American expats living in London find themselves in the unenviable position of having to file both U.S. taxes as a U.S. citizen, and UK taxes as a UK resident, on their worldwide income.American expats living in London find themselves in the unenviable position of having to file both U.S. taxes as a U.S. citizen, and UK taxes as a UK resident, on their worldwide income.
To complicate things further, the UK tax year runs from April 6th to April 5th, rather than being the calendar year.
Don’t panic though. Living in London is an incredible opportunity and experience. The history, culture, accent (once you get used to!), pubs, social scene, and having the rest of the UK (and indeed Europe) on your doorstep more than compensate for the double tax filing burden. And, in actual fact, double tax filing doesn’t have to be as complicated as many American expats living in London first fear.
British taxes in brief
If your only income is from employment in the UK, tax will be deducted at source and you don’t have to file a UK tax return.
Otherwise, the UK tax year ends on April 5th, and if you file online you have until the following January 31st to file.
The British equivalent of form 1040 is called form SA100, and it should be filed to the British equivalent of the IRS, which is called HMRC.
UK income tax rates range from 0% to 45%.
U.S. taxes for expats
The first good news is that you have until June 15th to file, with a further extension available until October 15th.
Furthermore, while it’s still obligatory to file, there are several exclusions that you can apply for that will reduce almost every expat’s U.S. tax liability to zero.
Many expats living and working in London find that they pay more in UK income tax than the U.S. tax they would owe. In this scenario, it’s normally most beneficial to claim the Foreign Tax Credit.
The Foreign Tax Credit offers U.S. expats a $1 tax credit for every dollar equivalent of tax that they’ve paid abroad. For expats in London paying more UK tax than they owe to the IRS, this means that they can claim more U.S. tax credits than they need, eradicating their U.S. tax liability while giving them excess tax credits that can be carried forward and which may come in handy in the future. The Foreign Tax Credit can be claimed on form 1116.
For U.S. expats earning under around $100,000 and paying less UK tax than the U.S. tax they owe, the Foreign Earned Income Exclusion is often be a better option.
The Foreign Earned Income Exclusion lets expats who can prove that they are either permanent residents in the UK, or that they spend at least 330 days outside the U.S. in the year, exclude the first around $100,000 of their income from U.S. taxes.
The Foreign Earned Income Exclusion can be claimed by filing form 2555.
Further U.S. filing requirements for expats in London
As well as filing a federal tax return, U.S. expats in London who have over $10,000 in total in foreign bank or investment accounts at any time during the tax year are required to file an FBAR (Foreign Bank Account Report). This means filing FinCEN form 114 online before October 15th.
Because FBARs are filed to FinCEN rather than to the IRS, the penalties for not filing are much higher, so it’s important not to ignore FBAR filing, especially as the almost all foreign banks and investment terms now provide the IRS with information about their U.S. account holders directly.
Expats living in London with non-tangible foreign assets (so not including property, or cars etc) worth over $200,000 at any time during the tax year also have to report them by filing form 8938 with their federal return.
Need to catch up with your U.S. tax filing?
If you’ve been living in London for a while but you didn’t know that you had to file U.S. taxes, there’s an IRS amnesty program that will let you catch up on your U.S. filing without facing any penalties.
It’s called the Streamlined Procedure, and to qualify you have to file your last 3 tax returns, your last 6 FBARS (if required), pay any back taxes that you owe (often none, once you’ve claimed the most beneficial exclusions given your circumstances), and self-certify that your previous failure to file was non-willful.
The Streamlined Procedure is a great opportunity for expats living in London to become U.S. tax compliant before the IRS come to you.
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