Top US Tax Tips for Americans Living in the UK in 2018
Living in the UK is an incredible experience. History and culture are apparent almost everywhere, while London is one of the most interesting and thrilling cities in the world.
American expats living in the UK though find themselves in the unenviable situation of having to file both US and UK tax returns.
This is because Uncle Sam requires all American citizens and green card taxes to file US taxes, irrespective of where in the world they live, while the UK requires all UK residents to file.
Many American expats aren’t aware of the requirement to file US taxes from overseas though. Others were hoping that President Trump’s tax reforms would revoke this requirement. In any case, here are our top tax tips for Americans living in the UK in 2018, both those who are up to date with their filing, and those needing to catch up.
Know your US filing dates
Expats have an automatic extension until June 15th to file, with a further extension available until October 15th upon request.
As well as form 1040, most expats will also want to file the necessary forms to claim one or more of the exemptions available to reduce their US tax liability (in most cases to zero). Many expats also have to report their foreign financial accounts by filing an FBAR (Foreign Bank Account Report). In 2018, FBARs are due by October 15th, in line with the final expat tax return filing date.
Consider claiming the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion allows American who can prove that they live abroad in one of two ways to exclude the first $102,100 (for 2017 tax year) of their earned income from US tax.
The Bona Fide Residence Test requires expats to prove that they are a permanent resident in a foreign country, while the Physical Presence Test requires expats to prove that they spent at least 330 days abroad in a 365 day period that overlapped with the tax year.
Expats who meet the requirements of one of these two tests can claim the Foreign Earned Income Exclusion by filing form 2555 along with their US tax return.
Consider claiming the Foreign Tax Credit
Expats who pay more UK tax than the US tax that they owe should consider claiming the Foreign Tax Credit.
The Foreign Tax Credit gives Americans a $1 US tax credit for every dollar of tax that they’ve paid abroad.
The Foreign Tax Credit can be claimed by filing form 1116 alongside a federal return.
Check whether you need to file an FBAR
Expats who have foreign bank or investment accounts may also have to file a Foreign Bank Account Report, or FBAR.
An FBAR should be filed if the combined total balance of all accounts held at foreign institutions (including bank and investment accounts) that an American benefits from or has signatory or any control over (even if the account isn’t in their name) exceeds $10,000 at any time during a tax year.
FBARs are actually FinCEN form 114, which should be filed online by October 15th.
Penalties for incorrect or incomplete filing or not filing are steep, starting at $10,000 a year if the offense is considered to have been non-willful (unintentional).
Almost all UK banks and investment firms are reporting their American account holders (including account balances) to the US government, so the IRS knows which expats should be filing an FBAR.
Check whether you have filing requirements under FATCA
FATCA is an acronym for the Foreign Account Tax Compliance Act, a law passed in 2010 to crack down on tax avoidance.
It requires all Americans living abroad who have foreign financial assets with a value exceeding $200,000 at any time during the year to report them on form 8938, which should be filed along with form 1040.
If you’re behind on your filing, consider the Streamlined Procedure
Expats living in the UK who need to catch up with their US tax filing can do so using the Streamlined Procedure IRS amnesty program. To qualify, expats must file their last 3 tax returns and their last 6 FBARs (as applicable), pay any back taxes due (often none, once they back-claim one or more of exemptions available to expats), and self-certify that their previous not-compliance was non-willful.
Don’t delay though, as if the IRS comes to you first, perhaps based on information provided by a UK bank (or tax information provided by the British government), the option may no longer be available.
Don’t forget about British taxes
Expats whose only income is from employment in the UK will have income tax deducted at source and won’t have to file a UK tax return.
Expats with other income sources should file a UK tax return to HMRC (the British IRS) reporting their worldwide income by January 31st following the end of the British tax year - which runs from April 6th to April 5th (crazy Brits!).
If in doubt…
Filing taxes as an American living abroad is often more complex than filing from the States, so if you have any doubts or queries about your US tax situation, we recommend that you contact a US expat tax specialist for some advice.
The Trump Tax Reform Bill was signed into law in December, however the changes it contains refer to the 2018 tax year, so for filing in 2019. To see what steps you can take in 2018 to prepare, please contact an expat tax specialist CPA.
Bright!Tax (brighttax.com) is a leading provider of expat tax services to Americans living abroad. We have helped thousands of Americans living in the UK to file their US taxes, quickly, accurately, in their best interests, and with the minimum of hassle. We now also offer UK tax filing, offering a one stop shop solution. If you have any questions about filing taxes as an expat in the UK, don’t hesitate to contact us, and we’ll be happy to help.