Steve_

Yes, you must file a 1040 and a 2555 every year, read the instructions for Form 2555. It's pretty simple, provided your income is under the foreign exclusion limit (otherwise you need to pay some US tax, but usually it works out that you can exclude the first $150,000 or so of your income once you add on the foreign living expenses limit). Basically if your income is under that limit, it's the amount you earn minus the exclusion limit which is a negative figure so you put zero on the 1040.

The US taxes you on the basis of your citizenship, rather than where you reside, which is very unusual.

You may also need to file the Treasury Dept. FBAR form to declare your foreign assets, which as it says on it is not a tax form.

If you've never filed a US tax return the IRS usually asks you to file returns for the last seven years. The foreign exclusion limit didn't exist prior to 2006.

I know it sounds like a pain, but once you've done one it's pretty easy, you only need to know what your income was in US dollars for each year really, that's the hard bit.

If you don't have a social security number you can file an SS-5 with the embassy with proof of US citizenship.

Also you may want to file Form 8822 so they know your address and will send you a tax package every year.

Steve_

I'm not sure I'm following you but I'll say it anyway because it happens quite often that people get confused - foreign exclusion limit and the foreign tax credit are different things.

Form 2555 is used for the first, Form 1116 is the latter. As he resides abroad there is no foreign tax credit.

gworrall

Thanks everyone,

Steve - are all these forms available on the IRS website? That is including the SS5 as I have never had a social security number.

I'm still a little confused by this (for a change) but I gather I should be filing these forms every year even though I have lived/worked in the UK my whole life, and will do so straight away.

Just to answer penguin's query from an earlier post, I am definitely considered a US citizen and own a current US passport. This is purely because my mother met the criteria you have listed, and applied for my first US passport when I was a child, which I have continued to renew along with my UK passport.

Steve_

And just to clarify for the OP - yes you need to file a tax return but unless your income is over the foreign exclusion limit + the foreign living expense limit you owe no tax. It's just a requirement to file bits of paper. And don't listen to people who tell you to go out and get an accountant or TurboTax either until you've at least read the instructions on the Form 2555, it's not brain surgery.

gworrall

Steve -

You are exactly the person I have been looking for, and I had no intention of paying an accountant to tell me how to complete a couple of forms!
How can I find out the what the limits you mention are? I have seen different figures listed online and also in this thread. Is there a definitive answer online anywhere?

Thanks everyone for your responses.

Steve_

The IRS forms are on the IRS website, you need 1040 and 2555. The SS-5 form is on www.ssa.gov and the requirements for getting one are on the US Embassy in London website, iirc.

This is the FBAR form: http://www.fincen.gov/forms/files/f9022-1_fbar.pdf

Really it's nothing to freak out about unless you earn a ton of money, and if you earn a ton of money you can afford an accountant. There are hard tax forms, 2555 is not one of them.

There is a calculation on there of how much you can exclude.

Michael

The exclusions are only for earned income. By not taking the exclusions, your foreign tax credit are higher so therefore the total foreign tax credits from both earned as well as unearned income can be used to offset any US taxes owed whether on earned or unearned income.

If the exclusions are taken, foreign tax credits are not calculated for the amount of the excluded income and the only foreign tax credits that can be used are from the unearned income.

Therefore sometimes it is not beneficial to take the exclusions.

The exclusions are usually only beneficial to Americans living in a low tax country but probably won't make a difference whether they are used or not for people living in a high tax country. If the exclusions are not used in a high tax country, the foreign tax credits will normally be much greater than any possible US tax liability.

For example if you paid $30,000 in foreign taxes and would have a US tax liability of $20,000 if exclusions or tax credit were not used, you would have $0 tax credits if all that income was excluded so you would own $0 in US taxes but have $30,000 in tax credits to offset a $20,000 US tax liability if exclusions were not taken. In this case, it doesn't make any difference.

nun

You may well be correct about things being easy....ish. But, my experience is that people coming to the US tax forms for the first time need a bit of guidance to understand the terminology and to translate and enter the UK information on the 1040. Certainly for the UK person who has never filled out a tax form before the 1040 and all the associated schedules can be intimidating.

Areas where I would be particularly careful are declaration and paying of tax on UK pension contributions, US/UK tax treaty issues, UK ISAs and UK pooled investments like unit trusts or stocks and shares ISAs. If the OP has any of those things get more complicated.