Tax Advice for Americans moving to the UK
3D artist, Alexis Christodoulou
UPDATED: 4th May 2020
As an American citizen making the big move to the UK there a number of things you have to consider and be aware of, a key one being your UK and US tax obligations.
According to research conducted by the Chicago Council on Global affairs, the UK is American’s second favourite country in the world. It brings no surprise, therefore, that there are currently over 200,000 American Expats living in the UK. With a common language, a rich history and booming financial, tech and creative industries, there is a lot for Americans to love.
An added benefit for Americans moving to the UK is the Dollars current strength against the pound, this means that Americans are able to get that bit more for their buck while living in the UK.
Tax obligations and liabilities by residency status
Under US tax law, the rules for US citizens living abroad and US citizens residing in the US are generally the same. For Americans who have lived in the US and then immigrated, it is likely that they are classed for tax purposes as a US citizen.
Tests used to assess residency status
Physical Presence test
To meet this test you must be a U.S. citizen or resident alien who is physically present in a foreign country or countries, for at least 330 full days during 12 consecutive months. Any days spend residing within the US while qualifying under this test will be counted against you. There are significant tax credits and exclusions available to those who can prove physical presence in a foreign country.
Bona Fide Resident Test
In order to qualify for certain deductions, American citizens living abroad must pass the Bona Fide Residence Test to determine if a true overseas residency exists. In order to claim the deductions and exclusions you must:
Be a US citizen
Have set up residence in a foreign country
Live within that country for the whole year
Not have any plans of moving away from your country of residence and returning to the US
Foreign taxes and Americans living abroad
If you are thinking of moving to the UK for the foreseeable future, it is likely that you will be paying UK taxes. As the US and UK have an agreed double tax treaty, the taxes owed to one country can be offset with the other. This is determined by the Americans ‘Tax home’, which is the general are that is the main place of business, employment or permanent post of duty.
FILING REQUIREMENTS AS AN AMERICAN CITIZEN LIVING ABROAD
As an American citizen living abroad you will be required to declare your worldwide income by filing a US tax return.
You are, in theory, liable to US taxes. However, with expert US expat tax advice, your US tax owed can be offset through Foreign Earned Income Exclusion (FEIE) and/or Foreign Tax Credit, which allows you to claim a dollar tax credit for every Us dollar equivalent of tax paid in another country.
American Expats with no income
Filing a US tax return is in general only necessary for those who have been past the monetary threshold on the IRS filing chart. For the 2019 tax year, those who earned below $12,200 will generally not be required to file. Although, it is possible to skip filing a US tax return for those with minimal income, it is sometimes suggested to file to remain in good and safe standing with the IRS.
Foreign Earned Income Exclusion
If you have foreign earned income and your tax home is outside the US, you may be able to claim the foreign earned income exclusion (FEIE).
Foreign earned income includes - salary, wages, bonus, self employed income, commissions
It does not include - dividends, interest, capital gains, gambling winnings, alimony and pensions (normally rental income unless you can show you provide services as part of renting out your property - even then, only a portion can be used for the exclusion)
For the 2020 tax season, the foreign earned income exclusion is a maximum of $105,900. If you have any excess left over, it does not carry forward to the next year.
A person who claims the Exclusion cannot claim any credits or deductions that are related to the excluded income, for instance a foreign tax credit or deduction for any foreign income tax paid on the excluded income. The earned income credit is also unavailable. Furthermore, for IRA purposes, the excluded income is not considered compensation and, for figuring deductible contributions in an employer retirement plan, is included in modified adjusted gross income.
FOREIGN HOUSING EXCLUSION AND DEDUCTION
You can claim the foreign housing exclusion or foreign housing deduction in addition to the foreign earned income exclusion.
Foreign housing exclusion - you can claim this with employed income
Foreign housing deduction - you can claim this with self-employed income
Note - if you claim the foreign housing exclusion or deduction, you can't claim the additional child tax credit mentioned below.
FILING DATES FOR EXPATS
Coronavirus update:
For the 2020 tax year, there have been a number of changes due to the Coronavirus Outbreak. Due to the unpredictable climate, everything is fluid and therefore may be subject to change. We will be keeping our website up to date with all of the latest changes
April 15th- All taxes you owe to the US must be paid. For the 2020 tax year, the deadline has been extended to July 15th.
June 15th- Expats receive a 2-month filing extension until June 15th, with a further extension available until October 15th.
Covid-19 and Tax Owed
Taxpayers are able to defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax This deferment refers to 2019 tax payments or estimated tax payments for 2020.
EXTRA FILING REQUIREMENTS FOR EXPATS
In addition, you are also required to file a separate report with your foreign financial accounts and bank accounts (FBAR).
It does not stop there for many US expats and there are additional forms that need to be filed each year depending on your circumstances.
1 - FORM 8938 - REPORTING FOREIGN FINANCIAL ASSETS
Although you report any bank accounts, investment accounts (including ISAs), pensions and any other foreign financial accounts on the separate FBAR, you may also need to report those as part of your US expat tax return.
Step 1 - seeing which assets need to be reported
The IRS is looking for all assets that you have an interest in to be reported.
You have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on your income tax return.
Step 2 - reporting thresholds for filing form 8938
The reporting thresholds for the foreign financial assets you have an interest in are:
Single - more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
Married filing jointly - more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
Married filing separately - more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is a flat rate penalty of $10,000 for filing late or not filing per year, additional penalties of $10,000 per month start after 90 days, up to an additional maximum penalty of $50,000.
2 - FORM 5471 - US CITIZENS REPORTING INTERESTS IN FOREIGN COMPANIES
If you held 10% or more shares in a company outside of the US, at any time during the year, you may need to report that company back to the US each year using form 5471.
If you were a director, or officer, of a company outside of the US - even if you held no shares, or your shares were under the 10% threshold - you may also be required to file form 5471.
If you meet the 10% threshold and then acquire additional shares or dispose of any shares then you may need to report those transactions on form 5471.
There are different levels of reporting on form 5471 depending on your level of involvement with the company.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is a flat rate penalty of $10,000 for filing late or not filing per company per year, additional penalties of $10,000 per month start after 90 days, up to an additional maximum penalty of $50,000.
3 - FORM 8865 - US CITIZENS REPORTING INTERESTS IN FOREIGN PARTNERSHIPS
If you had 10% or more interest in a partnership outside of the US, at any time during the year, you may need to report that partnership back to the US each year and file form 8865.
There are different levels of reporting on form 8865 depending on your level of involvement with the partnership.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is a flat rate penalty of $10,000 for filing late or not filing per partnership per year, additional penalties of $10,000 per month start after 90 days, up to an additional maximum penalty of $50,000.
4 - FORM 8621 - US CITIZENS WHO HAVE INVESTMENTS OUTSIDE THE US IN FUNDS (INCLUDING ISAS)
Form 8621 is commonly known as PFIC reporting - passive foreign investment companies.
Step 1 - is the investment a PFIC?
The IRS has two tests:
Income test - 75% or more of the income from the investment company is passive income (for investments this includes interest, dividends and capital gains)
Asset test - 50% or more of the assets held by the company are held to produce passive income
If you invest in a fund and it meets the two tests above, for each fund you will need to complete form 8621.
ISAs (individual savings accounts) are tax free in the UK, but they are taxable in the US. Individual stocks and shares in an ISA do not have PFIC reporting, but ISAs commonly contain funds (groups of shares) and these are liable to PFIC reporting.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is no penalty specifically for the form, but failing to file does allow the IRS to leave open the statute of limitations for the whole tax return indefinitely.
5 - FORM 8833 - CLAIMING THE US UK TAX TREATY
You may want to use the US UK tax treaty to stop double taxation, or another common reason is if you have IRAs and social security from the US while living in the UK.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - if you claim tax treaty benefits, relying on a treaty based return position, and don't file form 8833, you are subject to a penalty of $1,000 for each failure.
6 - FORM 8960 - ADDITIONAL TAX ON INVESTMENT INCOME
If you have passive income - interest, dividends, capital gains, property income - you may need to complete form 8960.
The thresholds for form 8960 are below - these are your modified adjusted gross income (not just your investment income):
Single — $200,000
Married filing jointly — $250,000
Married filing separately — $125,000
If your total income exceeds the threshold, the investment income above the threshold is liable to Net Investment Income Tax (NIIT) at 3.8%.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is no penalty specifically for the form, but failing to file does allow the IRS to leave open the statute of limitations for the whole tax return indefinitely.
MISSED FILING
If you have been living in the UK and were not aware of your US tax filing obligations, the IRS have set up an amnesty program that allows you to catch up on your US filing without being subject to paying penalties, this is called a Streamlined Procedure.
If you do need to file, the IRS has an amnesty, the streamlined filing compliance procedures. If you are living outside the US, the streamlined program you will use is the streamlined foreign offshore procedures.
The streamlined filing process has 3 parts: (1) the last 3 overdue tax returns, (2) a disclosure document (form 14653) to explain why you have not been filing - not knowing you needed to file is a valid excuse (the IRS call this non-willful conduct), (3) 6 years of FBARs
BRITISH TAXES
As a US citizen living in the UK, you are also subject to UK taxes. The British tax year between April 6th to April 5th. British tax returns should be filed by January 31st of the year following the end of the given tax year.
Contact us for American Expat tax assistance