Filing US Taxes from UK

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Filing US Taxes From UK

If you are an American expat living in the United Kingdom, you probably have questions about your U.S. tax responsibilities.

Do I need to file U.S. taxes?

Will I have to pay taxes in both the U.K. and the U.S?

How is the tax year determined?

What are the filing deadlines?

Let’s explore some of these issues as they pertain to US citizens living in the UK.

US tax filing obligations for US Expats residing in the UK

US citizens and Lawful Permanent Residents (Green card holders) are required to file annual United States Income tax returns, regardless of current country of residence. This does not necessarily mean that you will actually be paying tax to both countries, as will be explained below. Even if you are exempt from all US income tax, due to relief from double taxation, your obligation to file your tax return still remains.

In addition, there are other filing requirements that apply only to taxpayers who fulfill certain conditions. The most common is the Foreign Bank Account Report (FBAR), a Treasury Department information return, which is explained in more detail below. Others include Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations), Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts), and Form 8938 (Statement of Specified Foreign Financial Assets). The above filings report required information, but generally do not result in the assessment and payment of tax.

US versus UK Tax Year

The tax year in the United Kingdom runs from April 6th to April 5th, but US taxes need to be reported according to the calendar year – January 1st to December 31st. As such, for US reporting purposes, UK earnings and related taxes paid need to be prorated properly based on the US tax year, and then converted into US dollars. When converting UK earnings to US dollars, one may use the specific foreign exchange rate on the date of payment, monthly averages, or the annual average rate.

Due Date for Filing US return

As a US citizen living abroad, you are entitled to an automatic two-month extension to file your US taxes. This changes your filing deadline from April 15th to June 15th. Furthermore, you can apply to extend your deadline until October 15th; application for this must be made by June 15th, and the extension is automatically granted. Even with these extensions, interest on taxes due begins to accrue on April 15th. However, the late-paying penalty will only apply if taxes are not paid by June 15th. The late-filing penalty does not apply unless the tax return is filed after all valid extensions.

An additional two-month discretionary extension can be requested, if need be, which can extend the filing due date to December 15th.

The deadline to file an FBAR is automatically extended until October 15th. No extension filing is required.

Avoiding Double Taxation

Foreign Tax Credit
There are a few systems in place that can help US expats avoid paying taxes to both the UK and the US on the same income. The first is the foreign tax credit. Any foreign taxes already paid on a category of foreign-sourced income can be used as a credit to offset any US tax assessed on that category of income, with a limit to the percentage of total income that is foreign-sourced. This credit is usually very helpful for US expats living in the UK, as UK taxes generally tend to be higher than US taxes, and the taxpayer will most often be left with no US tax obligation on his UK-sourced income. If a taxpayer pays more tax in the UK than would be owed in the US, the excess tax credits can be carried forward for up to ten years. In addition, as per the US-UK income tax treaty, certain US-sourced income can be re-sourced to the United Kingdom for foreign tax credit purposes in order to utilize taxes paid to the United Kingdom and avoid double taxation.
Foreign Earned Income Exclusion
Another option available to US expats is to utilize the US foreign earned income exclusion. Use of this exclusion will allow the taxpayer to exclude from his taxable income up to $105,900 of his foreign earned income in 2019. An additional exclusion amount may be allowed for foreign housing expenses. Some UK residents might prefer the foreign earned income exclusion over the foreign tax credit as it allows them to file their US tax returns soon after the close of the US tax year, and does not necessitate that they wait until after the completion of their tax assessment at the later close of the UK tax year. Keep in mind, however, that this exclusion only applies to earned income, like wages and self-employed business income, and not to passive income like interest and dividends.
Totalization Agreement
The Totalization Agreement between the US and the UK helps taxpayers avoid paying both social security tax and national insurance. It allows for an exemption from US self-employment tax for US expats residing in the UK. Taxpayers need to report the self-employment income on their annual income tax return, and then claim the exemption from the related social security tax.
Tax Treaty Provisions
Furthermore, the US-UK treaty stipulates that US social security benefits paid to US citizens living in the UK are taxable only in the UK, and not in the US at all. Additional tax treaty provisions include parallel taxation of UK employer-sponsored pension plan contributions and benefits. This means that contributions paid by or on behalf of a US person to a UK employer-sponsored pension, as well as benefits accrued under the pension scheme, are not taxable for United States purposes in the year of contribution or benefit accrual. This is assuming that these contributions and benefits qualify for similar tax relief in the United Kingdom.

FBAR (Foreign Bank Account Report)

A US citizen who holds interest in or signature authority over foreign accounts in which the aggregate total highest account balance during the year was $10,000 or more is obligated to file an FBAR for that tax year. The FBAR is filed with the FinCen, a bureau of the Treasury department, separate from the tax return and other forms, which are filed with the Internal Revenue Service, a different bureau in the Treasury Department. The FBAR reports the highest account balance for the year in each of the taxpayer’s foreign accounts, including bank accounts, investment accounts, pension funds, insurance and annuity policies with cash value, and more. There is no tax assessed on the balances reported. The purpose of the FBAR is merely to assure the US government that its taxpayers are not hiding funds abroad.

Net Investment Income Tax

All high-earning individuals with income from passive sources are subject to US net investment income tax (NIIT). This is a 3.8% flat tax assessed on passive income of individuals who earn more than $200,000 ($250,000 threshold for married filing jointly taxpayers), and it applies even to passive income from UK sources. Many UK residents in this situation are unpleasantly surprised by this tax, as the UK income tax they paid on their passive income cannot be used to offset the NIIT.

Election to Include Non-US Spouse on Taxpayer’s US return

If a US citizen or green card holder is married to a spouse who is neither a citizen nor resident of the US, then the spouse’s income is not required to be reported to the IRS at all. That being said, one has the option to elect, via section 6013(g) election, to file jointly with the non-US spouse in order to take advantage of a higher standard deduction; in some situations, this can lower the overall tax liability. Another scenario where making this election is advantageous is when adding the spouse’s income to the return will increase eligibility for the “Additional Child Tax Credit Refunds” (Form 8812).

However, there are downsides to making the election. Firstly, once the election is made, all of the spouse’s worldwide income must be reported to the IRS. As such, the election is not advisable in most cases, as the results will often be worse than when filing alone. In addition, in a case where no election is made, there exists the option of transferring ownership of income-producing assets to the non-US spouse, thereby decreasing the taxable income reportable to the IRS. If the election is made, that possibility is lost. For more information see ELECTION TO TREAT NON-RESIDENT ALIEN SPOUSE AS A US RESIDENT (IRC 6013(g))

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