As a US citizen, the most confusing aspect of moving overseas is keeping up with your tax dues. Like most people contemplating a move, you’ve probably learned that you’ll continue to file taxes with the US IRS regardless of the location where you live and work. And, that includes the United Kingdom. The IRS expects you to inform them of the impending move and declare your worldwide income even if your earnings are lower than the taxable bracket. As long as you retain US citizenship or a Green Card, you’ll file returns. This rule is applicable even if the Green Card has expired.
Dual Taxes Need Not be a Cause for Concern
Considering that the UK administration levies taxes on income from all sources, irrespective of the point of origin, the total dues you might have to pay can seem unreasonable. However, the US and UK have an Expatriate Tax Treaty. If you file returns with Her Majesty’s Revenue & Customs (HMRC), the IRS equivalent in the UK, you can claim a tax credit on your US returns. Remember that the purpose behind the tax is to secure your future after retirement. For this reason, if you’re contributing toward Social Security and Medicare in your host country, you won’t have to pay the IRS back home.
Foreign Earned Income Exclusion (FEIE)
Each year, the IRS sets a specific income limit for US expats after accounting for inflation. You can deduct this amount from your total taxable amount from worldwide sources and pay dues on the balance only. This limit has been set at $108,700. For instance, if you earn $200,000 in the fiscal year ended December 31st, 2021, the taxable sum is $200,000 - 108,700 = $91,300. If your income is below the limit, you’ll file returns even if you don’t owe taxes to the IRS. It is highly advisable to contact an expat tax CPA with experience in dealing with U.S. expatriates in the United Kingdom.
Foreign Tax Credit
Yet another provision for US expats paying taxes to a foreign country is the Foreign Tax Credit. If you’re paying taxes on your wages and investment income to the UK administration, you can deduct the non-refundable amount from the IRS federal tax dues. Of course, you cannot claim both the FEIE and tax credit. Your expert tax consultant can guide you best on how to take advantage of the breaks and lower your final tax cut.
Foreign Housing Exclusion (FHE)
If you qualify for the FEIE, you have the option to take advantage of the Foreign Housing Exclusion also. This tax break is offered to US expats who are incurring living expenses in a foreign country. As long as you fulfill the criteria for being a bona fide UK citizen and physical presence test, you can deduct some of your household expenses from the gross taxable income. For instance, rent, leasing fees, renter’s insurance, parking fees, furniture rental, and basic utilities, excluding TV subscriptions, internet, and telephone services.
Taking advantage of the tax breaks provided by the IRS can help US expats lower the tax burden during their stay in the UK. Do your homework and gather the necessary information.