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Taxation of Americans in the UK

 


If you are a US citizen, or resident alien, your worldwide income is subject to US income tax, regardless of where you live.

 

If you are resident in the UK you will also be taxable in the UK. Certainly on any income arising in the UK, but also depending on your circumstances, you may well be liable to UK tax on your worldwide income.

Both the UK and the US have provision in their tax rules to allow credit for taxes paid in  other countries. In addition there is a tax treaty between the UK and US designed to reduce double taxation. However, because of the differences between the two tax systems - the rates that are applied, the allowances that are available and the conditions attached - you may end up suffering double taxation. However, with proper planning the impact of this can be reduced and perhaps eliminated.


Filing Requirements

 

If you are a US citizen or resident alien, the rules for filing income, estate and gift tax returns are generally the same whether you are in the United States or abroad.

 

The filing limits vary depending on your precise circumstances, but even those on fairly low incomes are are still quite likely to need to file. For example you will need to file if:

 i) you are self employed and your income is above $400; or

 ii) you file as married, filing spearately and your income is above $3,800

 

 

If you file on a calendar year basis, your return will be due by 15 April together with any tax due. However, if you are living outside the US you will generally be allowed an automatic 2 month extension. You may also be able to claim a further extension.

 

Foreign Earned Income and Housing Exclusions

 

If you meet certain requirements you may qualify for the foreign earned income exclusion and the foreign housing deduction. This entitles you to exclude $91,400 of   your foreign earnings. Note that this exclusion applies only to income you receive for services you perform. Income from investments (interest, dividends or capital gains) cannot be excluded.

 

In order to claim the foreign income exclusion you must meet the following three requirements:-

 

1.      Your tax home must be in a foreign country.

2.      You must have foreign earned income.

3.      You must be either:

a.  US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

b.  A US resident alien who is a citizen or national of a country with which the US has an income treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

c.  A US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

 

You may also be able to claim a deduction or exclusion from gross income for part of your housing amount if your tax home is in a foreign country. 

 

Thus for example if your only income was foreign earned income of $100,000 and you meet the qualifying tests, you could exclude $95,100 of income and include $4,900 in your adjusted gross income.

 

Tax Credit or Deduction

 

You can also take either a deduction or a credit for income taxes paid in the UK.  Taken as a deduction, foreign income taxes reduce your taxable income.  Taken as a credit, foreign income taxes reduce your tax liability.  In most cases it will be to your advantage to take foreign income taxes as a tax credit, which subtract directly from your US tax liability, but this will not always be the case.

 

You cannot take a credit or reduction for foreign income taxes paid on earnings you exclude from tax. Therefore if the whole of your income is excluded under the foreign  earned income exclusion, you cannot deduct or take credit for any of the foreign taxes paid on your wages.

 

If only a part of your wages is excluded, you cannot deduct or take credit for the foreign taxes allocable to the excluded part.

 

You need to calculate the available tax credit separately for both earned income and passive or unearned income (interest, dividends, rents etc).  In addition the foreign tax credit is limited to the part of your total US tax that is in proportion to your taxable income from sources outside the US.