tax advice

Old Jul 23rd 2011, 6:37 am
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Default tax advice

Hi,

Just wanted advice on one thing as I have searched online and can't find a simple answer to my question - I can find a ton of legal jargon but nothing that I can really understand.
My situation is I was born in the UK and have lived/worked there all my life. I am lucky enough to have dual nationality purely because my mother was born and lived in America for her childhood. As I have never worked or lived in America, is there still a requirement for me to file a tax return?
I am not trying to avoid doing so, just want to understand why I would be required to. I am obviously not entitled to any tax rebate from the IRS, as I have never paid taxes on any earnings in the US. Thanks to anyone who can answer this.
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Old Jul 23rd 2011, 8:09 am
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Default Re: tax advice

Originally Posted by gworrall View Post
As I have never worked or lived in America, is there still a requirement for me to file a tax return?
Yes. At least for Federal. Probably not any State.

Wasn't this discussed at:
http://britishexpats.com/forum/showthread.php?t=720479

I am not trying to avoid doing so, just want to understand why I would be required to. I am obviously not entitled to any tax rebate from the IRS, as I have never paid taxes on any earnings in the US.
Why? Because it's US law.
You may not have to pay anything because of exclusions of foreign earned income and credits for any foreign tax paid but you still have to file.
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Old Jul 23rd 2011, 3:48 pm
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Default Re: tax advice

Have to file...also have to declare monies and assets over $10K.

If a bloke, also have signed up for SS between ages 18-26.
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Old Jul 23rd 2011, 3:55 pm
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Default Re: tax advice

Originally Posted by JAJ View Post
Why? Because it's US law.
You may not have to pay anything because of exclusions of foreign earned income and credits for any foreign tax paid but you still have to file.
Also, you do not have to file for any year in which your income falls below the filing threshold for that particular year.

In practice this is something that you need to be aware of but that you don't necessarily have to do anything about as long as you don't actually owe the IRS any money since the penalty for not filing is a percentage of the tax that you failed to pay - if that amount is 0, then so is the penalty.
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Old Jul 23rd 2011, 11:56 pm
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Default Re: tax advice

Thanks md - good to get some practical advice - thats what I was hoping for.

I will be looking into this very closely over the next few days, and will complete paperwork, but I can't see that I owe any money to the IRS. Is there any reason why I would since I haven't ever worked/lived in America?
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Old Jul 24th 2011, 12:38 am
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Default Re: tax advice

Originally Posted by gworrall View Post
I will be looking into this very closely over the next few days, and will complete paperwork, but I can't see that I owe any money to the IRS. Is there any reason why I would since I haven't ever worked/lived in America?
It is possible.

The US taxes its citizens on their entire worldwide income but allows them to offset any income taxes that they have already paid in foreign countries (such as the UK) with which the US has a "tax treaty".

Essentially what you should, in theory, be doing is calculating your US income tax liability every year (the US tax year runs from 1st January through 31st December) based on your entire income for that year and the prevailing US Federal tax rates and then subtracting from that amount however much UK income tax you paid.

So, yes, depending on how much you earn and what the US and UK tax rates are in a particular year you could end up owing US income tax.

Last edited by md95065; Jul 24th 2011 at 12:40 am.
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Old Jul 24th 2011, 5:33 pm
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Default Re: tax advice

thanks md,

I will hopefully rectify this situation over the next couple of days, and pay what I owe, if anything. As I understand it I have until 31st August to do this. Can you let me know your source of info because I can't seem to find a lot online that relates to my particular situation. Cheers!
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Old Jul 24th 2011, 6:12 pm
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Default Re: tax advice

Originally Posted by gworrall View Post
thanks md,

I will hopefully rectify this situation over the next couple of days, and pay what I owe, if anything. As I understand it I have until 31st August to do this. Can you let me know your source of info because I can't seem to find a lot online that relates to my particular situation. Cheers!
31 August? If you mean the Voluntary Disclosure program, you probably do NOT want to file under that. It's designed to deal with those who have hidden funds in tax havens offshore and not paid any tax. Not those who have skipped filing returns and probably don't have much tax to pay because they have been paying foreign taxes all along.

Most overseas Americans in this situation have simply filed the outstanding tax returns going back 6 years. There is an IRS field office at the US Embassy in London and they are used to seeing US citizens in this situation. What's important is that you file the past-due returns, pay any tax due, and file on time in future.

You probably should get advice from a qualified US tax practitioner (and there are some in London) but bear in mind what you have been told above.
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Old Jul 25th 2011, 11:26 am
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Default Re: tax advice

Remember it isn't just tax forms that you need to fill out. If the sum of your foreign accounts is over $10k in any one year you have to file an FBAR form. Also remember that ISAs are not US tax free and that if you invest in a stocks and shares ISA or UK based unit trusts etc. you will have to comply with PFIC rules. If you have a UK pension plan you will have to invoke the UK/US tax treaty to keep contributions tax free and you will have to include any employer contribution you get as income on your US taxes.

In short this isn't just a few forms to fill in. The US taxes are complicated and once you throw in the international aspect it becomes mind bending. Seek professional advice. A simple return should cost a few hundred pounds.

Last edited by nun; Jul 25th 2011 at 11:28 am.
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Old Jul 25th 2011, 11:31 am
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Default Re: tax advice

Originally Posted by md95065 View Post
Also, you do not have to file for any year in which your income falls below the filing threshold for that particular year.

In practice this is something that you need to be aware of but that you don't necessarily have to do anything about as long as you don't actually owe the IRS any money since the penalty for not filing is a percentage of the tax that you failed to pay - if that amount is 0, then so is the penalty.
FBAR isn't taxes, but failure to file that comes with nasty fines.
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Old Jul 25th 2011, 3:09 pm
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Default Re: tax advice

Normally most expats use the $92,900 foreign earned income exclusion and foreign housing exclusion and only use foreign tax credits on unearned income to offset possible taxes owed on unearned income.

http://www.irs.gov/businesses/small/...=97130,00.html
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Old Jul 26th 2011, 1:42 am
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Default Re: tax advice

The mirror site to this, US expats living in the UK, has a special section on US tax advice for folks living in the UK.

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

You might get some help there as many of the posters are Americans and are probably a bit more familiar with the resources available over there for Yanks needing tax advice.

By the way, are you certain you are a US Citizen? Do you have a passport? Do you meet the requirements of the test for being born abroad to 1 parent who was a US Citizen, especially the bit about your mother living in the US a number of years AFTER she turned 14?

http://en.wikipedia.org/wiki/United_...tates_citizens

Birth abroad to one United States citizen

A person born on or after November 14, 1986, is a U.S. citizen if all of the following are true (different rules apply if child was born out-of-wedlock):[7]

The person's parents were married at time of birth
One of the person's parents was a U.S. citizen when the person in question was born
The citizen parent lived at least five years in the United States before the child's birth
A minimum of two of these five years in the United States were after the citizen parent's 14th birthday.

INA 301(g) makes additional provisions to satisfy the physical-presence requirements for periods citizens spent abroad in “honorable service in the Armed Forces of the United States, or periods of employment with the United States Government or with an international organization”. Additionally citizens who spent time living abroad as the “dependent unmarried son or daughter and a member of the household of a person” in any of the previously mentioned organizations can also be counted.
A person's record of birth abroad, if registered with a U.S. consulate or embassy, is proof of citizenship. Such a person may also apply for a passport or a Certificate of Citizenship to have a record of citizenship. Such documentation is often useful to prove citizenship in lieu of the availability of an American birth certificate.

Different rules apply for persons born abroad to one U.S. citizen before November 14, 1986. United States law on this subject changed multiple times throughout the twentieth century, and the law is applicable as it existed at the time of the individual's birth.

For persons born between December 24, 1952 and November 14, 1986, a person is a U.S. citizen if all of the following are true (except if born out-of-wedlock)[7]:

The person's parents were married at the time of birth
One of the person's parents was a U.S. citizen when the person was born
The citizen parent lived at least ten years in the United States before the child's birth;
A minimum of 5 of these 10 years in the United States were after the citizen parent's 14th birthday.

For persons born out-of-wedlock (mother) if all the following apply:

the mother was a U.S. citizen at the time of the person’s birth and
the mother was physically present in the United States or one of its outlying possessions for a continuous period of one year prior to the person’s birth.[8] (See link for those born to a U.S. father out-of-wedlock)[7]

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Old Jul 26th 2011, 2:16 am
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Default Re: tax advice

Originally Posted by nun View Post
Remember it isn't just tax forms that you need to fill out. If the sum of your foreign accounts is over $10k in any one year you have to file an FBAR form. Also remember that ISAs are not US tax free and that if you invest in a stocks and shares ISA or UK based unit trusts etc. you will have to comply with PFIC rules. If you have a UK pension plan you will have to invoke the UK/US tax treaty to keep contributions tax free and you will have to include any employer contribution you get as income on your US taxes.

In short this isn't just a few forms to fill in. The US taxes are complicated and once you throw in the international aspect it becomes mind bending. Seek professional advice. A simple return should cost a few hundred pounds.
Great info,very useful!
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Old Jul 26th 2011, 2:50 am
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Default Re: tax advice

Originally Posted by Michael View Post
Normally most expats use the $92,900 foreign earned income exclusion and foreign housing exclusion and only use foreign tax credits on unearned income to offset possible taxes owed on unearned income.

http://www.irs.gov/businesses/small/...=97130,00.html
As UK tax is often more than the US tax liability you can use the extra UK tax credit to "pay" US tax on things like UK pension contributions. This will reduce the US tax liability on withdrawal.
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Old Jul 26th 2011, 5:38 pm
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Default Re: tax advice

Originally Posted by nun View Post
As UK tax is often more than the US tax liability you can use the extra UK tax credit to "pay" US tax on things like UK pension contributions. This will reduce the US tax liability on withdrawal.
That is true since the current top marginal tax rate is 50% in the UK and 35% in the US. Unearned income is generally the only possible way that a person can get hit with a US tax liability when living in a high tax rate country. This is because tax credits developed from foreign excluded earned income can't be used to offset US taxes owed for foreign unearned income. So if a person has a large unearned income (interest, dividends, capital gains, etc.), sometimes it is better not to take the exclusions so that all foreign income taxes paid can be used to offset any US tax liability.
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