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There are many advantages to living in the UK as an American: Sadly, escaping the reach of the IRS is not one of them.
You have certain obligations that come with your rights as a US national. Your obligations include the filing of an annual tax return, even when you live this side of the Atlantic.
And naturally, there are many differences between HMRC and IRS allowances and rules. Life as an ex-pat is never simple.
Your Annual IRS Tax Return
Your annual Form 1040 is infinitely more complex as an ex-pat; at least if you want to avoid being taxed twice on your income and capital gains.
FBAR
The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including expats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.
The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year.
Source: Joshua Ashman (CPA & CEO of ExpatTaxProfessionals)
FATCA
FATCA and FBAR forms overlap in the information they require, but are sent to different government departments, so you need to file both or face hefty fines.
The Foreign Account Tax Compliance Act (FATCA) is the latest attempt by the IRS to combat offshore tax evasion. You need to attach a FATCA Form 8938 to your tax return detailing maximum account values during the year along with details of interest, dividends and royalty payments you have received. The FATCA form requires you to cross-reference the appropriate line item on your Form 1040.
If you reside outside the U.S. and have a bank account or investment account in a foreign financial institution, you are generally required to include Form 8938 with your U.S. federal income tax return if you meet the following thresholds:
You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
Source: Joshua Ashman (CPA)
Avoiding Double Taxation
Never assume that the IRS and HMRC talk to each other to help you. They do communicate, but you need to tell the IRS your story, rather than relying on HMRC to tell them everything.
You need to claim various allowances on your Form 1040 to avoid being taxed twice on your capital gains or income.
Foreign Earned Income Exclusion
If your business is mostly conducted in the UK, whether as an employee or as a self-employed individual, then your tax home is the UK, though you have to convince the IRS that this is the case.
Once your tax home is established as being outside the US, you can exclude the first $100,000 of your foreign income from your US tax liability. Attach a completed Form 2555 to your tax return to claim this allowance.
Foreign Tax Credit
Use the Foreign Tax Credit Form 1116 to set every dollar you pay in British income tax against your federal tax liability in the US on a dollar for dollar basis.
Capital Gains
You need to tell the IRS about all your long-term capital gains.
(Joshua Ashman tells us, “Short-term capital gains in the US are taxed as ordinary income.”)
You will pay UK capital gains tax on your UK gains, but use Form 1116 Foreign Tax Credit form to remove your liability for federal taxes on those gains.
The Executive Summary
As an American, you can never escape the IRS. Your US taxpayer obligations follow you around the globe. However, that doesn’t mean you have to pay two lots of taxes because the IRS allows you to make deductions for what you pay local tax authorities such as Her Majesty’s Revenue & Customs (HMRC).
It is easy to run afoul of IRS rules, especially as an expat because of the extra forms you need to complete. Employing an expat tax form completion and filing service may cost a few pounds, but the company’s expertise may save you tax you would otherwise have paid. It also saves time and stress because the job is done quickly and you know it’s done right.
