Back to basics – everything you need to know if you’re looking for US expat tax advice

The US tax system is famously one of the most complex in the world. In fact, the US is one of just two countries in the entire world that continues to tax its citizens no matter where they live. The other is Eritrea.

And for US expats living in the UK, tax time means double the stress. Not only do they have to file taxes with the UK’s HM Revenue & Customs (HMRC) department, but also to the US Government’s Inland Revenue Service (IRS).

There’s a lot for US expats to grasp when it comes to understanding their tax obligations. Which is why we’d always advise talking to an experienced professional.

Tax advice for US expats is essential

Navigating the US expat tax system, as well as the UK’s tax system, is difficult. At best it’s time consuming, and at worst, it’s very easy to get wrong. Just one missing piece of paperwork could mean penalties.

Some US expats may have lived in the UK for decades and assumed that they’re no longer obliged to file taxes with the IRS. Others may assume that the UK and US Government sort it out between themselves. While this could be a logical conclusion, it’s absolutely not the case.

One of the major differences between the US tax system and most other country’s is that the onus is on the citizen to sort out their taxes. That means filing the correct forms at the correct times. It also means understanding how to ensure that every aspect is covered, including foreign bank account reporting, self-employment reporting and much more.

What are the basic tax obligations for US expats in the UK?

Every US expat living in the UK is legally obliged to file a tax return with the IRS. It doesn’t matter how long they’ve been living away from the US, or where they work – they must file a tax return using Form 1040.

This catches some expats out as they wrongly assume they don’t earn enough to pay the IRS. While this may be true, they still have to file the tax return.

Expats also have to inform the Treasury department of the US Government about any bank accounts they hold in the UK. This includes bank accounts where they are a signatory. Under the Foreign Bank Declaration (FBAR) rules, US expats must file Form FinCEN114 with all the necessary information

These are just the basic forms for tax compliance. Expats must understand any other forms they’re required to file and why. This is one of the primary reasons for getting expert guidance in US expat tax matters.

Do US expats have to pay tax twice?

Under the Double Taxation agreement between the US and the UK, expats will be glad to hear they don’t have to pay double tax on the same income. Every pound they spend with HMRC in the UK in tax and social security reduces their US tax bill by the same amount.

And for US expats who didn’t realise they were supposed to be filing at all, there is also some good news. The IRS introduced an amnesty process, called Streamlined Procedures. Anyone who can prove to the IRS that they genuinely didn’t know they were obliged to file US taxes can use the system to get up to date. The programme demands they file backdated tax returns for the last three years, and FBARs for the previous five years.

How to exclude UK income from the US tax system

US expats can exclude their earned income from US taxes in certain circumstances. For income earned from freelance employment or other income earned in the UK, then they must fulfil the following criteria with the IRS:

1.Prove they are a tax resident in the UK

This involves informing HMRC of their status, selling all property owned in the US and requesting that the IRS recognises the status too.

In addition, they must also fulfil one of the following two:

2. Pass the Bona Fide resident test

To do so, they must live in the UK for an entire tax year. This still may not be enough for the IRS, particularly if their work contract is short term. The IRS will look at a number of factors to decide whether they are a bona fide UK resident. These include whether their family from the US is with them in the UK, whether they own property in the UK and whether HMRC is aware of their status.

3. Be physically present for a set number of days

The Physical Presence test measures how long the expat has physically spent in the country. They must spend 330 days out of the tax year (365 days) in the UK to be considered physically present under tax regulations.

More complex US expat tax information

We’ve only touched on the basics of US expat tax compliance. There are many other aspects, including pensions, self-employment and renouncing citizenship entirely.

The biggest burden on US expats is the sheer amount of paperwork and administration necessary to be tax compliant. Working with a properly qualified and experienced US tax advisor, such as Ingleton Partners, will not only ensure compliance, but also that the tax bill as low as possible. Contact the team here for a review of US expat tax affairs.