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The USA taxes based on citizenship, so it doesn’t matter whether you live in the States or abroad, if you’re a US citizen, you’re still required to file form 1040 every year, reporting your worldwide income.
The US-UK tax treaty doesn’t help prevent US expats living in the UK from filing either. Instead, to avoid double taxation, Americans living in the UK can claim one or more IRS provisions, most often either the Foreign Tax Credit or the Foreign Earned Income Exclusion, when they file their US tax return.
The Foreign Tax Credit allows expats to claim US tax credits up to the value of the UK income taxes that they’ve already paid, while the Foreign Earned Income Exclusion allows them to simply exclude up to just over $100,000 of their earned income from US tax. Which is more beneficial depends on the details of each expat’s situation, such as their employment status, income types and levels, and how long they’re living in the UK for.
The IRS assumes that expats who don’t file and claim one of these provisions owe US tax, meaning that they can suddenly find themselves facing an unexpected tax bill, which can be tricky to contest.
The US and the UK have signed a separate tax treaty called a Totalization Agreement that prevents double social security taxation, however.
Expats may also have to report their foreign bank and investment accounts and foreign registered assets and business interest to the IRS.
Many Americans living in the UK haven’t been filing US taxes though, as they aren’t aware that they’re supposed to, leaving them open to possible future run ins with the IRS, particularly given that the IRS can now access UK tax and banking information due to international information sharing agreements and FATCA.
The good news is that there is a way for expats who are behind with their US tax filing to catch up without facing any penalties, as long as they do so before the IRS contacts them.
In 2014, the IRS launched a revamped amnesty program called the Streamlined Foreign Offshore Procedures (often referred to as the Streamlined Procedure) specifically to offer expat Americans (some of whom have been living abroad without filing for decades) a penalty-free route to compliance.
To catch up using the Streamlined Procedure, expats have to file their last three years’ tax returns, as well as their last six years’ FBARs (Foreign Bank Account Reports, for expats who have a total of over $10,000 in foreign bank or investment accounts at any time during the tax year), and self-certify that their previous non-compliance was non-willful, meaning that they weren’t willfully avoiding filing US taxes.
When back filing their last three tax returns under the program, expats can claim the Foreign Tax Credit or Foreign Earned Income Exclusion in retrospect too, meaning most expats end up owing no US tax. Some, such as expat parents who claim refundable child tax credits, even find they are due refunds.
The Streamlined Procedure provides an excellent opportunity for expats to catch up with their US tax filing while ensuring they don’t face problems with the IRS further down the line.
Bright!Tax (brighttax.com) is a leading provider of expat tax services to Americans living abroad helping them to file their US taxes, quickly, accurately, in their best interests, and with the minimum of hassle. They now also offer UK tax filing. +44.203.769.0344, email@example.com