A Comprehensive Guide to US Expat Taxes in the UK: What American Citizens Need to Know

May 2, 2023 | George Orwell | 988 views

American citizens living in the UK face unique challenges when it comes to taxes. They are required to comply with both US and UK tax laws, which can be complicated and confusing. In this article, we’ll provide a comprehensive guide to US expat taxes in the UK, including key terms and concepts such as green card holders, FEIE, Foreign Tax Credit, FBAR, SSIP, and FinCEN.

US Tax Obligations for American Citizens in the UK

American citizens living in the UK are required to file a US tax return each year, reporting all their worldwide income. This includes any income earned in the UK, such as wages, rental income, or investment income. They may also be subject to US taxes on their foreign bank accounts and other foreign assets.

Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) is a tax exclusion that allows US expats to exclude a certain amount of their foreign earned income from US taxes. For 2021, the FEIE limit is $108,700. To qualify for the FEIE, the US expat must meet certain residency requirements. They must either be a bona fide resident of the foreign country or be physically present in the foreign country for at least 330 full days in a 12-month period.

Foreign Tax Credit – A Detailed Explanation of How It Works for US Expats in the UK

The Foreign Tax Credit is another option for US expats in the UK to reduce their US tax liability. This credit allows taxpayers to claim a credit for foreign taxes paid on their foreign earned income. The credit is dollar-for-dollar, meaning that for every dollar of foreign tax paid, the taxpayer can reduce their US tax liability by one dollar. However, the credit is subject to certain limitations and restrictions.

To claim the Foreign Tax Credit, the US expat must file Form 1116 with their US tax return. They must also provide documentation to support the amount of foreign tax paid. If the amount of foreign tax paid is less than the amount of US tax that would be due on the foreign income, the US expat may be able to carry forward the unused credit for up to 10 years.

Foreign Bank Account Reporting (FBAR)

US expats in the UK are required to report their foreign bank accounts if the total value of all foreign financial accounts exceeds $10,000 at any time during the year. This reporting is done using FinCEN Form 114, also known as the FBAR. Failure to file the FBAR can result in severe penalties, including fines and even criminal charges.

Streamlined Filing Compliance Procedures

For US expats who have not been filing their US tax returns or FBARs, the IRS offers the Streamlined Filing Compliance Procedures. This program allows eligible taxpayers to come into compliance with their US tax obligations without facing penalties. To qualify for the program, the US expat must meet certain requirements, including having a low compliance risk and certifying that their failure to file was due to non-willful conduct.

Conclusion

US expats in the UK face complex tax obligations, but with proper planning and understanding of the rules and requirements, they can ensure compliance with both US and UK tax laws. Working with a qualified tax professional who understands the intricacies of US expat taxes in the UK can help to minimize tax liability and avoid penalties. By utilizing options such as the FEIE, Foreign Tax Credit, and Streamlined Filing Compliance Procedures, US expats in the UK can stay on the right side of the law and avoid any unpleasant surprises at tax time. It’s essential to stay up to date on the latest tax laws and regulations that apply to US expats in the UK, as they can change from year to year.

In summary, US expats in the UK must comply with both US and UK tax laws, which can be complex and confusing. They must file a US tax return reporting their worldwide income, including any income earned in the UK. US expats in the UK may also be subject to US taxes on their foreign bank accounts and other foreign assets.

The Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit are two options that US expats in the UK can use to reduce their US tax liability. US expats in the UK are also required to report their foreign bank accounts using the FBAR, and they may qualify for the Streamlined Filing Compliance Procedures if they have not been filing their US tax returns or FBARs.

In conclusion, complying with US tax obligations as an expat in the UK can be challenging, but it is necessary to avoid penalties and remain in good standing with the IRS. US expats in the UK should work with a qualified tax professional who can help them understand their tax obligations and ensure compliance with both US and UK tax laws. With the right planning and advice, US expats in the UK can minimize their tax liability and enjoy their time abroad with peace of mind.

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