you need all of the t's crossed and the i's dotted.

 

[IrishRose54]

Okay, thank you again. I agree with your sentiment, and will be sure to hire a (and perhaps more than one) good tax attorney.
Cheers,
Rose

 

[Taxing Matters]

Hello,
I'm a UK-born citizen & naturalised US citizen about to move back to the UK; I have no property/obligations/employer in the US.

I'm wondering whether the US-UK tax treaty, article 22, will allow me to live in the UK as a professional gambler and legally avoid US income tax on my winnings .

The original US-UK tax treaty doesn't specify 'Gambling' in article 22 ('other income', page 24 of https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf) but the subsequent technical explanation from the US Dept of the Treasury DOES (see page 74 of https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf).

I'm concerned the US will invoke article 1, paragraph 4 of the same treaty (the 'saving clause') and demand I pay US income tax on on my UK-sourced winnings .

Alternatively, if for some reason the technical explanation doesn't apply, I could move to Ireland, as the US IRS website lists a similar US-Ireland treaty document that does specifically mention Gambling as allowable income in Article 22.

I think the answer to this is pretty straightforward. Gambling income is generally other income under the treaty and might be treated as business income in the case of a professional gambler but either way that doesn't help you. The savings clause in the U.S. - U.K. tax treaty (and which is a feature of pretty much every U.S. tax treaty) applies here and the U.S. will tax that gambling winning because you are a U.S. citizen and the treaty articles for business income and other income are not among the articles excluded from the reach of the savings clause in Article I, paragraph 5 of the treaty. For the most part U.S. citizens cannot invoke a tax treaty against the U.S. to avoid U.S. income tax. As for the McManus case, that doesn't apply here because Mr. McManus was not a U.S. citizen. So the savings clause was never at issue in that case. But while the gambling winnings are taxable income to you in the U.S. you do get a foreign tax credit for the income tax you pay to the U.K. on that income so you are not double taxed on it. The answer will be the same if you go to Ireland.

 

[IrishRose54]

Hi,

Thank you for your comments. It does seem to be the consensus that Article 22 is not applicable in my case. Therefore, I have little option but to declare/establish myself as a non-resident self-employed professional gambler and pay self-employment taxes and use FEIE (at least until I renounce).

Cheers,
Rose

I think the answer to this is pretty straightforward. Gambling income is generally other income under the treaty and might be treated as business income in the case of a professional gambler but either way that doesn't help you. The savings clause in the U.S. - U.K. tax treaty (and which is a feature of pretty much every U.S. tax treaty) applies here and the U.S. will tax that gambling winning because you are a U.S. citizen and the treaty articles for business income and other income are not among the articles excluded from the reach of the savings clause in Article I, paragraph 5 of the treaty. For the most part U.S. citizens cannot invoke a tax treaty against the U.S. to avoid U.S. income tax. As for the McManus case, that doesn't apply here because Mr. McManus was not a U.S. citizen. So the savings clause was never at issue in that case. But while the gambling winnings are taxable income to you in the U.S. you do get a foreign tax credit for the income tax you pay to the U.K. on that income so you are not double taxed on it. The answer will be the same if you go to Ireland.

 

[LdiJ]

I didn't want you to make a decision based on the opinion of anyone on an internet forum. I still do not think that you should. I am not disagreeing with the other response. I just think that you need one where you have paid for the research.

 

[IrishRose54]

LdiJ,

thank you for your genuine concern. As mentioned above, we will be meeting face to face with at least 2 tax attorneys that have specific experience working with professional gamblers; we would never base our opinion on 'what a bloke said down the pub' but I fully understand that there are those that do.

The Article 22 conclusion above is based on the views of several tax attorneys based in UK, Ireland and the USA, received over the last few days - I've approached more than 20 professionals so far to investigate if they had experience in this field (with a view to seeing them and paying them for their opinions).

I will update this thread once I have more information.

Cheers,
Rose

I didn't want you to make a decision based on the opinion of anyone on an internet forum. I still do not think that you should. I am not disagreeing with the other response. I just think that you need one where you have paid for the research.