Tax question - worries!

Old Sep 11th 2018, 11:25 pm
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Default Tax question - worries!

Hello. My husband and I recently moved home from the USA after just over 5 years abroad. We're both British Citizens, born in UK with UK passports.

I understand that for the upcoming US tax returns we will owe taxes on all US income, and will have to declare worldwide income too....So we will need to declare income from our salary earned in the UK for the latter part of this year.

My question - which is stressing me out - is will we have to pay US tax on our UK salaries through end of year? Or can we apply the 'foreign earned income exclusion' to ensure we are not double taxed? I understand the US/UK has a tax treaty but this whole situation is so complex with lots of caveats & exceptions. We will certainly be electing a US/UK tax specialist to ensure our records are correct for both countries.

Here are some additional bits of info for context:
.
  • We don't own a house or pension etc. We simply left the US where we were renting, shipped some boxes back, and are now renting in the UK
  • We pass the substantial residency test for the USA (lived there >183 days in 2018 alone)
  • This year I understand we are classified as dual aliens i.e. we were classified as resident aliens (from start of year until when we moved home) and became non-resident aliens from when we left USA through end of 2018. Therefore we have to file form 1040 per guidance here on dual alien taxation
  • This year we will only have lived back in the UK for approx. 5 months, and for only a handful of weeks each year since 2013
  • Prior to 2013 we were both active tax residents of the UK for ~8 years
I hope this is enough info to at least put my mind at rest. Will we have to pay double tax on UK earnings or does the US/UK tax treaty save us?

Thank you/brit

Last edited by britpop; Sep 11th 2018 at 11:28 pm.
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Old Sep 12th 2018, 8:25 am
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Default Re: Tax question - worries!

The eligibility for FEIE is dependent on meeting the bona fide residency test or the physical presence test. Start here: https://www.irs.gov/individuals/inte...come-exclusion - and scroll down to read the specifics from the links provided. If you go that route, you can qualify by filing an extension if necessary, but bear in mind that any tax due must still be paid by the normal April 15 due date.

Someone else will come along to give complete (and better) info, but assuming you are paying UK tax during calendar year 2018, it's likely that you could simply take a credit for UK tax paid against your US tax. The tax treaty theoretically saves you from double taxation, but in practice it doesn't always do so, partially because of poor wording in some instances, and the US 'saving clause' which gives the US the right to tax as if the treaty didn't exist.

Just be happy that this will not haunt you for the rest of your life.
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Old Sep 12th 2018, 9:42 am
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Default Re: Tax question - worries!

Thanks for your reply Vadio. I used the interactive tax assistant tool but noticed this disclaimer at the start which i think applies to me:

This interview will help you determine whether income earned in a foreign country is eligible to be excluded from income reported on your U.S. federal income tax return.

Information You'll Need
  • Amount of time you lived in or were present in a foreign country.
The tool is designed for taxpayers that were U.S. citizens or resident aliens for the entire tax year for which they're inquiring. If married, the spouse must also have been a U.S. citizen or resident alien for the entire tax year. For information regarding nonresidents or dual-status aliens, please see International Taxpayers and Publication 519, U.S. Tax Guide for Aliens.
A few things that stand out here which make me think it's more complex than simply the bona fide residency or physical presence test (both of which i wouldn't pass as will have only been in uk for 5 months this year and very few months over the last 5 years)
  • I am not a US citizen nor am i a resident alien for the entire tax year
  • I believe I am classified as a dual citizen status alien and think i need to file as a non-resident alien because that will be my status at the end of this tax year
Such a whirlpool of unknowns!

Last edited by britpop; Sep 12th 2018 at 11:24 am.
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Old Sep 12th 2018, 11:09 am
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Default Re: Tax question - worries!

The only thing I can say for sure is that you are not a 'dual citizen alien' as you are not US citizens. Good luck, and again, someone with more knowledge may come along and provide more information.
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Old Sep 12th 2018, 11:40 am
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Default Re: Tax question - worries!

You're correct - I mis-typed and should have said 'dual status alien' - not dual citizen alien. Thank you Vadio
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Old Sep 12th 2018, 1:13 pm
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Default Re: Tax question - worries!

As I understand the situation:

There are some facts to consider:
1. For US returns, a US Person status for the tax year is determined by the taxpayers status at 11:59 PM on 31 December.
2. As long as one retains US permanent resident status they are subject to US tax. For someone with 5 years total US permanent residence, once permanent residence is officially surrendered the individual is no longer considered a US person for tax purposes (8854 is not required).
3. Claiming FEIE during periods of US permanent residence will lead to considerable difficulties.

Is there a green card and if so when will it be/was it surrendered? This is the critical factor and so far there has been no mention.

If, at 11:59 PM on 31 December, the permanent residence has been officially surrendered the individual is a non-resident alien for US tax purposes. For their last year of partial US residence, they can file an 1040NR which will include a 1040 (attached as a separate statement) covering the exact period prior to surrender of permanent residence. Income received during this period of US Person permanent residence is computed on the 1040. Income received during the period of non-residence is not included on the 1040NR if it is not US taxable.

If , at 11:59 PM on 31 December, the permanent residence has NOT been officially surrendered the individual remains a US Person, and in a continuing residence situation (5 years in this case) the individual is subject to US tax for the entire year. If they also are subject to UK tax (in this case for 5 months) they may offset their US tax by claiming tax credits for UK tax paid during that US tax year. If no UK tax was paid or deducted at source during that US tax year, a 1040X would be required in order to claim tax credits once the UK tax has been paid and is known.
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Old Sep 12th 2018, 1:24 pm
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Default Re: Tax question - worries!

Originally Posted by theOAP View Post
As I understand the situation:

There are some facts to consider:
1. For US returns, a US Person status for the tax year is determined by the taxpayers status at 11:59 PM on 31 December.
2. As long as one retains US permanent resident status they are subject to US tax. For someone with 5 years total US permanent residence, once permanent residence is officially surrendered the individual is no longer considered a US person for tax purposes (8854 is not required).
3. Claiming FEIE during periods of US permanent residence will lead to considerable difficulties.

Is there a green card and if so when will it be/was it surrendered? This is the critical factor and so far there has been no mention.

If, at 11:59 PM on 31 December, the permanent residence has been officially surrendered the individual is a non-resident alien for US tax purposes. For their last year of partial US residence, they can file an 1040NR which will include a 1040 (attached as a separate statement) covering the exact period prior to surrender of permanent residence. Income received during this period of US Person permanent residence is computed on the 1040. Income received during the period of non-residence is not included on the 1040NR if it is not US taxable.

If , at 11:59 PM on 31 December, the permanent residence has NOT been officially surrendered the individual remains a US Person, and in a continuing residence situation (5 years in this case) the individual is subject to US tax for the entire year. If they also are subject to UK tax (in this case for 5 months) they may offset their US tax by claiming tax credits for UK tax paid during that US tax year. If no UK tax was paid or deducted at source during that US tax year, a 1040X would be required in order to claim tax credits once the UK tax has been paid and is known.
Thank you for your reply. No green cards involved, just H1B. The last date I was physically present in the US was close to mid-year 2018, and since that date I will have been in the UK with a close connection to the UK (ie working in UK and living in UK).

I haven't done anything to close/cancel my Visa yet, however my immigration attorneys do have an email in their inbox regarding this so anything that needs to be done to formalize my change to non-resident alien will be processed in the coming weeks i imagine. But hopefully my last date of physical presence plus the subsequent closure of my visa (as well as any docs required detailing my new UK ties) will be sufficient here.

Last edited by britpop; Sep 12th 2018 at 1:29 pm.
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Old Sep 12th 2018, 2:06 pm
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Default Re: Tax question - worries!

Remember, immigration status and tax status are two different things. Although working on an H-1B and the obvious restrictions of the visa, for tax purposes make sure the visa is cancelled ASAP. It may not be much of a problem, but who understands the whims of the IRS?
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Old Sep 12th 2018, 5:30 pm
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Default Re: Tax question - worries!

Don't confuse the length of time to define tax resident (which obligates you to file a return) for the length of time you report your income (and thus are liable to pay tax). When I returned to the UK from the US (L1 visa), my final tax return in the US was for a partial year. I returned on 31 July, so:
  • For the US tax return, I reported US income for the entire year, but UK income only for when I was resident in the US, ie 1 Jan to 31 July. After that date, I was not a US resident so none of their business what I earned in the UK.
  • For the UK tax return, I reported all income (US and UK) I received from 1 August to 5 April following year. I also reported what tax I had paid Uncle Sam on the above, and claimed the appropriate deduction.
There wasn't much overlap - due to the difference in tax bands I may have paid a couple of hundred pounds to HMRC on US income after I returned home, which was a pro-rata end of year bonus. Nothing to lose sleep over anyway.
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