Our readers asked us to cover the topic on filing U.S. federal income tax return if you are a U.S. citizen living in the UK. The starting point for any US expat tax-related topic is gaining a clear understanding who needs to file US taxes on their worldwide income: U.S. persons. Who is required to file a tax return by U.S. tax law? Individuals, who are U.S. citizens, including the ones with dual citizenship (U.K./U.S. in this case), also Green Card holders abroad. Everyone who earns a minimum required threshold has to file a tax return and pay taxes they may owe. Below are numbers for the 2018 year tax return to file in 2019:
- If you are under age 65 and single, your minimum income requirement is $12,000
- If you are 65 or older, then filing requirements raise slightly to $13,600
- For self-employed individuals, the threshold is $400 regardless of age and filing status.
Check the full table of federal income tax brackets for 2018 or send us an email to receive a personalized consultation.
U.S. – U.K. Tax treaty explained
If you are living in Great Britain, the U.S. – U.K. Tax treaty might come in handy to reduce double taxation. This benefit is greatly reduced when applied to U.S. citizens! All due to the presence of savings clause in Paragraph 3 of Article 1.
That said, some income can still be resourced by treaty, allowing a U.S. citizen in the U.K. to claim a Foreign Tax Credit. It will offset the U.S. tax liability for taxes paid to the United Kingdom. The official document is comprehensive (about 131 pages!) and covers following topics for both individuals and corporate entities.
Article 2: Taxes covered. Which taxes are covered in both U.S. and U.K.? In the case of the U.S., it’s federal income taxes imposed by IRS. It excludes social security taxes and federal excise taxes imposed on insurance policies issued by foreign insurers and with respect to private foundations. Speaking of U.K. taxes, they include the income tax, capital gains tax, corporation tax and petroleum revenue tax.
Article 4: Residence. It specifies the criterion to determine residence. In the case of a non-resident alien, it would exempt them from U.S. taxation. But in the case of a U.S. citizen, it would only allow the resourcing of that income in order to claim the Foreign Tax Credit on that income.
Article 6: Income from Real Property. The income of a resident of the U.K. or the U.S. derived from real property situated in the other Contracting State may be taxed in the country in which the property is situated.
Article 7: Business profits. A general rule that business profits of an enterprise of U.S. or U.K. may not be taxed by the other country unless the enterprise carries on business in that other country through a permanent establishment.
What is our U.S. Tax advice for U.K. residents?
As an American living abroad, you need to look into different U.S. expat tax solutions. They may protect you from possible double taxation and can help you save money on your U.S. tax return. The following is our expert U.S. tax advice for UK residents:
- In most of the cases, it’s better to claim Foreign Tax Credit over using Foreign Earned Income Exclusion (here is the infographic which explains why FTC wins over FEIE),
- A Foreign Housing Exclusion will allow you to have additional exclusions for some amounts paid to cover household expenses due to living in the UK,
- If you are U.S. citizen living in the U.K. who never filed a tax return, you may be eligible to use Streamlined Procedures to file late back taxes penalty-free,
- Don’t miss any tax deadlines: the U.K. tax year is different than the U.S. tax year. The U.K. tax year ends on April 5, whereas a U.S. taxpayer would normally use a calendar year. You need to allocate income to the proper tax year when translating income from U.K. documents to prepare a U.S. tax return.
One would submit tax returns to Her Majesty’s Revenue and Customs office (HMRC) by October 31st if you file by paper. In case if you e-file, you have to submit your taxes by January 31st of the next year.
What about U.S. expat tax deadlines?
If you are a U.S. citizen living in the U.K., keep these dates in mind:
- April 15th, 2019 – to file individual tax returns and pay taxes you owe;
- June 17th, 2019 – automatic 2-month extension deadline given for U.S. expats and FBAR filing due date;
- October 15th, 2019 – final deadline to file the U.S. taxes if you requested an extension before the original due date;
- October 15th, 2019 – automatic extension to file an FBAR to those who failed to meet the original deadline.
What about U.K. taxes on foreign income?
We already know about U.S. taxes on foreign income and how to keep more of it as a U.S. expat. The U.K. tax requirements on individual worldwide income depend on 2 factors: U.K. domicile and your residency status. So if you are a U.K. resident, then you must pay taxes on your worldwide income regardless of your location. And it is the same amount that you report on the U.S, expat tax return.
If you are wondering who should file U.K. tax returns, here is your answer. The HMRC sends tax forms to each individual. You may not receive a form if you have paid sufficient tax using payroll withholding. If you have an investment income or self-employment income, then you need to file a return and submit the taxes due. It includes income of GBP 100,000 or more, profits from the sale of shares, second homes, and other capital gains, property rental income etc.
How to save on a tax return if you are a U.S. citizen living in the U.K.
First of all, you can save money on both U.S. and U.K. tax returns depending on your residency status. As we mentioned earlier, it determines if you need to pay tax in the UK on foreign income. Non-residents only pay tax on their U.K. income?
There are special rules for U.K. residents who have permanent domicile abroad. Usually, residents have to pay U.K. tax on all their income! If you either spent 183 or more days in the U.K. in the tax year or your only home was in the UK, where you spent at least 30 days and owned/rented/lived in it for at least 91 days in total, then you are automatically considered a resident.
Both Foreign Tax Credit and Foreign Earned Income Exclusion will help you to lower your U.S. tax bill. Don’t forget about Child Tax Credit and Additional Child Tax Credit! They are the real bonuses for people with children as their dependents. For each eligible child, you may receive a credit of up to $2,000 to offset your tax owing. Generally speaking, you can take a tax deduction for these items: personal exemptions, qualified retirement contributions, alimony payments, charitable contributions, medical expenses etc.
Due to complexity and nuances of both U.S. and U.K. tax laws, we recommend consulting a U.S. expat tax professional. Experts help to understand all the U.K. residency and domicile rules, available U.S. expat tax deductions and credits to lower the tax bill.
If you are a U.S. citizen living in the U.K. and need a help with U.S. expat tax return, do not hesitate to contact us. We offer free 20-min phone consultations, you can ask us any questions, so our tax experts can provide a tailor-made solution. Everything remains strictly confidential and we will get back to you within 24 hours.