Filing U.S. tax returns from the UK
Filing US tax returns from the UK
The truth is, it 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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CHILD TAX CREDIT REFUND
Available to far more Americans in the UK than many think… check the criteria and claim your refund.
DO I NEED TO FILE?
If you’re working in the UK, it’s highly likely that you need to file US tax returns. If you’re not working and married to a non-American, you need to file too.
WHO DOESN’T HAVE TO FILE?
A typical example of an American in the UK who does not have to file a US tax return is a university graduate.
FTC VS. FEIE
The Foreign Tax Credit method is much better for those residing in the UK than the Foreign Earned Income Exclusion/ Form 2555, for the following 3 reasons…
FBARs
Reporting your non-US bank account information to the US Treasury isn’t difficult, but it’s really important. Big fines can be issued for those that don’t file FBARs.
UK PENSIONS
For most US tax filers, UK pensions aren’t an issue unless you’ve opened a SIPP or you’re contributing more money into your pension than your employer is.
ISAs
ISA (UK tax-free savings account) An ISA is usually bad news for Americans. The cost of reporting ISA activity usually far outweighs the benefits.
CAPITAL GAINS
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.
UK SIPP
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.
SELF-EMPLOYMENT
If you are self-employed and living in the UK, you’d effectively be the only person putting money into a pension fund. This means that you automatically have to report the pension as a foreign trust.
UK COMPANY
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.
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.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file US 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.
Connect with over 10,000+ expats today!
Embarking on an international journey shouldn’t mean navigating the complex world of US taxation alone. If you’re living and working abroad, our friendly, supportive Expat Tax Online Help Facebook group is here to assist. We’ve designed a community that serves as a comprehensive guide and resource platform tailored for US expats.
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.
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