Recently we’ve been asked to cover the topic on filing US federal income tax return if you are a US citizen living in the UK. You asked and we delivered! Read further to learn more about your US and UK tax obligations.
The starting point for any US expat tax-related topic is gaining a clear understanding who needs to file US taxes. Individuals, who are US citizens, including the ones with dual citizenship (UK/US in this case), or Green Card holders abroad who earn a minimum threshold for filing a US tax return are required by US tax law to file a tax return and pay taxes you may owe. Below are numbers for 2017:
- If you are under age 65 and single, your minimum income requirement is $10,400
- If you are 65 or older, then filing requirements raise slightly to $11,950
- For self-employed individuals, the threshold is $400 regardless of age and filing status.
Check the full table of federal income tax brackets for 2017 or send us an email to receive a personalized consultation.
US UK Tax Treaty Explained
If you are a US citizen living in Great Britain, the US UK Tax treaty comes in handy to reduce double taxation. There are often situations when it is not clear which country you have to pay your taxes to and this treaty provides clarification. Generally speaking, your residency status in each of the countries determines the country you will pay taxes to. The official document is comprehensive (about 131 pages!) and covers following topics for both individuals and corporate entities:
Article 2: Taxes covered. If you are wondering which taxes are covered in both US and UK, take a note that in the case of the US it’s federal income taxes imposed by IRS excluding social security taxes and federal excise taxes imposed on insurance policies issued by foreign insurers and with respect to private foundations. And when it comes to UK taxes, they include the income tax, capital gains tax, corporation tax and petroleum revenue tax.
Article 4: Residence. Who is a considered to be a resident in respective countries? For example, when it comes to a corporate entity, it states that a company is treated as resident in the UK if it is either established there or managed and controlled there (Paragraph 5).
Article 6: Income from Real Property. The general rule is that income of a resident of the UK or the US derived from real property situated in the other Contracting State may be taxed in the country in which the property is situated.
Article 7: Business profits. A general rule that business profits of an enterprise of US or UK may not be taxed by the other country unless the enterprise carries on business in that other country through a permanent establishment.
What Is Our US Tax Advice For UK Residents?
As an American living abroad, you need to look into different US expat tax solutions which may protect you from possible double taxation and can help you save money on your federal income tax return. The following is our expert US tax advice for UK residents:
- In most of the cases, it’s better to claim Foreign Tax Credit over using Foreign Earned Income Exclusion (here is the infographic which explains why FTC wins over FEIE),
- A Foreign Housing Exclusion will allow you to have additional exclusions from your income for some amounts paid to cover household expenses due to living in the UK,
- If you are US citizen living in the UK who never filed a tax return, you may be eligible to use Streamlined Procedures to file late back taxes penalty-free,
- Don’t miss any tax deadlines: the UK tax year is different than the US tax year. You submit tax returns to Her Majesty’s Revenue and Customs office (HMRC) by October 31st if you file by paper and by January 31st of the next year if you e-file. There are no any extensions.
What about US expat tax deadlines? If you are a US citizen living in the UK, who needs to file US tax return, keep these dates in mind:
1. April 17th, 2018 – to file individual tax returns and pay taxes you owe;
2. June 15th, 2018 – automatic 2-month extension deadline given for US expats and FBAR filing due date;
3. October 15th, 2018 – final deadline to file your US tax returns and FBAR if the extension was requested before the original due date.
What About UK Taxes On Foreign Income?
We already know about US taxes on foreign income and how to keep more of it as a US expat. The UK tax requirements on individual worldwide income depend on 2 factors: UK domicile and your residency status. So if you are a UK resident, then you must pay taxes on total investment income regardless of your location. And it is the same amount that you report on US expat tax return.
If you are wondering who should file UK tax returns, here is your answer: the HMRC sends tax forms to each individual and if you have paid sufficient tax using payroll withholding, you may not receive a form. If you have an investment income or self-employment income, then you are required to file a return and submit the taxes due on the income: income of GBP 100,000 or more, profits from the sale of shares, second homes, and other capital gains, property rental income etc.
How To Save On A Tax Return If You Are A US Citizen Living In The UK
First of all, you can save money on both US and UK tax returns depending on your residency status. As we mentioned earlier, it determines if you need to pay tax in the UK on foreign income. For example, do you know that non-residents pay tax only on their UK income?
There are special rules for UK residents who have permanent domicile abroad as usually, residents have to pay UK tax on all their income! If you either spent 183 or more days in the UK in the tax year or your only home was in the UK, where you spent at least 30 days and owned/rented/lived in it for at least 91 days in total, then you are automatically considered a resident.
Speaking about US federal income tax returns, both Foreign Tax Credit and Foreign Earned Income Exclusion will help you to lower your tax bill. Don’t forget about Child Tax Credit and Additional Child Tax Credit! They are the real bonuses for people with children as their dependents. For each eligible child, you may receive a credit of up to $1,000 to offset your tax owing. Generally speaking, you can take a tax deduction for these items: personal exemptions, qualified retirement contributions, alimony payments, charitable contributions, medical expenses etc.
Due to complexity and nuances of both US and UK tax laws, we strongly recommend every taxpayer to consult a US expat tax professional to understand and be aware of all the UK residency and domicile rules, the requirements, available US expat tax deductions, credits, and exclusions which will help to lower the tax bill.
Have a question? Contact Olivier Wagner.
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