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Watch Rose-ann explain the most commonly asked questions for American expats in UK.

U.S. Tax Help When
You’re Living In The U.K

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How are your US taxes affected when living in the UK?

If you are a US citizen or Green Card Holder living in or planning on moving to the UK, you may be wondering whether you still need to file US tax returns. There is a lot of information out there, so we spoke about expat taxes with Rose-ann, a certified EA, to give you the straight-forward and necessary information.

Who needs to file?

If you are an American expat living in or arriving to the UK, you will need to file your US taxes. This goes for any US citizen, dual national or Green Card Holder in the UK, even if you are no longer earning US income. Just because you are not earning income in the US, your US tax filing requirements do not stop. The US tax system works on a citizenship basis, so if you hold US citizenship, you are taxable on your worldwide income. For example, if you are not earning US income but have an employment contract in the UK, this must be reported on a US tax return.

Who doesn’t have to file a US tax return when living in the UK?

A typical example of an American in the UK who does not have to file a US tax return is a university graduate, who has come to the UK for an internship. With an internship you’ll likely only earn €6,000 for the calendar year. As a single filer, this is below the $12,200 threshold (even once converted from GBP to USD), and you do not have to file.

Frequently Asked Questions 

What is the threshold for Americans in the UK to file US tax returns?

If you are living in the UK, you will most likely still need to file a US tax return. The threshold is generally pretty low, so there are only a few US expats in the UK who do not need to file US tax returns.
If you’re a single filer, once you earn in excess of $12,400 USD you have to file a tax return. For married joint filers the threshold is $24,800, and for Head of household it is $18,650. All worldwide income of any currency counts towards your income total and if you’re over the filing threshold you’ll need to file a US 1040 Federal Tax return for that year.

Those who are married filing separately only need to earn more than $5 and then they’ll need to file a US tax return too. If you are married to a non-American and your worldwide income exceeds just $5 you need to file a US tax return. This catches people out… just because you may not working and earning an income, it doesn’t mean you don’t have to file. For example, you would be required to file if you made $5 through bank interest or pension/retirement interest, the sale of stocks or receiving dividends. This threshold took a major change in 2018 following the Trump tax reforms of 2017.

Finally, if you’re self-employed, or have any self-employment income over above US$400 per year (in any currency from any country) you must file a US tax return disclosing your whole worldwide income from all sources.

What is the Headof Household filing status on US tax returns?

The Head of Household filing status comes with great tax benefits if you qualify. You are considered a Head of Household if you meet the following criteria:

  1. You are providing more than 50% of the costs of expenses in a given household.
  2. You are unmarried (single, divorced or legally separated) or considered unmarried (married to a non-American or non-Green Card Holder) by December 31 of the year. If you are married to an American, the status generally does not apply to you.
  3. You also need a dependent.

For example, if you are single and living with a dependent child, you can file as Head of Household and claim higher standard deductions you may also be eligible for the Child Tax Credit Refund if your income isn’t too high.

What counts as a dependent when filing US tax returns as a Head of Household?

The criteria for having a qualifying dependent is as follows:

  1. You lived in a household which you paid over half of the costs to keep with a dependent as listed on the IRS website, for more than half of the year.
  2. In the case of a dependent parent, they do not have to live with you in order for you to file as Head of Household. You just need to have paid more than half of the costs for keeping their principal home.

What counts as household expenses in order to file as a Head of Household?

The following are some of the expenses that if you pay over 50% of, will qualify you to file as a Head of Household:

  • Rent
  • Insurance
  • Property taxes
  • Mortgage interest
  • Utility bills
  • Repairs and household maintenance

How does the US-UK Tax Treaty and Totalization Agreement work?

 The US-UK tax treaty was updated and signed in 2001, to tackle double taxation. As a US expat living in or planning on moving to the UK, understanding the tax treaty and totalization agreement is essential. US tax treaties are agreements between the US and a foreign country, to provide tax relief and prevent double taxation. Tax treaties cover income tax and capital gain tax, while totalisation agreements cover social security tax.

The UK as a tax treaty and a totalization agreement with the United States.

Totalization Agreement:

 The US has entered into totalization agreements with several countries including the UK, to avoid the double taxation. This agreement prevents US expats living in the UK from paying social security/Medicare taxes to two countries at the same time. With the totalization agreement, contributions can be made to either country – which country depends on how long you will stay in the UK. If you are planning to live in the UK for up to five years, you should continue paying social security/Medicare taxes to the US. If you intend to live in the UK for longer or are unsure about how long you will live in the UK, you should instead pay these taxes in the UK.

Those working for a US employer in the UK and those who are self-employed are generally required to continue paying these US social security contributions. Those working for a foreign firm generally don’t have to. But, keep in mind, if you’re paying National Insurance in the UK it’s likely you won’t have to pay Social Security and Medicare in the US.

If a US citizen or Green Card Holder lived in the UK for 7 years and therefore paid their National Insurance contributions to the UK in this time, these contributions would count towards US social security benefits for when they retired.

Foreign Tax Credit:

 If you are a US expat living and earning in the UK and have either paid or accrued UK taxes, you will benefit from using the IRS’ foreign tax credit. Under this programme, you can take your foreign income taxes as US tax credit to reduce your US tax liability.

You can claim credit for foreign taxes that were ‘imposed’ on you, which really means a tax deducted from your wages. In general, only income taxes (wages, war profits and excess profit taxes) qualify for the credit.

The amount of foreign tax that qualifies does not necessarily equal the amount of tax withheld by the foreign country, due to tax refunds. In order to qualify for credit, the amount of tax must be reduced from any refunds made to you.

How to file for Foreign Tax Credit:

In order to claim the foreign tax credit as an individual, you need to file IRSForm 1116 with your US tax return. Before completing Form 1116, all of your foreign taxes paid will need to be converted into US dollars. The IRS prefers this to be converted to the foreign exchange rate at the date of each transaction, but for practical reasons, you can use the IRS foreign exchange set rate for the year, for most income types. To help, the IRS provides annual average exchange rates on their website which you can use.

When it comes to Capital Gains, you need to use the Foreign Exchange rate on the day of the transaction. Many internet sites such as xe.com provide historical exchanges rates that you can rely on.

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