jmood

For a USC living outside the US - I heard that if your income is less than $85K per year, you just file a return but there is no tax due. If your income is more than $85K what happens? Let's say you live in the UK and pay all your due UK taxes. Does the amount you earn in the UK above $85K get additionally taxed in the US as per the existing US income tax brackets after the personal exemptions are applied, or with no exemptions, or is it taxed totally differently?

penguinsix

It's not quite that simple.

You owe taxes on your worldwide income. Salary in the UK, interest income paid to the bank account in the US, capital gains from selling stock or a home no matter where.

Assuming you meet the tests for the Foreign Income Exclusion, you can 'exclude' about $95,000 of FOREIGN INCOME from your 'gross income' on your tax return. You may also qualify for the Foreign Housing exclusion as well. The details are particular to your specific case, but if you get that you can exclude a certain amount of qualified housing expenses.

You cannot exclude money made in the US, such as interest income, or rental income from a property in the US.

After you take that out, for most people you find that your "income" is relatively small, or basically nonexistent. You then go through the other hoops of deductions for medical expenses or mortgage interest or whatever. If at the end of all that you still have income then you have to pay tax on that income (though, unfortunately, at the rate it would have been had you not excluded the foreign income).

Unfortunately a message board really isn't the best place to get the answers you need. I would recommend contacting an accountant with some experience in cross-border tax filings. The US expats in the UK board has some recommendations: http://talk.uk-yankee.com/index.php?board=11.0

p.s. don't forget about FBAR or FATCA, two other things Americans overseas often need to deal with each year.

nun

As a US citizen you are taxed by the US on your worldwide income. If you are a UK resident and ordinary resident, the UK will also tax your worldwide income on an arising basis. You are saved from double taxation by the US/UK tax treaty.

You have to file US taxes and might also have to file a UK self assessment if you have any non UK income. For 2012 the US allows you to exclude up to $95100 of foreign earned income, so that's wages not things like dividends and capital gains. You can use foreign tax credits to reduce your US tax due on any income above the FEIE limit. Alternatively you can choose not to use the FEIE at all and just take a tax credit for tax you have paid in the UK on all your income which will probably end up with you having a zero (or very small) US tax bill. The approach you take will depend on your particular circumstances.

If you have UK pensions, ISAs or other investments and accounts you should be particularly careful that you file the appropriate FBAR and FATCA forms and deal with them correctly on your US taxes. If you have US investments such as mutual funds, ROTHs, 401k, IRAs etc you should also understand their UK tax implications. Retirement accounts are not a big deal in the accumulation phase, but the UK taxation of US mutual funds will depend on their HMRC reporting status.

Steve_

Read IRS publication 54, that's what it's for.

Also read the instructions for IRS Form 2555, which I think answers your question in detail.

jmood

Thank you all.