robin1234

My wife & I have lived in the US since 1991, I'm a dual UK/US citizen, she's a US citizen. We plan to retire about a year from now, early 2013.

We plan to buy a home in the UK. While it might take us a few months or more, we plan to leave the small town where we currently live, pleasant though it is, we are really only here for our jobs... we are starting to plan with our daughter, for her to build a two car-garage with a one bedroom apartment above in her house in Massachusetts, for our exclusive use as a "granny flat." This is all speculative at present, but doable, and would leave us with a small home in the US and one in the UK.

We'd like to live primarily in England, and are semi-aware of the tax complexities it will involve, with assets & retirement income mostly in the US. Can we just count ourselves as UK residents for tax purposes, if we spend a month; two months, etc., per annum in our pied-a-terre in Massachusetts? What if one of us spends longer periods in the US, the other of us is only in the US for a few weeks vacation every year?

I looked at this IRS publication which talks about establishing "bona fide residence" abroad, and also talks about a "physical presence test," which suggests you have to be in the foreign country for a minimum of 330 days each year, so maybe a maximum of 35 days in the US each year? What if you're in the US more than 35 days? What if one of you is away from the UK for 20 days per year, but the other of you is away from the UK & in the US for (say) 60 days per year, and you file US taxes married, filing jointly?

Obviously not expecting definitive answers, just want to know if others have experience of these types of issues or have insights. Thanks!

Michael

Bona fide residence abroad is used to determine if you can claim the foreign earned income and foreign housing exclusion. It does not allow for unearned income and makes your US tax complicated if you have a large amount of unearned income because it evaluates your total worldwide income to try to figure out the tax rate on that unearned income. As far as earned income from US sources such as pensions and social security benefits, generally those cannot be excluded on the foreign earned income exclusion but may possibly be excluded due to tax treaties.

So therefore normally the only advantage of claiming the bona fide residence abroad would be if you had foreign earned income but then it may not even be worth it since it is likely that you will have foreign tax credits to offset any US taxes owed on that foreign earned income. Unless you live abroad in a low tax country, there is not a big advantage on claiming the bona fide residence abroad since foreign tax credits normally offset US taxes owed.

As far as unearned income, foreign taxes paid on unearned income can be used as a tax credit.

theOAP

If the only income you and your wife have are pensions and bank interest, then there is no earned income as Michael says. Therefore, no 'test'. You'll be filing Form 1116 only to offset any tax paid to the UK.

Two thoughts:
1) It may be worth some consideration on establishing a tax home in your own mind, separate from all the rules and BS. This would be based on which country the majority of your income comes from. You then make the effort to pay tax on all income in that country, and use credits to offset tax in the 2nd country (using the Self assessment form in the UK, if it's the 2nd country). It sounds complicated, but give it some thought. In the long run, it makes things much simpler. If you get caught in a situation where you're always receiving a tax rebate from one country or the other, it can lead to endless filing amended returns, and it's never ending.

EDITED to add: I always considered it easier to pay all tax to the UK, and use credits for the US. But the majority of my income is either UK, or UK source.

2) THE BAD NEWS, (of course, I can't resist). Form 8938 does have the 'test' as part of its reporting requirements. It would affect the threshold ($50,000 vs $200,000 MFS) for reporting.

Michael

True but if you can be considered a non resident of the UK, your total taxes probably would be lower as a resident of the US and not the UK if that is possible.

theOAP

If you spend an average of over 90(?) days a year in the UK over a 3 or 5 year period (? forget which right now) you are resident for tax purposes if you are a UKC.

robin1234

Yes, and I want to spend more than 90 days a year in the UK. MUCH more. So maybe that would be a good starting point, be a UK resident for tax purposes from the point of view of the HMRC. So the IRS doesn't really care how many days you spend in the US? I guess in this regard I was led astray by my experience in the past of filing state taxes for two US states, when we moved from MA to NY for instance, when it often hinges on a count of how many days you spent in each state.. in NYS they also ask you how many days you spent in New York City, although I don't really see that the question has any tax consequences, if you were just there on vacation.

Michael and theOAP, thanks to both for your insights.

Michael

Moving from state to state can cause state tax filing problems because each wants it's share of taxes and they want to base it on your total income. So there is a complicated process to proportionally figure their share as if all the income was made in that state.

theOAP

As you know, the BIG difference is the US taxation regardless of residence. I'm always tempted to use the example of NY taxing on citizenship (born in NY) and the consequences for a NY citizen if they would move to California. Eyes glaze over when explaining that example to an American that's never lived further than 10 miles from where they were born. Or, for a member of Congress for that matter.

Bob

No idea if this is a problem, but something to look into perhaps, but if you're partial resident in MA and having to file MA state returns, the issue of providing the certificate of medical insurance to avoid the $1200 fine for not having medical insurance.

theOAP

I was wrong on both counts.

From Directgov:
you're also treated as resident if you're in the UK for an average of 91 days or more in a tax year (worked out over a maximum of four consecutive tax years)

http://www.direct.gov.uk/en/MoneyTax...UK/DG_10026136

robin1234

Fortunately I keep my healthcare from my employer up till 65, then I have Medicare. On the topic of Medicare, I will probably pay for Medicare Part B from age 65 even if I'm not living in the US as there is a penalty if you need to pick it up later and you have not been paying for it continuously.

Bob

Better not shit on the deans desk then, as per the other thread

robin1234

I wouldn't do that but can still liven the old place up a bit in other ways.. Be doing them a favor really.

Michael

Part B has open enrollment every year. Currently Part B is about $100 per month and there is a 10% increase annually if you don't originally sign up at 65. So if you sign up at 75, you would pay $200 per month assuming that the premium didn't increase during that time. Medicare does this because they don't want healthy retirees to wait until they are sick and then sign up.