Filing US tax returns from the UK
can be overwhelming and confusing. We’ve put this guide together to cover the main considerations such as ISAs, pensions, salary and self-employment income. You’ll find detailed information on what you have to report regarding your UK bank accounts (FBAR) and if you’re eligible for the US Child Tax Credit Refund.
Read the guide and get in touch with any other questions.
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For US citizens or Green Card holders selling their principal home in the UK, it is tax-free. However, capital gains tax could be enforced on the US side if the gains exceed the exclusion amount.
Self-invested personal pensions (SIPP) can sometimes be a tricky area to navigate, and what seems like a straightforward pension scheme for a British citizen can actually end up being a lot more complex for a US Citizen or Green Card holder.
For US taxpayers who own foreign companies, remaining tax compliant can feel onerous. As a small business owner in the UK, US expats can find some relief from filing and tax requirements.
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.
Do I actually have to pay US tax on my UK income?
After realising that they need to file a US tax return, a big question for many Americans, Green Card Holders and dual nationals living in the UK, is whether they need to pay US tax on UK income. The US-UK Tax Treaty is one of the most comprehensive and beneficial treaties (or ‘totalisation agreements’) out there for Americans. Its main purpose is to avoid double taxation. The Treaty prevents US expats living in the UK from paying social security/Medicare taxes to two countries at the same time, as contributions can be made to either country, depending on how long you will stay in the UK.
There are 2 types of benefits for expats living and working in the UK:
– The Foreign Earned Income Exclusion (FEIE), and
– Foreign Tax Credit
Under the FEIE / ‘Form 2555’, you report all of your current income on your US tax return and claim a corresponding exclusion / deduction to arrive at your taxable income. So, the amount excluded will be taken off of your net tax liability and you will just pay tax on what is left above the FEIE limit (around $100,000 / £80,000 a year) if there is any left over. However, form 2555 is not the most beneficial way for filing US taxes from the UK. The best way is to claim the Foreign Tax Credit.
The UK is a high tax jurisdiction, with tax rates higher than the US – meaning that whatever is paid in the UK, is still higher than US tax. If you are paying taxes in the UK where it is higher, you effectively never end up paying taxes to the IRS. So, once your US tax liability is calculated on your US tax return and you claim Foreign Tax Credit for the UK tax payments you’ve made, the bottom line will be 0 or negative. To put it simply, taxes paid to HRMC are offset on the US side, which will mean that you will end up paying no taxes in the US.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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