Paying Taxes as a U.S. Expat in the United Kingdom

Moving to a new country and building a life comes with a set of challenges. One of the most critical aspects for US expats is staying compliant with the rules and regulations in your home country and the new overseas location you’ve moved to. Especially when it comes to taxation laws. Should you check with a tax consultant for expats, you’ll learn that even if you’re currently living in the UK, the US IRS expects you to file tax returns each year with the American government. This rule applies for as long as you retain US citizenship. Or, retain a valid Green Card. Here’s some additional information you’ll find helpful.

The US Government Follows the Dual Taxation Rule

According to this rule, you’ll pay taxes on all income you earn, whether American or global sources. You’ll also complete and file the FinCEN Form 114 (FBAR) or the Foreign Bank Accounts form, which will include information on all the assets you own in different bank accounts. These accounts may include and are not limited to savings accounts, brokerage accounts, unit trusts, mutual funds, and any other foreign financial assets. However, this rule is applicable only if the aggregate or combined total of all these accounts adds up to $10,000 or more. Or, reaches this limit at any time during the fiscal year.

You Can Take Advantage of the Different Exclusions

The IRS has several provisions to help US expats lower their tax burden. Your tax advisor will help you understand how they work. Here are some of the main exclusions you should know about.

  • Foreign Earned Income Exclusion (FEIE) – The IRS sets up an income limit each year after allowing for inflation. This limit was set at $107,600 for 2020 but is $108,700 for 2021. When calculating your taxes, you’ll deduct your foreign income up to this amount and pay taxes only on the remaining total.
  • Foreign Tax Credit (FTC) – In an attempt to help US expats avoid paying taxes to two countries on the same income, the IRS has the FTC provision. Accordingly, you can declare the taxes paid to the UK government in your returns and claim the credit. For instance, if you’ve paid $450 to the UK Her Majestys Revenue & Customs (HMRC)and the tax owed to the US IRS is $350, your tax credit is limited to $350.
  • Foreign Housing Exclusion – The IRS allows US expats to deduct certain household expenses from their taxable income. These costs can include rent or an equivalent of the housing rental value provided by a UK employer. Other expenses can also be deducted such as personal property insurance, renting parking space and furniture, homeowner’s insurance, and utilities other than internet subscription, cable TV, and telephone connections.

Navigating the taxation laws when you’re living abroad as a US expat can be confusing. More so, since the start and end of the financial year in both countries is different. Your best bet is to work with an experienced consultant who is knowledgeable about the intricacies and can help you stay compliant with the laws.

Rachel Maria

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