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Tax liabilty on taxed interest earned in the Uk

Tax liabilty on taxed interest earned in the Uk

Old Aug 14th 2012, 2:45 pm
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Default Tax liabilty on taxed interest earned in the Uk

Hi

If you have interest earned on UK savings that are taxed at source are they also liable to US tax?

Does the double taxation agreement between the two countries come into force, so that only tax in the Uk is applicable?

Advice would be welcome?

Thank you
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Old Aug 14th 2012, 3:17 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

Recently met with my accountant to discuss the same thing!
Any and or ALL income which you earn in the UK regardless of whether the tax is paid at source is also payable to Uncle Sam.

I am meeting with my US accountant sometime this week so if you need more info I have certain questions I need to ask anyway. So I can update you in you need anything in particular answered.
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Old Aug 14th 2012, 3:29 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by goldenstate31 View Post
Recently met with my accountant to discuss the same thing!
Any and or ALL income which you earn in the UK regardless of whether the tax is paid at source is also payable to Uncle Sam.

I am meeting with my US accountant sometime this week so if you need more info I have certain questions I need to ask anyway. So I can update you in you need anything in particular answered.
Many thanks for this. Would appreciate an update. I am presuming that any tax paid in the UK will be credited against US tax liability?
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Old Aug 14th 2012, 4:07 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

Source countries always have first dibs on taxes due but due to tax agreements between countries, taxpayers that reside in another country usually can apply taxes paid to the foreign country to offset any taxes owed to the resident country. This is usually a tax credit so therefore it offsets taxes paid to the foreign country so when the source countries taxes are higher than the resident country, no taxes are owed to the resident country. In some cases where the taxes paid to the foreign country is less than a certain amount and is higher than the taxes that would be owed to the resident country, all of the tax credits can be used to offset even other taxes owed to the resident country.

For example, you paid 35% tax to a foreign country on a $1,000 income but the US taxes at a 10% rate. Therefore there is a $350 credit but only $100 is owed to the US for that income but because of US law, the IRS does not require you to go through the complex calculations to proportionalize the tax credits since the income is so low, so you get to write off and additional $250 against US taxes owed. Hope that makes sense. So in this case, the US government is in effect paying about 70% of the taxes owed to the foreign country.

Last edited by Michael; Aug 14th 2012 at 4:16 pm.
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Old Aug 14th 2012, 4:20 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by Michael View Post
Source countries always have first dibs on taxes due but due to tax agreements between countries, taxpayers that reside in another country usually can apply taxes paid to the foreign country to offset any taxes owed to the resident country. This is usually a tax credit so therefore it offsets taxes paid to the foreign country so when the source countries taxes are higher than the resident country, no taxes are owed to the resident country. In some cases where the taxes paid to the foreign country is less than a certain amount and is higher than the taxes that would be owed to the resident country, all of the tax credits can be used to offset even other taxes owed to the resident country.

For example, you paid 35% tax to a foreign country on a $1,000 income but the US taxes at a 10% rate. Therefore there is a $350 credit but only $100 is owed to the US for that income but because of US law, the IRS does not require you to go through the complex calculations to proportionalize the tax credits since the income is so low, so you get to write off and additional $250 against US taxes owed. Hope that makes sense. So in this case, the US government is in effect paying about 70% of the taxes owed to the foreign country.
Many thanks for this advice makes it clearer.
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Old Aug 14th 2012, 5:21 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by Phoenixsuns View Post
Hi

If you have interest earned on UK savings that are taxed at source are they also liable to US tax?

Does the double taxation agreement between the two countries come into force, so that only tax in the Uk is applicable?

Advice would be welcome?

Thank you
If you are a US resident your worldwide income is subject to US tax. However, there are provisions in the tax code and treaties to avoid double taxation and to allow credit for foreign tax paid.

If you have interest taxed at source in the UK you can apply that UK tax as a tax credit on your US taxes. However, if you have something like a Cash ISA that is UK tax free you will have to pay US tax on any interest and won't have any UK tax to credit.

In the area of pensions the US/UK tax treaty has special provisions and if you are a US resident you can apply for a UK pension to be paid to you without any UK tax being withheld. You obviously have to pay US tax on it.
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Old Aug 14th 2012, 5:37 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

You mention that this is interest on savings. So one way around this in the future, to keep things simple, is to keep your savings in a tax-free offshore jurisdiction such as the Isle of Man. That way you simply pay US taxes.
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Old Aug 14th 2012, 6:20 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by Phoenixsuns View Post
Many thanks for this advice makes it clearer.
I have been able to write off more than higher income people since I am retired and the IRS does not tax social security benefits at 100%. This has put me in a 10% marginal tax bracket and I own overseas securities that were taxed at the source of over 20%. So my income from foreign investments was a certain amount and a little more than 20% was withheld by foreign governments but I was able to use the full tax credit to write off taxes owed to the IRS instead of just 10% of the foreign income reducing my US tax liability.

However once foreign income becomes larger, the taxpayer must porportionalize the tax credits and then you can only write off no more than than your current marginal tax bracket. So if foreign income is high and your current marginal US tax bracket is 10%, you can only write off 10% against US income. This means that you pay no additional US taxes but you pay the full foreign taxes.

However if the income is from a low tax country, then you could possibly owe additional US taxes.

Last edited by Michael; Aug 14th 2012 at 6:22 pm.
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Old Aug 15th 2012, 6:46 pm
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by robin1234 View Post
You mention that this is interest on savings. So one way around this in the future, to keep things simple, is to keep your savings in a tax-free offshore jurisdiction such as the Isle of Man. That way you simply pay US taxes.
Many thxs for this. Can you suggest any banks in the Isle of Man I should look at and are there any safeguards to your money?
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Old Aug 29th 2012, 12:23 am
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Default Re: Tax liabilty on taxed interest earned in the Uk

I have a question that is close to the OP. I'm a LPR in USA and I have shares held in a shares ISA and other shares not in an ISA in the UK. The dividends I earn are below taxable levels so I'm not paying any taxes in the UK, also until last year I was a full time student so also ineligible to pay tax in the UK. I am talking about relatively small amounts of money, like 500 GBP or so per year so not a lot.

So here's the thing; I have never been able to find a place in turbo tax to declare said UK income and have therefore not declared it to the IRS for about 5 years now. Is this really bad? Am I going to get into trouble for this?

This year for the first time Turbo tax had some fields regarding foreign income and asked me to file a form TD F 90-22.1. I have not yet done so and feel uncomfortable giving account numbers to the IRS on this form as it requests. Yes my share holdings exceed 10000 USD in value but my income from said funds is not a lot. So do I have to file TD F 90-22.1? Have any of you done this?

Turbo tax says "all interest income, even from a foreign source, is taxable. If at any time during the year the total balance of all your foreign accounts was more than $10,000, you will also need to complete Form TD F 90-22.1"

To make matters even more difficult, all my UK tax certificates are issued based on the UK tax year which is April to March, whereas the US is asking for data on my accounts to cover the Jan to Dec time frame, which is more tricky to calculate. Any advice welcome, I can't afford an accountant so I'm just winging it! I don't earn a lot here in the US so I don't relish the idea of paying any extra taxes on top of the high taxes I'm already paying.
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Old Aug 29th 2012, 12:56 am
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by britinOR View Post
I have a question that is close to the OP. I'm a LPR in USA and I have shares held in a shares ISA and other shares not in an ISA in the UK. The dividends I earn are below taxable levels so I'm not paying any taxes in the UK, also until last year I was a full time student so also ineligible to pay tax in the UK. I am talking about relatively small amounts of money, like 500 GBP or so per year so not a lot.
The shares ISA is a foreign grantor trust and you should be filing IRS 3520 foreign trust forms. If it is invested in UK unit trusts you might also need to file IRS 8621 PFIC forms too

So here's the thing; I have never been able to find a place in turbo tax to declare said UK income and have therefore not declared it to the IRS for about 5 years now. Is this really bad? Am I going to get into trouble for this?
Yes this is bad. As a US LTR you need to declare your world wide income. UK interest and dividends go on Schedule B. Capital gains go on Schedule D, although things will be complicated by the provisions of the UK/US tax treaty, any UK tax you have paid and 8621 issues.

This year for the first time Turbo tax had some fields regarding foreign income and asked me to file a form TD F 90-22.1. I have not yet done so and feel uncomfortable giving account numbers to the IRS on this form as it requests. Yes my share holdings exceed 10000 USD in value but my income from said funds is not a lot. So do I have to file TD F 90-22.1? Have any of you done this?

Turbo tax says "all interest income, even from a foreign source, is taxable. If at any time during the year the total balance of all your foreign accounts was more than $10,000, you will also need to complete Form TD F 90-22.1"
Turbotax is right! You must file a TD F 90-22.1 (FBAR) for any year you were a US resident and your total foreign accounts balance was $10k or more. Failure to file this results in substantial fines.

To make matters even more difficult, all my UK tax certificates are issued based on the UK tax year which is April to March, whereas the US is asking for data on my accounts to cover the Jan to Dec time frame, which is more tricky to calculate. Any advice welcome, I can't afford an accountant so I'm just winging it! I don't earn a lot here in the US so I don't relish the idea of paying any extra taxes on top of the high taxes I'm already paying.
The fact that you don't relish paying more tax isn't relevant to the IRS; your worldwide income is US taxable. You will get credit for UK tax paid, but you have to include the income and the tax on your 1040 and do the calculations to see how much US tax you owe.

Right now your tax bill isn't the thing I'd worry about, but the potential fines for not filing FBAR and the cumulative interest on any tax you owe to the US.
I would strongly advise you to seek professional advice because of the stocks ISA you own and FBAR delinquency if you have failed to file for 2012.

Last edited by nun; Aug 29th 2012 at 12:59 am.
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Old Aug 29th 2012, 2:31 am
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by nun View Post
The shares ISA is a foreign grantor trust and you should be filing IRS 3520 foreign trust forms.
Has it been established definitively that that is the case? An ISA is simply a tax-free wrapper and does not look from the outside to be anything like a "trust" in the legal sense of the term.


Yes this is bad. As a US LTR you need to declare your world wide income. UK interest and dividends go on Schedule B. Capital gains go on Schedule D, although things will be complicated by the provisions of the UK/US tax treaty, any UK tax you have paid and 8621 issues.
However amounts are probably going to be quite small, given what we have been told.



Turbotax is right! You must file a TD F 90-22.1 (FBAR) for any year you were a US resident and your total foreign accounts balance was $10k or more. Failure to file this results in substantial fines.

Can result - but not necessarily will result. It's not automatic.


The fact that you don't relish paying more tax isn't relevant to the IRS; your worldwide income is US taxable. You will get credit for UK tax paid, but you have to include the income and the tax on your 1040 and do the calculations to see how much US tax you owe.
Which may not be much if the amount is small. We're talking about GBP500 or so of income, so probably not a lot of underpaid tax in the grander scheme of things.

Normally you have to go back 3 years unless the omission of income exceeds 25% of your adjusted gross income, in which case it's 6 years.
Don't forget to file amended state tax returns.


Right now your tax bill isn't the thing I'd worry about, but the potential fines for not filing FBAR and the cumulative interest on any tax you owe to the US.
I would strongly advise you to seek professional advice because of the stocks ISA you own and FBAR delinquency if you have failed to file for 2012.
I am not sure if it's worthwhile to pay thousands of dollars to fix a tax problem that's probably only a few hundred dollars. And I would definitely be cautious about any advice to enter the "voluntary disclosure program".

As far as I understand, a tax underpayment of a few hundred $ suggests that amended tax returns should be filed for the open tax years and FBARs back-filed if necessary. For tax year 2011, remember to file form 8938 if applicable.
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Old Aug 29th 2012, 3:22 am
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by JAJ View Post
Has it been established definitively that that is the case? An ISA is simply a tax-free wrapper and does not look from the outside to be anything like a "trust" in the legal sense of the term.
Professionals generally see stocks and shares ISAs as foreign grantor trusts. The tax free wrapper has no meaning for US taxation. If you look through that the stocks and shares ISAs are usually structured as trusts with the ISA administrator being a trustee. A cash ISA is easy to deal with as it's simply an interest bearing account

However amounts are probably going to be quite small, given what we have been told.
This could well be the case, but fines, and compounding interest for several years can quickly add up.

Can result - but not necessarily will result. It's not automatic.

Correct. There are a number of voluntary disclosure approaches or just quiet filing, but the potential for substantial FBAR fines exists

Which may not be much if the amount is small. We're talking about GBP500 or so of income, so probably not a lot of underpaid tax in the grander scheme of things.
It's impossible to assess the tax due...are we talking GBP500 or are there other sources of income too such as UK pensions or personal pensions annuities etc. Given the current information I'd be more worried about FBAR fines, compounding interest and getting the amended forms filed correctly as it will get complicated.

Normally you have to go back 3 years unless the omission of income exceeds 25% of your adjusted gross income, in which case it's 6 years.
Don't forget to file amended state tax returns.
Agreed

I am not sure if it's worthwhile to pay thousands of dollars to fix a tax problem that's probably only a few hundred dollars. And I would definitely be cautious about any advice to enter the "voluntary disclosure program".

As far as I understand, a tax underpayment of a few hundred $ suggests that amended tax returns should be filed for the open tax years and FBARs back-filed if necessary. For tax year 2011, remember to file form 8938 if applicable.
The OP may be able to navigate the US and UK tax systems, the Tax Treaty and various voluntary disclosure options, but the number of 1040Xs and figuring out how to deal with things like foreign grantor trusts that invest in PFICs takes some dedication, "just winging it" is not a good approach. I also wonder if there is anything else that may be problematic in the tax situation like certain pensions. These are fairly common pitfalls for people who move between the US and the UK, but they can lead to complex tax returns and are compounded if a number of years need to be amended. BritinOR needs to get US (and potentially UK) tax compliance and I would also advice some simplification of investments to make future tax filing easier. That is why I suggest professional advice.

Last edited by nun; Aug 29th 2012 at 3:43 am.
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Old Aug 29th 2012, 4:49 am
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Default Re: Tax liabilty on taxed interest earned in the Uk

Ok, I realise that I have been delinquent for some time and I need to deal with the issue. I always file my taxes on time, but because I use turbo tax I am limited by the fields they ask me to complete. I once tried to file taxes manually but the forms were pretty complicated.

I'm only 27 and don't have pensions income, but I do have a pension which is worth a measly 1000GBP, and I don't believe that growth in it's value constitutes taxable income. I just leave that alone.

So I'm going to work on filling in the FBAR form for 2012 and go from there. I am afraid that by filing this form I will draw attention to myself, will the IRS give me a chance to provide the information they would have liked for the past years, or will they just issue me with a fine right away? I am very uncomfortable with putting all my account numbers on this form, I don't see why they need such personal information.

I've been in Oregon since 2007, but only LPR since March 2010 (before that I was on an F1 visa)
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Old Aug 29th 2012, 9:57 am
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Default Re: Tax liabilty on taxed interest earned in the Uk

Originally Posted by britinOR View Post
I'm only 27 and don't have pensions income, but I do have a pension which is worth a measly 1000GBP, and I don't believe that growth in it's value constitutes taxable income. I just leave that alone.

This is meant as a truely friendly word of advice: You are falling into a trap where a large number of those in a similar situation make an incorrect assumption. It is not only about the tax you may owe (which may be nil or insignificant). The real danger may lay in the 'information forms', and their assciated penalties, that are required for UK stocks and shares or simply being a member in most types of UK pension plans, even if you are only 27 and not drawing the pension. The type of pension, and its treatment under the treaty, must be investigated.

I am very uncomfortable with putting all my account numbers on this form, I don't see why they need such personal information.

Welcome to our world. It's a tremendous amount of information, and includes everything about your account (bar the PIN number), and includes your date of birth, social security number, and signature. And yes, it is ALL required. It's one of the key areas that most of us find very uncomfortable (including, primarily, how the information remains secure whilst transferring it to the Treasury).
See response above.

In addition, there is a new programme starting on Sept. 1, 2012, for those such as yourself. BUT, as JAJ mentioned, it is in effect a disclosure programme. As such, I would not recommend anyone to simply 'file with best intentions'. If you take advantage of the new initiative, please do so with the assistance of a professional adviser who understands both US and UK situations, and has done this type of work before. A 'reasonable cause' letter will be required and a risk of compliance decision will be made by the IRS.

Some pros are now offering a 'you complete the forms and we check them' type of service. It may be good, or it may simply be a way to entice you into their services. Tough decision, as getting the submission wrong can carry additional problems. Or, you can just wing it, and hope for the best. But you MUST acquaint yourself with the risks involved. Read, read, and read more of the information available before you act.
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