mickok

Hi all! Well we've been in the UK since moving back from the US in May. For me it's been 35 years away, and for my USC wife, it's a whole new experience. Lots to say about the transition, lots of ups and downs. But overall we're glad to be here and at the same time experiencing a lot of homesickness, which I expect will never really go away.

I'm struggling to get a handle on my US/UK taxes. Right now I'm looking at the IRS 1116 Foreign Tax Credit form. Our income is mostly from the US: a state pension, savings interest, and some wage income (we both teach part-time at a US college but our work is completely online and we never visit the US for work purposes). We only have income from some savings interest here in the UK. So no PAYE income, and I need to file for Self Assessment in the UK. Unless I'm misunderstanding anything, all of our income will be fully taxable by the UK under the tax treaty, and all UK tax paid will qualify for tax relief from the IRS.

I would be claiming foreign tax credit for taxes PAID rather than ACCRUED. My question is: since I won't actually PAY UK taxes on my 2013 income until 2014, can I simply claim a tax credit for this for the 2014 tax year rather than the 2013 tax year, even though the 2014 UK tax payment is partly for tax of income received in 2013? If not I'm wondering how does one calculate the UK tax on 2013 income between our date of arrival and 31 Dec 2013 so that I can request a credit for that amount on my 2013 form 1116?

Sorry for the lengthy delivery of a simple question, I couldn't figure a shorter wording!

nun

Be careful. As you are performing work in the UK you are liable for UK income and payroll taxes...watch out for US earnings deductions.

The tax treatment of your US state pension (I assume you mean a state Government pension) critically depends on your citizenship, so are you a US citizen?

You have to estimate the taxes you pay to align the different US and UK tax years and do continual corrections over the years. Good record keeping is vital

JAJ

Agreed. Being a cross-border employee has a lot of issues involved, especially with payroll taxes (National Insurance / Social Security). Although it may be possible to use the social security agreement to mitigate these, it is generally better to re-define the work relationship to that of a contractor.

Then you pay tax / National Insurance on a self-employed basis in the U.K. and since there's a social security agreement between the U.K. and U.S. you should normally exempt from U.S. self employment tax.

As to the specific question, an online forum may not have the answer. Have you read the instructions to form 1116? Also, have you looked to see if you can claim the Foreign Earned Income Exclusion - especially if you become a contractor rather than an employee. Too late to fix any 2013 tax issues, but not too late for 2014.

mickok

Thank you for your kind responses. I hold dual citizenship, with a North Carolina state pension, and I teach online for a US college. My wife is a USC and also teaches online for a US college. I had assumed that we would report these income streams as foreign income on our UK self assessment, would pay UK taxes and NI, and would request a tax credit on our US tax forms. I'd also assumed we would have to pay US Social Security on this income as well as NI since there's no chance of the college redefining our work as contractors, and that this would be a future benefit for us. I have over 30 years paying SS in the US but we will need to consider whether WEP will be an issue for my wife in our situation.

I realize I may be asking too much, but I'm curious how does citizenship affect the way my pension is treated under the treaty? I thought that 90% of foreign pensions were taxed as income by the UK, but perhaps that is just for pensions not covered by a treaty?

I know the forum might not be the place for tax questions. My dilemma, that I'm sure others share, is whether or not to go to the expense of a tax accountant given that our overall income is quite low (less than 30k ukp). I fear that that any extra tax savings generated would be dwarfed by the amount of the accountant fees.. Has anyone else struggled with this and do others handle their own taxes in these circumstances?

Thanks to all on this forum. I've appreciated the help and encouragement I've received and hope to have more to contribute myself at some point.

nun

Because you are performing the work in the UK you are right that you will have to pay UK income and payroll taxes. However, make sure that the US college isn't withholding US income and payroll taxes on your earnings. You'd then apply a FTC or FEIE on your US taxes.

You need to look at the SS agreement between the US and the UK, but you should not be paying payroll taxes twice on the same earnings. You should apply for a refund of FICA and make sure it is not withheld as it sounds as if you are self employed and being paid by the US college in which case NICs are due but not FICA.

http://www.ssa.gov/international/Agr...phlets/uk.html

If you have 30 years of SS payments WEP will not apply to you.

As a US citizen the Saving Clause in the treaty allows the US to keep taxing you as if the treaty was not in place, except for a few exclusions. So for most US pensions there will be a US withholding tax, then you have to pay the UK tax on 90% of the payment as it has primary taxation authority, then you apply Article 24 and get a credit for UK tax paid, and any US tax already withheld, on your US taxes which often results in a US tax refund.

For SS payments the situation is different as US SS payment made to the UK are only taxable in the UK. However, if you are a US/UK dual citizen and get a UK state pension paid to you in the UK it is both US and UK taxable because of some poor wording in the treaty.

For Government pensions the situation is different again, but for a US/UK citizen the result is that you end up paying tax just as if it was a non-Government pension.

mickok

That's great information, thanks so much nun! It all fits my own understanding except I hadn't seen the link to the SS Totalization agreement which is very helpful. The college deducts federal income taxes so I'll need to submit a Foreign Tax Credit to get a refund on that as well as the taxes on my pension. I'll talk to them about FICA withholding..

I will qualify for a small UK pension, what a pain that this will be taxed twice! The joys of dual citizenship!

Thanks very much for your help!

nun

The payroll taxes depend on how exactly you're employed, where and when you were hired and how long you intend to do the work in the UK etc. If a US company sends you to the UK for less than 5 years you can keep paying FICA and be exempted from NICs.......but I don't think that would apply to your situation.

FYI you won't be taxed twice on any of your income. The treaty and US and UK domestic rules are sometimes complicated, but they don't tax you twice. There's always a tax credit or exemption to avoid that. The rules basically just dictate the proportion of your tax bill you pay to each country.

mickok

Yup, the most challenging issue seems to be figuring out who to pay what proportion of our taxes to and what forms to complete! What fun. But .. based on your comments and everything else I've learned, it looks as if we should pay taxes on all our income (pension, wages, some book royalties and savings interest) to the UK and apply a foreign tax credit to our US taxes based on that amount. Which is relatively straightforward. To keep things as simple as possible we're avoiding any investments other than what we already have in 401-ks and SEP/IRA's, which I believe will be taxed as pension income by the UK but only when we actually withdraw funds. We do both have cash ISAs which I know must be declared as annual savings interest on our federal forms along with other UK savings interest.

Then there are state taxes! I've yet to determine whether I'll need to pay North Carolina taxes even though I'm non-resident. The state requires me to file even as a non-resident because I receive income over $5500 from within the state. Not sure what that means yet but I'm prepared for the worst..

nun

Because you live in the UK, the UK will have primary taxation authority in most circumstances, but your US citizenship means that you'll always be liable to US tax which is why you need to go through all the FTC issues. If you were just a UK citizen things would be a lot easier as you could file a W-8BEN to avoid US tax.

I can't help with NC tax. You should call NC revenue. I'll be in a similar situation to you if I move back to UK as I'll be a US/UK dual citizen getting a Massachusetts state pension. I'll have no MA tax liability as MA state pension is free of MA tax and I'll be non MA resident. You should see if NC taxes it's state pension.

mickok

Massachusetts has the right approach! Up until this year North Carolina taxed public pensions with just a $4000 exemption ($2000 exemption for private pensions) but beginning 2014 these exemptions have been dropped so pensions are fully taxable.. SS and VA benefits are not taxable..