UK/US taxes

Old Mar 3rd 2012, 6:02 pm
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Default UK/US taxes

I just typed a message, but think it has disappeared so I am retyping it.

Last year after my move back to the UK I filed taxes electronically for my US tax return. I worked part of the year in the US part in UK so listed both earnings.

This year I am a bit confused as to what to do. I want to file electronically again with the US (I am a UK and US citizen) as required, but have no US earnings just UK ones. Will they expect me to pay taxes? I would hate to have to owe them (US) money when I wasn't even in the country at the time.

Could anyone enlighten me as to how this works?
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Old Mar 3rd 2012, 6:55 pm
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Default Re: UK/US taxes

Originally Posted by Dapple View Post
I just typed a message, but think it has disappeared so I am retyping it.

Last year after my move back to the UK I filed taxes electronically for my US tax return. I worked part of the year in the US part in UK so listed both earnings.

This year I am a bit confused as to what to do. I want to file electronically again with the US (I am a UK and US citizen) as required, but have no US earnings just UK ones. Will they expect me to pay taxes? I would hate to have to owe them (US) money when I wasn't even in the country at the time.

Could anyone enlighten me as to how this works?
You are covered by the UK-US tax treaty, so won't get double-taxed (or taxed twice). Depending on your tax status, earnings, exemptions, personal allowance, etc., the US may determine you owe additional tax - but I think generally income tax rates are higher in the UK, so the income tax you pay here will likely be higher than you would have if you'd earned the same amount in the US (so the US probably would consider you don't owe tax to them - you will get "credit" for the tax you paid to HMRC under the UK-US tax treaty).

One complicated aspect is that the dates of the two tax years (UK and US) are different. I'm not sure how you work this out, but I assume you'd figure out from your UK payslips how much you earned and how much tax you paid from Jan 1st to April 5th, and from April 6th to December 31st, and add them up.
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Old Mar 3rd 2012, 9:24 pm
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Default Re: UK/US taxes

If you're talking about earned income from employment (as opposed to investments etc.), you can probably take the Foreign Earned Income Exclusion (somewhere north of $90k):

http://en.wikipedia.org/wiki/Foreign...come_exclusion

Don't forget to file your FBAR and FACTA if applicable.
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Old Mar 6th 2012, 9:14 am
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Default Re: UK/US taxes

Just complete your Form 1040 as usual.

The way I did it and AFAIK;

You are required to report your UK earned income (on Form 1040, Line 7). Then you can claim Foreign Earned Income Exclusion (Form 2555) which will enter a Credit (negative amount) on Form 1040 Line 21.
If you had UK earned income under equivalent of $92,900 then the Credit will equally offset the Income. No need to report the Foreign Income tax you paid.
You should make this reporting, it is not OK to assume you get the FEI Exclusion and therefor not report your income.

If you earned over equivalent of $92,900 then you are liable for US taxation on the excess and this is where an attributable amount of foreign income tax plays a part. Foreign Tax Credits can be capped if the income is high, it is not always direct one-for-one credit.

You still qualify for US standard deduction and exemptions, which may help if you have US passive income e.g. interest or dividends received

If you had passive (e.g. interest) income in UK (form 1040 Schedule B, same as US passive income) you can claim credit for foreign tax paid (Form 1116).

You do have 2 months automatic extension to file (and pay AFAIK) by reason of having a non-US address, extendable on application by another 4 months.

------------

You mention electronic filing. Is this the IRS e-file process that you use?

I used TurboTax and TaxAct to figure my US tax on my UK income;
a) they do not allow electronic filing from overseas
b) I was not happy with the way TT figured my Foreign Tax Credits and TT admits in their Q&A to problems. TaxAct produced a different result to TT so I also figured it by hand, confirming TaxAct result but since I already did it manual I will file my manual report.

Last edited by J.JsOH; Mar 6th 2012 at 10:36 am. Reason: for clarity
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Old Mar 6th 2012, 9:48 am
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Default Re: UK/US taxes

You are a US citizen and thus subject to US tax on all worldwide income until the day you die.

Now that said, there are a lot of credits and exemptions (like the ones mentioned above) that can negate a large portion of your income from the US tax man such that the filing is essentially a paperwork exercise which results in a bit fat check for $0 being made out to the US government. The foreign earned income, the foreign housing exemption, and the tax treaty as well.

The general rule is that if you don't owe, you don't have to file. If after all the exemptions and whatnot your balance due to the US government is $0 you don't have to file. Now, most professional accountants, especially those dealing in cross-border tax filings, would strongly recommend you do file even in the cases when you don't owe given the complexity of these forms and the recent crackdown launched by the IRS on overseas 'hidden' bank accounts and whatnot.

You should also note that as a US citizen overseas you need to:

a) file an FBAR on any bank account > $10,000 US that you have under your control.
b) file a FATCA for any bank account > ?$>50000? Honestly I don't know the number because the law just took effect this year, but it's a bit higher than the FBAR requirements.
c) file a form 5471 if you own a certain percentage of a foreign company.
d) you may also have some state income tax filing requirements if you haven't made a clean break (i.e. still have property, driver's license, bank accounts, etc).

You might want to google each of those for more details on the requirements.

I also recommend the US expats in the UK forum which has a special section just for dealing with US taxes while living in the UK:

http://talk.uk-yankee.com/index.php?board=11.0

Good luck
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