Do we pay tax in the UK or USA or both??
 

Hi,

Hopefully someone can guide me here as i'm sure some people have been through the same experience. I went to the USA on an 18 month j-1 visa. I met my husband there and got married. I paid taxes in the USA for the tax year 2005. My husband and I moved to the UK in June 2006 and have been working here ever since. Now its getting time to pay our 2006 taxes in the USA. We were technically self-employed as we were hired as contractors to the US Army so we were paid in one chunk out of which we were supposed to keep a portion aside to pay taxes.

We are about to start the process of moving back to the USA and getting me a spouse visa so I want to get our taxes right as we have to provide them for the I-864 and I-130. What is the best way to proceed? Should we just pay our taxes as normal via e-file or can someone recommend a UK based tax firm that would help us? Do we need to declare and pay taxes in both countries....its all so confusing...any guidance would help!!!!

Re: Do we pay tax in the UK or USA or both??
 

I sympathize, I know how confusing the tax side of being an expat can be.

I can't help you much except to say that there's a US-UK tax treaty that means you can't get taxed twice (i.e., by both countries). My GUESS (and that's all it is) is that you'd submit your tax form to whichever country you'd spent most of the tax year in. What buggers things up a bit is that the US tax year runs Jan-Dec and the UK tax year runs Apr-Mar.

Re: Do we pay tax in the UK or USA or both??
 

You pay them wherever your tax home is. If it's UK, you pay them there, and vice versa. If you do pay in the UK, and your husband is a US citizen, he'll have to file a US tax return as well, but as has been said, there is a double taxation agreement in force and if you show you've already paid tax overseas in the UK, you will not pay US side.

If your tax home is in the US, you will have to pay US taxes, but not UK. However, if you have remained outside the US for 330 days of the year or more, you will be exempt the first $80k.

However, I'm thinking that as you spent only a short period in the UK, since Jun last year, and are returning to the US, you will have less than the 330 days outside of the US, therefore, you will pay full US taxes, but shouldn't have been paying them to the UK. However, I'm not sure how that plays with your current Visa status - what I'd do is get yourself an ITIN number, and then your husband can file the return jointly.

Re: Do we pay tax in the UK or USA or both??
 

only if your income is less than $80K per person, otherwise you then pay tax to the IRS on anything above that...includes capital and the like...

Re: Do we pay tax in the UK or USA or both??
 

This sort of stuff is pretty tricky, so I imagine it's not easy or cheap to find professional advice. At the very least, you might want to read up a bit, so you have an idea as whether any advice you get seems sensible.

I am not a professional - the following is my opinion which might help you get started.

For US taxes:
(there's a very comprehensive guide to US tax for "aliens" at http://www.irs.gov/pub/irs-pdf/p519.pdf)

US citizens are taxed on worldwide income.

Non-US citizens are taxed one of two ways, resident alien or non-resident alien. If you meet the "green card" test or "substantial presence" test in 2006, you are a US resident for US tax purposes. Resident aliens are taxed like US citizens. (It is possible to file a "dual status" tax return with both non-resident and resident parts of the year taxed differently - this gets even more complicated).

If you left the US in June 2006 after 1.5 years, it's likely you meet the "substantial presence" test for 2006, so you would file taxes as a US resident alien.

This means the two of you would file US 2006 Tax as married filing jointly, and would include your US and UK income on the tax form.

For UK taxes:
(my experience is that the Inland Revenue are very approachable and accurate if you call them up and ask, unlike the IRS)

Income earned in the UK while resident in the UK will be liable to UK income tax, for both you and your husband. So in April, you would each file a UK self-assessment form. Note that if you're genuinely self-employed, you should inform Inland Revenue when starting self-employment and pay Class 2 national insurance.

Avoiding dual taxation:
If you are obliged to pay UK tax on income that you also have to declare on your US tax form, you can subtract the UK tax paid from the US tax owed by claiming a "foreign tax credit". http://www.irs.gov/pub/irs-pdf/p514.pdf

Hope this helps,

Richard

Re: Do we pay tax in the UK or USA or both??
 

That all seems logical, but it's a case of "easier said than done". How do you figure out how much of your US tax bill directly arose from your UK earnings? Also, if you have any allowances (such as offsetting mortgage interest, as you are allowed to do on your US tax return, but not UK) how does that figure in? Seems that would reduce your US tax bill, but then when you submit your UK tax return showing how much tax you paid in the US, they'd look at it from a UK tax law persepctive, i.e., "didn't pay much tax, we need to take some more" ... ? (they won't care that the US allowed you to offset mortgage interest and relocation expenses against your US tax bill)

Also, how do you figure in the fact that the US tax year runs Jan-Dec, but the UK tax year runs Apr-Mar?

Here's what I'm thinking of doing (I returned to UK in July 2006):

Submit my 2006 US tax return showing all US income, mortgage interest, etc., and pay subsequent taxes (actually, get tax refund, as usually happens).

Submit 2006-2007 UK tax return in April 2007 showing all UK income, etc., and pay UK tax (or get refund, as appropriate).

My guess is that this probably is not the right way to go about it, but my question is "Who the heck will ever tell me it's not right and how would they figure out what is my correct tax owed?"

Re: Do we pay tax in the UK or USA or both??
 

Good point - I imagine if you're paying what looks like a reasonable amount of tax to both sides, it's unlikely anyone will object. It's not like you're manipulating things to dramatically reduce the tax you're paying. Also, it seems with a lot of this stuff, there's no clear right answer anyway.

No idea about the detailed answer to your questions, but if you're not going to be living in the US for the 2007 tax year, then you might want to look up "dual status" tax returns - basically does what you're suggesting where you pay full US taxes up to the day you leave, then only tax on US-source income after that.

Re: Do we pay tax in the UK or USA or both??
 

Not much help to most....but I did find out that in MA, you can claim some of your rent in the state taxes, small percentage, but it's better than nothing :)

Re: Do we pay tax in the UK or USA or both??
 

Here is an article from the Daily Telegraph Expat section which might be helpful. It has a helpline phone number for the Inland Revenue that is specially for expat questions.

http://www.telegraph.co.uk/global/ma.../25/fitax2.xml