29 Oct Tom LR Griffiths with tax advice for US expats
My blog covers all kinds of US expat tax information, advice and updates, but in this post, we’re getting back to basics. Expat taxes for US citizens living in the UK are complex.
If you are a US expat living and working in the UK, then it’s your responsibility to ensure you are fully compliant. This means, not only must you understand your obligations to Her Majesty’s Revenue and Customs (HMRC), but also to the US Inland Revenue Service (IRS).
And for those unfamiliar with the complex US tax system, these obligations are not immediately clear. Which is exactly why tax advice for US expats is essential.
Is expert tax advice for US expats always necessary?
The reality is, without specialist advice, navigating the US tax system and the UK’s HMRC is time consuming and difficult. Life gets very complicated for US expats in this position, particularly towards the end of the tax year.
And while some may assume that the tax authorities will sort it out between them, this is not the case. Both agencies do communicate with each other, but it’s still necessary to fill out separate tax returns with both countries. It may not seem logical, but US expats must file tax returns with both countries to keep within the law.
Some US expats who have lived in the UK for most of their lives remain unaware of their US tax obligations until red tape catches up. This is dangerous territory as it can eventually lead to hefty fines.
I would always advise you contact a tax expert and to find out exactly where they stand with their tax obligations. The IRS does have various amnesty programmes in place to help you get up to date without incurring penalties, but the onus is on you as a US expat to organise your own taxes.
Basic tax obligations for US expats living in the UK
Every US citizen, including those living overseas and Green card holders, must file Form 1040 with the IRS. This is the annual tax return form. If you are a US expat and have calculated you owe no taxes to the IRS, you still have to file the return.
There are no exceptions to this rule, and it catches many people out, as they assume there is no obligation to file if they earn less than the current threshold (2019’s is $105,900).
You also need to tell the US Treasury department about any foreign bank accounts you hold, both in the US and UK. So, in addition to Form 1040, US expats must file Form FinCEN114 to cover the Foreign Bank Declaration (FBAR) rules. This includes pensions and any bank accounts where they are a signatory. Those that fail to file both of these forms every year can be hit with thousands of pounds in penalties.
Be aware that these are not the only forms to file. There are number of additional forms relating to personal circumstances that must go along with Form 1040 to the IRS. Once again, it’s up to you to find out which forms you need to file and when.
Double taxation agreement lowers US tax bill
There is some good news for US expats. You won’t be double taxed by both authorities on the same income. This is down to the Double Taxation agreement between the US and UK, which means every pound paid in UK social security and income tax reduces your US tax bill with the IRS by a corresponding amount.
As mentioned earlier, there are IRS amnesty programmes in place. The Streamlined Procedures allow expats to get up to date with FBARs and tax returns. However, these are for people that the IRS considers as accidentally non-compliant. In other words, only for those who can prove they didn’t understand their obligations.
Excluding UK income from US taxes
If you want to exclude your UK income, then as a US expat you must meet certain criteria. To exclude income from freelancing or any other income earned in the UK from US taxes, you must:
- Prove you are a tax resident in the UK
To do this, you must inform HMRC that you are a tax resident. You must also sell any property owned in the US and get acceptance of your status from the IRS.
You must also fulfil one of the two following criteria.
- Pass as a bona fide resident
To qualify under the bona fide resident test, you must live in the UK for a complete tax year. However, that still isn’t enough if your work contract is short-term. The IRS will evaluate a number of factors including whether your family is living with you in the UK or are still in the US. They will also look at whether you have bought property in the UK, and whether the HMRC is aware of your status.
- Pass the Physical Presence test
Out of the full tax year, if you can prove you have spent 330 days in the UK, then you will be considered physically present for tax purposes.
Frequently asked questions about US expat tax
Here are some other frequently asked questions by US expats regarding tax requirements.
- How are pensions affected?
Any payments made into a pension fund are treated differently in the US and UK. In the UK, there is a generous limit for pensions to be considered tax deductible against earned income. However, UK payments into pensions are unlikely to be considered tax deductible by the IRS.
- What about income from self-employment?
Self-employed US expats must also include a Schedule SE form with their annual tax return. US expats working as self-employed in the UK still have to pay US self-employment taxes. These include social security and Medicare tax on profits made. These are not covered within the double taxation agreement with both countries. The only way to not have to pay these is to revoke US citizenship entirely.
- Should I renounce my US citizenship?
This is the most extreme solution to US expat tax dilemmas. It is only for people who never want to live in the US again. While it will remove any obligation to the IRS, US expats may have to pay exit taxes. These are payable if average income over the five years previous to renouncing was more than $165,000. Anyone considering renouncing US citizenship must ensure they are fully compliant with all liabilities with the IRS before doing so.
Get expert advice from a US and UK tax expert
Double taxation agreements do mean that most US expats will not be paying much, if any, tax to the IRS. However, for the self-employed, Medicare and social security remain the exceptions.
The biggest tax burden on US expats is the administration involved in insuring compliance. Finding an appropriately qualified US and UK tax expert is absolutely essential to manage the complex obligations with the IRS. At Ingleton Partners, we have decades of experience in handling these matters, and can ensure your tax bill is as low as possible. Contact us here for a review of your US and UK tax affairs.
Tom LR Griffiths is a US and UK tax specialist at Ingleton Partners.