We’ve received requests from our regular readers for a guide on how to fill out an IRS 1040 form when living abroad. So here we go!
It’s important to file your taxes correctly because…
You should know that if you’re not already aware, you need (1) to file taxes in the UK as well as (2) in the US. The UK has different taxation years than the USA.
If you’re filing a U.S. federal tax return from the UK, you’ll have to prorate your foreign earnings to match U.S. reporting standards.
To understand the different types of taxation that may be relevant to you, start by understanding who has to pay US taxes on their worldwide earnings: all U.S.-citizen individuals, Green Card holders, and U.S. persons for federal income taxes. You also need to know if you’re filing a UK personal income/corporation (PIC) return or an individual UK self-assessment (SA) return.
If you’re working in the UK, then anything you earn there is taxable in both countries. And if you don’t file your taxes properly, you might be liable for double taxation.
To file a tax return, you must be required to file one under US law.
All people living in the United States who are not permanent residents or citizens must pay federal income taxes, even when they’re living overseas.
If you earn at least $10,000 for the year, then you must file a federal income return and pay any taxes owed.
Here are the key bracket numbers for filing in 2022:
If you’re under age 65 and single and earn less than $12,400 per year, your eligibility for Medicaid depends on your state.
If you’re 65 or older, then the threshold for filinig increases to $14,050.
If you’re an independent contractor (or sole proprietor), the income tax withholding threshold is $400 regardless if you’re under 25 years old or not.
If you’re not sure whether you fall into one of the categories, check out the full list of federal income tax rates for 2021 or contact us for a personal consultation.
The United States (U.S.) – United Kingdom (U.K.) tax
If you live in Great Britain, the US – UK tax treaty may be useful to help you avoid paying taxes twice and pay less for things.
Remember: Unless you’re going to use an accountant, you need to do your taxes. If you don’t, you could end up paying double taxes.
Why?
Due to the beneficial presence of a savings provision in paragraph three, article one of the Treaty,
(3) Notwithstanding anything else in this Treaty except paragraph 4 of this Article, a party may not invoke against another party any right which it has waived under this Treaty.
That being stated, some income can still go back into the U.S., enabling a U.S. resident in the UK to get foreign credit. However, your credit should not be mistaken for a deduction. Deductions, when taken as you submit taxes, lower your total taxable income. On the other side of things, though, a credit eliminates or reduces the exact amount of taxes owed. In general, this will counterbalance the US taxes you owe to the UK.
The official documents cover the following topics for both individual and corporate clients.
Here’s a basic overview of the key sections for a new immigrant.
Article 2: Taxes Covered.
If you’re planning to move to either the United States or the United Kingdom, you’ll likely encounter two types of taxation. First, there’s federal taxation, such as the Federal Insurance Contributions Act (FICA) and Social Security. Second, there’s state taxation, such as sales and property. While these may sound similar, they differ significantly. For example, FICA only applies to employers who pay wages above $106,800 per year. State taxation can apply regardless of how much money an employer pays.
Article 4: Residence
This paragraph explains how to calculate whether an individual is a resident or not. For instance, if someone were to work in the United States for three months out of every year, they could be said to be a resident of the United States. On the other hand, if someone lives in the United States for six months out of every year then they can be said to be a non-resident.
Article 6: Income From Real Estate
A person who resides in one country but owns property in another may be subject to tax in both countries.
Article 7: Business Profits
There is no blanket tax exemption for foreign companies operating in the United States or Great Britain. However, there are some exceptions.
To learn more about the U.S.-U.K. income taxes, visit the IRS website for the full documentation. You can also read up on an official technical description to clarify any confusion.
We provide tax advice for U.K. residents.
If you’re an American living overseas, you need to consider different U.S. tax options.
They might be able to shield you from potential double taxation and could potentially save you some money on your taxes.
You shouldn’t assume that working in the U.K., where the government doesn’t require employers to pay social security contributions, means that you don’t need to file taxes. On the contrary, there are stricter rules regarding taxation in the U.K…
We also recommend:
It’s usually better to use foreign tax credit than to use foreign earned income exclusion. Here is an infographic which explains why.
An Additional Home Office Expense Allowance will let you claim an extra allowance for some of the costs associated with living in the UK.
If you’re a U.S. resident living outside the United States who has never previously had an IRS audit, you may qualify for Streamlined Procedures to avoid penalties if you fail to meet filing deadlines.
Don’t miss any deadline for filing taxes: the U.K.’s fiscal year end on April 6, whereas a U. S. taxpayer, uses a calendrical (calculating by date) method. You must account for your earnings during the correct time when preparing your U.S. taxes.
If you’re in the UK, you must submit your tax return by October 31 of the current year, and you must send it early if you want to use paper instead of electronic filing. You must submit your taxes by January 30th of the following year if you choose to e-filing.
When are expat tax deadlines for US citizens living abroad?
If you fail to file your tax return by the deadline, you may be fined.
If you fail to pay any debts by the deadline, you could lose your right to stay in the country where you’re currently living.
If you’re a U.S. resident living in the UK, here are some important dates to remember:
April 15th, 2023 – to file an individual tax return and/or file an extension for paying taxes owed;
June 15, 2022 – automatic two-month extension deadline for US citizens living abroad
If you filed for an automatic six-month tax refund, then you need to file by October 15, 2022.
Automatic extensions to file FBARs for those who missed their original filing deadlines.
What About U.K. Taxes on Foreign Income?
We’ve already discussed how to fill out an American expatriate tax form if you live overseas. However, if you’re living abroad and working in the U.K., you’ll need to make sure you understand what kind of taxes you owe. In particular, you should know whether you can deduct any expenses related to your work in the United Kingdom. If so, you may be able to reduce your taxable income by taking those deductions.
If you’re filing UK tax returns, who should file them?
If you are employed in the UK, you are required to pay income taxes and must file them correctly.
If you’ve used payroll withholding to pay enough taxes, you won’t get a Form W-4 from us.
If you earn an investment or business profit of £100,000 or more, you must file a tax return and pay any taxes owed. It includes profits from the sales of stock, second houses, and other capital gains; rental incomes; interest payments; dividends; royalties; pension contributions; gambling winnings; and so on.
If you’re a U.S. citizen living abroad, there are some ways to save on tax returns.
You can save money on both US and UK taxes depending on your residency status; non-resident residents only owe taxes on their UK earnings.
There are some exceptions if you’re a British citizen living overseas. You’re not required to pay taxes on any income earned outside the country unless you meet certain conditions. For example, if you spend 183 or more consecutive nights in the United Kingdom during the calendar year, you may be deemed a resident.
They both will help you to lower the amount of taxes you owe.
Don’t forget about Personal Exemptions, Qualified Retirement Contributions, Alimony Payments, Charitable Contributions, Medical Expense Deductions etc. These savings are great for those who have kids as their dependents. Each eligible child can get a refundable childcare credit worth $1,200. You also get an additional $500 if you are single and file jointly. Another benefit of having kids is that you can claim them as dependents on your taxes. This means that you’ll save money by paying lower taxes.
How to avoid getting into trouble when using social media.
Because of the complexities and subtleties of U.S. and UK tax law, we recommend consulting our US expatriate tax professionals.
The UK and US both have a system of taxation. They’ve agreed upon certain things so that they’re able to work together effectively.
An experienced accountant on your team will be able to explain all the U.K.-residency and -domicile rules and teach you about available U.S.-expat-deduction and credit opportunities so that you can minimize your taxes.
If you’re a U.S. resident who lives abroad and needs assistance filing an American Tax Return (ATR), don’t be shy to reach out to us.
Our team offers free 20-minute telephone consultations where you can talk to one of our qualified advisors who will help you design an effective strategy for your business. All conversations remain strictly confidential and we will respond to you within 24 hours, no matter where you live.