Tax Rules for Americans Living and Working in the UK
For those who are working in the UK and need advice and help on your taxes, this useful guest post explains how you can easily get into trouble and more importantly, how you can get out of trouble and also where to start, what to do and who can do it for you. Take time out to read this and pass on the link to this post to anyone else you know who may need to know this info.
By I.J. Zemelman, EA. Tax Operations Director at Taxes for Expats
The Hardships of the Easy Way
When it comes to taxes, especially the less common expatriate tax issues, the easy way can quickly become the hard way. The most common simplified tax preparation methods are the popular mass-market tax programs. And while tax software does work well for most people, these programs are simply not equipped to handle all of the overseas issues relevant to expatriates. Going to a chain tax business while back home in the U.S. may only be one step above the software, though, as the employees at these chains are usually unfamiliar with expatriate exclusions and other issues. Expatriate teachers may feel that their only real option is to simply put off paying their taxes. Unpaid taxes are a constant source of worry and weight, however, making this the least desirable of all choices. Many of our clients have put off their taxes for years (of course, one year turns into two and two into five). Tax software and tax chain employees will prove useless in these situations. Only a true and specifically trained professional can dig someone out of this kind of back taxes hole. The good news, though, is that it can be done….and more easily than you might think.
The Better Way
If you are working overseas, there are professionals who do specialize in overseas laws and expatriate tax issues who can guide you in preparing your tax forms. At Taxes for Expats, we can ease your worries, save you money, return you the IRS’s good graces, and handle all your tax matters with superior knowledge of your very unique situation. As an expatriate, if you file your taxes without knowledge of the special exclusions, you may overpay by thousands. We’re here to help you avoid that. There are important things to know before filing your taxes as an overseas teacher, though, whether or not you choose to have your forms prepared and filed by an expert.
First, as a U.S. citizen, you are used to filing your taxes by April 15th. This is a good rule to follow; because, as an expat, your taxes are still owed by that day. The date to file, however, is actually June 15th for expats (two more months to file, no more time to pay). For your first year overseas, you will probably need an extension (past June fifteenth) to be able to qualify for the Foreign Earned Income Exclusion (for which you definitely want to qualify). You should file your extension request by June fifteenth. Also, note that tuition breaks for your kids (although they enhance your income) are not taxable income. Housing benefits, however, are usually considered taxable.
Avoid Mistakes. Hire the Expat Expert.
Although we strongly advise against it, if you do decide to prepare your tax forms on your own (or without the help of a specifically trained expatriate tax expert), study, study, study beforehand. In order to claim the Foreign Earned Income Exclusion, you will have to specifically prove that you qualify for it. Many of our clients come to us after having been turned down for the claimed exclusion.
Simply put, the IRS is not going to sacrifice all of your tax dollars without making the exclusion a little difficult to navigate. In a matter of minutes, we can glance at your forms and determine where you have made mistakes (which will cost you the exclusion). Unanswered questions (because you simply do not know the answers), will, in most cases, cause the IRS to deny you the Foreign Earned Income Exclusion. Once denied, we can file an amendment to fix the problem. Of course, it is better to simply have your forms prepared accurately, and completely, the first time.
Even though you may be current with the filing of your tax returns – you may have overlooked something extremely important: FBAR (Foreign Bank and Financial Accounts). FBAR must be reported on Form TD 90-22.1 if the aggregate total of all international accounts equals or exceeds $10,000 AT ANY POINT throughout the taxable year. Failure to abide by FBAR filing requirements has steep consequences with the IRS, and claiming ignorance only helps so much. Non-willful FBAR violators (those who accidentally file inappropriately or who was not aware of the need to file, etc) may be charged up to $10K, and willful violators will be charged either $100K or 50% of the balance of their combined accounts – whichever number is greater.
Another measure to prevent international tax evasion which was taken by the US in 2010 is the Foreign Accounts Compliance Act (FATCA), through which overseas financial institutions report information to the US on all accounts held by American Citizens. In recent months the United States has been working to extend its agreement with more European countries and is planning to enact an agreement with as many international locations as possible.
FATCA – Form 8938
Updated FATCA rules state that an American Citizen who is either regarded as a foreign resident for the complete tax year or who meets the physical presence test requirements for residing in a country overseas is required to file the new Form 8938 if any of the following apply:
• If you are single: Total combined foreign accounts totaled or exceeded $300K at any point throughout the year OR total combined foreign accounts totaled or exceeded $200K at the end of the taxable year.
• If you are married and filing jointly: Total combined foreign accounts totaled or exceeded $600K at any point throughout the year OR total combined foreign accounts totaled or exceeded $400K on the last day of the taxable year.
UK Specific Rules
Now that you have a basic understanding of basic IRS rules we will take a look at some of the evolving tax rules and regulations for American Expats in the UK.
For many years now, American Citizens relocating to the UK have been allowed to be viewed as a non-domiciled resident in the United Kingdom. Non-domicile status exempts UK taxation on all income and gains earned or acquired in the US as long as the income is remitted in the United States. The current rules of the agreement between the UK and the US mandate that this status is only available for 7 out of 9 taxable years – at which time a remittance basis charge in the amount of £30,000 is owed to the UK in order to retain such status. If the taxpayer is still a resident after a total of 12 years the remittance basis charge amount is increased to £50,000. If you are unwilling to pay this fee you must report all international income to tax authorities in the UK.
Inspired by changes in the United States, tax authorities of the UK have significantly increased the amount of penalties to be assessed for failure to file required UK tax returns – including, even, a penalty which was applied to 2010/2011 and all previous tax years which is applied to late filers whether or not they owe any taxes. Perpetually failing to file taxes will result in a daily penalty of £10 and further penalties calculated by tax liability.
While there are many changes happening in the UK which could increase taxpayers’ liability there are still a few steps that American Expats can take to be less affected by UK taxes. American Citizens being seconded to the UK by an overseas employer may have tax relief options for housing and cost of subsistence if they are residing in the UK with the intention of staying for a period less than 2 years. US Expats can generally also stay active with the US Social Security Administration and be exempt from paying into the UK National Insurance Program for a period of 5 years or less.
US Expats who plan on residing in the UK for duration of 3 years or less are eligible to claim a beneficial tax residence status through which they are exempt from UK taxes in regard to earnings received on non UK workdays. In order to claim this status one must plan appropriately upon receiving a UK assignment and ensure that all banking arrangements are copasetic. Taking time to plan properly provides a useful outlet through which mobile global executives may reap sizeable tax savings.
As with all taxes, proper planning is critical. In order to save as much as possible and invest in the most beneficial pension plan(s) speak with a qualified tax professional before making any decisions. Tax treaties are designed to eliminate double taxation and simplify the filing process, but there are many details that everyday taxpayers can’t possibly know. Find out what you don’t know so your lack of knowledge doesn’t leave you liable for more taxes than you need to be.