Leigh_A

Hi all

We moved to the US in April 2014 and so are just having our first year tax returns prepared for us.

Between my spouse and I, we paid $30,000 in tax in the UK last year (some from before our move, and some after). However, due to the limitations on the Foreign Tax Credit, we are only able to apply $15,000 of this to our 2014 return.

Whilst the remaining $15,000 can be rolled over to future returns, we are just not likely to use this, certainly not in the next couple of years at least.

I perform my work in the US, but for a UK employer. My salary is paid in the UK and has UK tax deducted. I had naively assumed that the Foreign Tax Credit would take into consideration all of the tax I paid in the UK and I wouldn't be double-taxed at all in 2014.

As I am a US tax resident and I actually performed the work activities within the US, could I technically claim a refund of all the tax I paid to HMRC from April 2014? That would equate to about $7,500 from April to Dec. It seems to make more sense to just get that money back from the UK (if that is possible) and use it to pay against my US taxes, rather than having it tied up in a Foreign Tax Credit that is rolled over to another year that is unlikely to ever be used...

Just thinking aloud really and I've probably missed something completely obvious!

nun

You'll only be able to use the FTC up to the amount of US tax you owe. But you have a fundamental problem in that you should not be paying UK income tax at all if you live and work in the US.

I would file a UK return and claim back all the UK income tax you paid while a US resident....then just pay your US income taxes and no need for FTC.

Michael

I believe the reason that you can't take 100% tax credit is due to the following.

Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.

Foreign Tax Credit - How to Figure the Credit

Since you were a resident of the US for tax purposes from April and paid for work in the US, earned income from April is considered from sources in the US and therefore the IRS has the first bite at the taxes. Since you weren't a resident of the UK and didn't work in the UK from April, the UK government should not have taxed your earned income. In other words, it is not the taxpayer that decides where they want to pay their taxes but tax residency is the determining factor. This not only applies to the US tax laws but typically to the tax laws of all countries.

I'm not sure why your company assumed that they should continue to withhold and pay taxes to the UK government on your earned income when you were a resident of the US for tax purposes and worked in the US.

In my opinion, you should be able to get a refund from the HMRC since your earned income from April should not have been taxed by the UK since you were not a resident of the UK for tax purposes.

Michael

In my opinion, that depends on whether they file "dual status" or not. If they file "dual status", then foreign income made prior to April shouldn't be US taxable and foreign tax credits not taken. If they do not file "dual status", then the income made in the UK prior to April is declared on the US tax return and foreign taxes paid on that income can be used to offset US taxes owed.

Both ways should be calculated to determine the best tax advantage since deductions allowed is different depending on which way the return is filed.

Leigh_A

Thank you both so very much - your responses were incredibly helpful and I appreciate the time you took to reply.

Our tax return is being prepared by Deloitte (organized by my spouse's employer) and they have not mentioned this at all. They simply treated all of our UK tax paid for 2014 as FTC, even post-April. I really shouldn't be surprised though; when calculating our tax, they only considered a return filed as Married Joint and opting as residents for the full year. When we asked them this morning what the tax calculation would be if we stuck with Dual Status, they seemed genuinely surprised that we would even want to know and hadn't even calculated it themselves. They had not considered any of the other available filing statuses for us!

So just to clarify my understanding - regardless of whether we file as Dual Status or elect to be considered residents for the full year, all of the tax I paid in the UK for wages I earned whilst living in the US must be reclaimed from HMRC and paid to the IRS.

goatherder

Hi

E&Y still do mine over here in the US. They get it wrong constantly. Not a year has gone by in 5 that they have not missed something.

You should file as dual status in the US. You will pay US income tax on the portion that relates to when you are a resident.

You reclaim from the HMRC the portion from when you are in the US.

Only issue to watch is the timing of the refunds. Tax is normally only done a cash basis. Meaning this year you will pay US tax on your income from the time you are in the US and in April next year get a refund from HMRC for the overpayment because you are in the US. I had to file an extension for the first year if I recall to satisfy some sort of residency test. I paid an estimate of the US tax in April and then sorted it out later once the UK situation was cleared up. Deloitte should be telling you all about this (its the one thing that E&Y got right).

Goat.

Michael

You claim all tax paid in the UK for wages earned whilst living in the US must be reclaimed from HMRC but you don't pay that to the IRS. You only pay the IRS what is owed according to US tax laws which could be more or less than what is reclaimed from HMRC.

Michael

Is your husband working for a small company or a company that does few transfers? Normally a large company knows that once an employee starts working in the US, they are a US resident for tax purposes and requires the employee to fill out a W-4 (US income tax withholding form). For an employee on a L-1 visa, they can possibly have the option of paying either UK NI or FICA (social security and Medicare tax) for up to 5 years but they don't have an option for income tax.

nun

The responses to your questions are all in agreement.

What you must do is stop your employer from taking out UK taxes. You also need to think about National Insurance vs FICA and make sure your employer is dealing with those correctly in your particular circumstances. Basically both your employer and Delloite have done a piss poor job and landed you with troubles that could have been easily avoided. Instruct Deloitte to get you a full refund of all UK income tax paid for work you did while US resident and to file a US dual status return for 2014.

Michael

+1

Everything was caused by your husband's company's incompetence and therefore they should pick up all the additional costs due to that incompetence.

It will likely take time to get the UK refund but either a US extension or taxes must be filed by April 15th and either US taxes must be paid or a tax estimate paid. Since you will have to pay the taxes or estimate, the company should give your husband an interest free loan to cover the taxes or estimate until everything can be resolved.

There may also possibly be penalties and interest owed to the IRS since US taxes were not withheld and your employer should be responsible for those. They should agree to pay for those penalties and interest but that will likely be considered as income to you so they should also pay any tax that you may owe on that income.

Leigh_A

Thank you all for your responses.

My spouse's employer is certainly not small - he works for one of the largest banks. My employer however is small and have kept me on working remotely from the U.S. because they needed the specialist knowledge I have on their services. In all honesty, they have no idea what they are doing in terms of me working from here. But that is due to end on 31st March, so it won't be a problem for much longer.

Luckily we are fully paid up here. I never did quite trust Deloitte and so kept aside a huge portion of my salary each month and in January I made a large estimated tax payment (just in case) which has covered my taxes in the US. At the time I asked Deloitte to help me calculate my estimated tax payments, which consisted of them emailing me through the 2014 tax tables the day before the final quarter's payment deadline, telling work out the tax due and to then take off any tax I had paid in the UK (no mention of a possible limitation) - but I just didn't trust that advice and so I paid everything I thought I owed here without deducting UK tax paid. And I'm mighty glad I did!!

I've just ran through the figures filing as Dual Status (Married Separate) and we are definitely better off that way.

So now the money I get to reclaim from the HMRC will be mine to keep.

Michael

OK, I didn't realize that it was your job that created the problem. If you decide to find a new job or become self employed, apply for an Employment Authorization Document (EAD) and then you will be legal to work in the US. It takes about 60-90 days to receive an EAD after application. Not all dependent visas authorize a spouse to work.

nun

So if your husband paid in the US? and it's just you that is still paying UK income tax? I can see how Deloitte might get confused if that's the way things are. Did you file a P85 when you left the UK? I'd call HMRC, explain your situation and ask them how to claim the tax back.....a P85 is probably your starting point.

Steve_

File dual-status, that way you can eliminate the tax up to April, have a read of IRS publication 519. Although you won't be able to claim the standard deduction.

Basically that's not legal, you're not resident in the UK anymore so you have to either be self-employed in the US or be on a US payroll. You would then invoice the UK company. You would no longer be their employee but a contractor instead. You're no longer subject to UK taxes. There should be no need to file for a foreign tax credit - you shouldn't be paying foreign taxes, you're performing the work in the US.

File a P85 and become non-resident. Have a read of the IRS publications on self-employment, basically you have to pay both halves of the payroll tax (FICA). You can use a corporation instead if you want but if you've only got one client there's no real point, especially if they're in a foreign country. You might need to get a business licence depending on local law. There's no VAT, and there's no sales tax even if you're selling them something because it's an export (they may however owe HMRC the VAT on the import, however export of services is zero-rated anyway).

You might be able to talk HMRC into refunding all the taxes that have been withheld but bear in mind that might get your employer into trouble because they should have taken you off their payroll.

tht

The UK might also view you as tax resident in the UK depending on if you traveled back there and for how many days. Having a job in the UK would probably not go in your favor in trying to prove you left and were no longer resident.

Another important point to note depending on where you live in teh US, is that (in general) the credit only applies to offset some federal tax, so if you pay state and/or city it wont help you there.

I don't think the HMRC will care about where you were working, if you were employed by a UK company and the income was remitted to you in the UK, they will want their cut.