Our regular blog followers have been asking us to create a guide on how to file U.S. tax return when living in the UK, so let’s get into it.
Why is it Important to File Your Taxes Correctly?
If you aren’t already aware, you need to be: there are penalties for late tax filing in the U.K. as well as in the U.S. The tax years differ in both to make things even more complicated.
How do you report your income appropriately on both? Filing a U.S. tax return from the U.K. presents you with a new set of challenges. You will need to prorate your foreign earned income to match U.S. reporting standards.
The starting point for any US expat tax-related topic is gaining a clear understanding of who must file US taxes on their worldwide income: all U.S. citizens, Green Card holders and US persons for tax purposes. As a U.K. resident you must file a UK tax return and as a US citizen, you must file another tax return with the IRS.
Therefore, any work you do in the U.K. is considered taxable in both countries – and making sure you are filing your taxes correctly could save you from double taxation and keep you out of hot water.
Who is Required to File a Tax Return by U.S. Tax Law?
All working individuals who are U.S. citizens (including the ones with dual citizenship) and Green Card holders must file tax returns, regardless of if they live or work abroad.
Everyone who earns a minimum required threshold has to file a US tax return and pay any taxes they may owe.
Here are the key brackets for the 2021 year tax return to file in 2022:
- If you are under age 65 and single, your minimum income requirement is $12,400
- If you are 65 or older, then filing requirements raise slightly to $14,050
- For self-employed individuals, the threshold is $400 regardless of age and filing status.
If you need help figuring out where you lie in the rules and regulations, either check out the full table of federal income tax brackets for 2021 or send us an email to receive a personalized consultation.
The 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 and expensive payments that you struggle to keep up with.
This is very important to remember: unless you file your taxes properly, you are liable to pay taxes to both countries. This can only be avoided through careful tax filing.
All due to the beneficial presence of the savings clause in Paragraph 3, Article 1 in the treaty.
(3) Notwithstanding any provision of this Convention except paragraph (4) of this Article, a
Contracting State may tax its residents (as determined under Article 4 (Fiscal Residence)) and its
nationals as if this Convention had not come into effect.
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. Your tax credit, however, shouldn’t be confused with a tax deduction. Deductions, when taken as you file taxes, reduce your overall taxable income. Tax credits, on the other hand, eliminate or reduce the exact amount of taxes you have to pay. Overall, this will offset the U.S. tax liability for taxes paid to the United Kingdom.
The official document is comprehensive and covers the following topics for both individuals and corporate entities.
Here’s a general overview of the important sections for a migrant:
Article 2: Taxes Covered.
If you’ve been wondering which taxes are covered in both the U.S. and the U.K., this is the section for you. 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. U.K. taxes include income tax, capital gains tax, corporation tax, and petroleum revenue tax.
Article 4: Residence
This article specifies the criterion to determine residence. In the case of a non-resident alien, it would exempt them from U.S. taxation. However, 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. The statutes that declare your residency differ between the UK Visas and Immigration office and Great Britain’s tax collectors. You may, for example, be considered a taxable resident even though you’ve been in the country for only a few months.
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 is that business profits of an enterprise of the 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.
If you want to learn more about U.S. – U.K. tax treaty, full documentation can be found online and you can also read up on the official technical explanation to clear up any confusion.
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.
These may protect you from possible double taxation and can help you save money on your U.S. tax return.
What you shouldn’t do is live in the U.K. with the assumption that you can work tax-free. In comparison, filing taxes with the U.K. calls for more stringent requirements than the States.
We also recommend:
- Most of the time, 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 a U.S. citizen living in the U.K. who has 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.
If you are in the U.K., you need to submit tax returns to Her Majesty’s Revenue and Customs office (HMRC) by October 31st – and send it early if you prefer to file by paper. If you e-file, you have to submit your taxes by January 31st of the next year.
What About U.S. Expat Tax Deadlines?
Penalties are given when you don’t file your taxes in the U.K.
From paying interest on money you owe to paying a set £100, failing to file on time can eventually result in you losing your right to live abroad.
If you are a U.S. citizen living in the U.K., keep these dates in mind:
- April 15th, 2022 – to file individual tax returns and pay taxes you owe;
- June 15th, 2022 – automatic 2-month extension deadline given for U.S. expats;
- October 15th, 2022 – final deadline to file the U.S. taxes if you requested an extension before the original due date;
- October 15th, 2022 – automatic extension to file an FBAR to those who failed to meet the original deadline.
What About U.K. Taxes on Foreign Income?
We’ve already covered how to file U.S. taxes on foreign income and how to keep more of it as a U.S. expat. You also need to remember that the U.K. tax requirements on individual worldwide income depend on 2 factors: U.K. domicile and your residency status. If you are a U.K. resident, then you must pay taxes on your worldwide income regardless of your location. This would be a total of the same amount that you report on the U.S. expat tax return.
Who Should File U.K. Tax Returns?
The HMRC sends tax forms to every working individual. If you are earning money in the U.K., you’re liable to paying taxes and must properly file your earnings.
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 Tax Returns 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 U.K. on foreign income. Non-residents only pay tax on their U.K. income.
There are also 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’ve 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! This saves money by lowering your required tax. 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.
How to Avoid Getting In Trouble
Due to the complexity and nuances of both U.S. and U.K. tax laws, we recommend consulting our U.S. expat tax professionals.
Both the U.K. and the United States have a set agreement on their taxes. After both the IRS and the HMRC discussed the issues, the rules guiding their foreign tax laws were made to ideally work for both countries.
Having an expert on your team will help you to understand all the U.K. residency and domicile rules and learn about available U.S. expat tax deductions and credits to lower your 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 so you can ask us any questions and our tax experts will provide a tailor-made solution. Everything remains strictly confidential and we will get back to you within 24 hours.