Frequently Asked Questions (FAQ) about US and UK expat tax. Harrison Swift has the answers to your US & UK tax queries.
As defined by the IRS:
“An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.
Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.“
US citizens have IRS filing obligations no matter where they reside in the world. The requirement to file will depend on your individual situation, but for most people you will find that you do need to file a federal tax return every year.
The word “resident” is often confusing in this question. If you are asked this by a foreign financial institution, what they are likely asking is if you are obligated for federal tax filing. If you are a US citizen or “green card holder” (US Lawful Permanent Resident) or physically resident in the US you will always be resident for federal tax purposes.
In most situations you will find that you do need to file a tax return, as holding lawful permanent resident status in the USA obligates you to IRS filing requirements until you formally relinquish your green card status. Even if your actual green card has expired, until you file the required documentation with the IRS your filing obligations remain.
Before replying to any letter from a tax authority it is important that you get the advice of a professional tax advisor.
Most foreign financial institutions are sharing various details about their US taxpayer clients with domestic bodies - who then share this information with the IRS/Treasury department.
The Foreign Account Tax Compliance Act (part of the HIRE act) is the law passed by the US legislature that compels foreign financial institutions to report on foreign assets held by their US account holders - which will otherwise be subject to withholding requirements.
FBAR is another name for the FinCEN Form 114 and was formerly known as the Report of Foreign Bank and Financial Accounts. It is a required form for any US Federal tax payer who meets the filing threshold - the threshold being quite low as it was set in the 1970s.
This form was introduced by FATCA and requires much of the same information as the FBAR - with some notable exceptions and additions. The filing requirement is variable and in general has a higher threshold than the FBAR requirements.
The substantial presence test is a test to determine whether a non-US person is a tax resident for federal tax purposes.
This is a treaty between the US Federal tax system and the UK that is designed to prevent double taxation between the two countries.
In countries where there are double tax conventions, most situations are covered to prevent double tax. Where there is no double tax convention, then US domestic law may make provision to avoid double tax.
This is the tax and financial planning you should do BEFORE you move countries. Waiting till after you are resident in a new country could have negative implications depending on your financial setup and your planning options will narrow once you have arrived.
Potentially. Any FX gains over a small amount will be taxable. Unfortunately, in regards to mortgages, no relief will be given for FX losses. Relief may be available if a valid Qualified Business Unit (‘QBU’) has been operated.
If you live outside the US, your default filing status will normally be “married filing separately”. If, however, you have qualified dependents, then you may be able to file as “Head of Household”. Exceptionally, the IRS allows a one-time election to file jointly with your non-US taxpayer spouse, but if you opt out you can never opt-in again. Thus you should carefully consider your filing options before you decide how to proceed.
You do not have to file jointly with a non-US taxpayer spouse. There are, however, some information returns that may detail your foreign spouses assets (such as companies and partnerships). Specialist advice should be taken.
The US currently allows up to $250,000 (per owner) of exclusions on capital gain for a qualified residence. This will also apply to a residence sold in a foreign country.
The Foreign Earned Income Exclusion is a common filing position for US expats. It entitles you to exclude the first $120,000 (2023 levels) of your foreign earned income for tax purposes.
This is an addition to the FEIE, and allows you to deduct qualified housing expenses over a threshold amount, and up to a limit, depending on where you live. Like the FEIE, you can then deduct this from your foreign earned income when computing your tax obligations.
PFIC stands for Passive Foreign Investment Company - and can include many non-US investments such as mutual funds, exchange traded funds, investment trusts, some foreign pensions and private investments, etc… The IRS imposes onerous tax rates on income and gains derived from PFICS and you should carefully consider your potential tax obligations, especially as they can lead to double taxation.
Crypto is currently treated as a capital asset and the US Federal capital gain and loss rules apply.
If you are a shareholder of a non-US company, then there are certain filing requirements depending on the percentage ownership held by US Taxpayers. Constructive ownership rules may apply to shares owned by a non-US spouse. In some situations the company may be a “controlled foreign corporation (CFC)” or PFIC, depending on the percentage of US owners and the underlying activity.
A timely entity classification election will allow you to change the tax status of a foreign entity. For example, a company could elect to be treated as a partnership. Careful consideration should be taken before making any entity classification election as mistakes are easily made in this specialist area.
Potentially. Each state has different rules and some states do not have an income tax. If you spend time in any state the rules should be checked to see if you have created a taxable presence. If you know you are not resident in any state but you have income or capital gains connected to that state, then the rules will need to be checked to see if you owe taxes as a nonresident.
Many states are currently running disclosure programs. These can be generous or non-existent and you should consult to determine what filing route is best for your situation.
People often ask this question - and really they are asking different things depending on their situation. For instance, is it about “residency” or “domicile”? What type of tax are you seeking to manage? Every state has different rules about residency, domicile and taxes - and each person has a unique situation that needs to be considered.
Many states operate a tax on real estate gains, regardless of residency. If this situation applies to you and you are not a state resident of the state where the sale happened, you may need to file a non-resident state return.
No. Depending on the foreign country you are resident in and their tax rules, you may be able to get foreign tax credit relief for the state taxes paid.
This will depend on each state's rules, however, some of the big states that operate an income tax will require you to prorate your state work days over total work days to arrive at a taxable amount. This may require a non-resident return.
If you are a US Taxpayer who is behind on your federal taxes, you may want to consider entering one of the disclosure programs to bring your affairs up to date.
You can work with a tax advisor to figure out which disclosure program is best for you situation. We help clients do disclosure all the time, and are experienced with making it a smooth process.
The Streamlined Foreign Offshore Program is the main route for US taxpayers living overseas to bring their tax affairs into compliance. This route is available to taxpayers who have non-willfully fallen behind on their tax filings. Generally it will require you to file the last three past due years of income tax returns and information returns, along with the past six years of the “FBAR”.
You may have to file if you:
There are multiple ways to make a UK tax disclosure, but the method we would normally recommend for individual taxpayers with an offshore asset is the Worldwide Disclosure Facility (WDF).
There may be certain tax reliefs if you are not domiciled in the UK, even if you are tax resident in the UK. We can help you make this assessment based on your individual facts and circumstances.
This is a short term (up to three tax years) relief to allow you to exclude the income attributable to your non-UK work days from UK tax. Careful planning will need to be implemented around bank accounts and the operation of your finances in order for the tax relief to be claimed.
Before replying to any letter from HMRC it is important that you get the advice of a professional tax advisor.
In most situations yes. There are no double tax conventions between the UK and individual US states. The UK, however, has a concept in domestic law of ‘unilateral foreign tax credits’, these may give you relief against double taxation.
The wording of the trust deed could be a problem from a UK tax perspective. HMRC may view this type of arrangement as a substantive trust - which would be required to file its own trust returns.
UK LLPs and certain other non-US entities may have a ‘default entity classification’ that is not what you would expect. In the example of a UK LLP the default entity classification is a company. This could cause there to be double taxation between the UK and the USA.
Potentially. This has been tested in court and in a certain situation relief was given. In other situations, however, membership of a US LLC may give rise to ‘double tax’. There are other matters to consider such as UK payroll, corporation tax, etc… Before moving to the UK you should take advice regarding any foreign entities.