Best tax advice for US expats from the experts at Ingleton Partners 

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 Tom LR Griffiths is a US and UK tax specialist from Ingleton Partners. Below he shares his best tax advice for US expats. 

The United States famously has one of the most complex tax systems in the world. It’s also one of only two countries that continues to tax its citizens when they’re overseas, regardless of where they live and work. 

All of which makes tax a complicated subject for US expats living in the UK. If you are a US citizen or Green Card holder living in the UK, and you fail to file taxes correctly for both countries, you can be penalised. This can mean a hefty fine. 

As a US and UK tax specialist, I ensure that clients are tax compliant on both sides of the Atlantic. I can also advise on how best to minimise the tax you owe, by legally excluding income and reducing your liability. 

A brief introduction to taxes for US expats

But it’s worth understanding how it works first. There are approximately 200,000 US expats living and working in the UK. And each one has different US tax requirements. Even those with dual nationality may be obliged to pay tax to the US. It’s always advisable to get expert help with US and UK tax compliance, to ensure you’re not at risk of any penalties. 

In broad terms, US tax rules for expats living in the UK are roughly the same as for US citizens living in America. Both systems tax citizens on their worldwide income. The major difference between paying tax as a US citizen overseas and a US citizen living in the States, is the filing deadline. 

For those living in the US, the filing deadline is always 15 April. US expats overseas have an automatic extension until 15 June. You don’t have to apply for this extension, but any tax owed must still be repaid by 15 April. If you don’t, then you will begin accruing interest on that date. 

Differences in income and circumstances

If you don’t earn any income, then you will not be subject to tax wherever you live. However, there is a strong possibility you will still be required to file a tax return with the IRS. This is to ensure that your tax liability is sanctioned by the US Government and avoids complications if your circumstances change. 

The UK has a double tax agreement (or treaty) with the US. This is to ensure that you don’t pay tax twice on the same income. It’s delivered through tax relief and credits. For example, if you’ve already paid tax in the UK, you can generally offset this against the tax you owe the US. 

However, for this to work to your advantage, it must be managed correctly. If it isn’t, then you could well be charged twice on the same income. Ensuring you’re both compliant but not paying too much tax needs advice from a specialist tax advisor. 

You could give up your US citizenship and this would remove your liability to pay US tax. However, you cannot renounce your citizenship solely to avoid paying tax. Again, this needs specialist advice. 

What is FBAR and do you have to file it? 

Many US expats hold bank accounts in the country of residence and often in other countries too. In addition to their tax return, US expats must also file a Report of Foreign Bank and Financial Accounts (FBAR) by 15 April. FBAR must be filed online and covers all the bank accounts held by the US expat if the total balance is more than $10,000. This includes insurance, pensions and trusts. 

If you don’t file a correct FBAR report, you will incur an automatic fine of $10,000 per each account. You can choose to file your own FBAR online, but if you’re not sure exactly what is required, it’s best to work with a tax advisor. 

Legal tax exemptions and credits

The most common way to reduce your US tax liability is by the Foreign Earned Income Exclusion (FEIE). This allows US expats to not pay tax on the first $105,900 of earnings from overseas. This threshold is for 2019 and increases every year. To qualify for FEIE, you must meet the following criteria: 

  1. Income must be earned overseas an cannot be; 
  • From employment by the US Government or US military. 
  • Earned in international waters, as this is not a foreign country. 
  • Paid in the tax year after the work was undertaken. 
  • Earned from social security benefits, annuities or pensions. 
  • Earned while in combat zones as identified by the US president. 
  1.  Live in a foreign country.
  2. Have earned income in the foreign country (excluding the above). 
  3. Be a US citizen or
  4. Be a US resident alien that has citizenship with a country that has a double tax agreement with the US. 
  5. Be a tax resident for a whole tax year, without breaks. For the UK, you must pass the Statutory Residence Test, which will confirm you as a UK tax resident. 
  6. Be able to prove you were physically present in an overseas country for a minimum of 330 days during 12 consecutive months. 
  7. If you qualify for an exemption with FEIE, you must file Form 2555 or Form 2555-EZ. 

UK tax for US expats

The UK tax system is different from the US. The tax year is 6 April to 5 April, and anyone who earns an income during that tax year is liable to pay income tax. This is either paid automatically through a scheme called ‘pay as you earn’ (PAYE), or by a Self-Assessment Tax Return. This must be completed online and will show you how much UK tax you owe. It must be filed and paid for by 31 January the next year. 

For US expats living in the UK, the first step is to find out whether you are a tax resident of the UK. To do this, complete the Statutory Resident Test, which is a questionnaire that will determine your status. If you are a tax resident, then you must pay tax on your worldwide income to the UK Government. 

If you aren’t determined to be a UK tax resident, you are only liable for income from investments or work in the UK. This could be a salary based in the UK, or income earned on rental properties you own in the UK. 

If you need advice or assistance to ensure you are legally compliant with both US and UK taxes, contact Ingleton Partners. We have many years of expertise in helping clients with these complex tax matters and can take you through the whole process.