The ties that bind the United States and the United Kingdom have never been stronger, with millions of Americans traveling to England, Scotland, Wales, and Northern Ireland each year to visit such iconic landmarks as Big Ben, Westminster Abbey, and Loch Ness and try local cuisine like fish and chips, haggis and steak and kidney pie.
However, for more than 200,000 American citizens, just visiting the UK isn’t enough. They have chosen to live in the UK, immersing themselves in the culture, and living like locals. For them, living abroad may have been a dream from when they were young. If you’re an expat living outside America right now, chances are you understand the need to experience another culture, perhaps be closer to a foreign family, or explore the rich history.
Whether you decided to retire to another country, pursue a work opportunity abroad, or study across the pond at one of the UK’s prestigious universities, most Americans enjoy their time there – however, they still have to file their US taxes from the UK.
The good news
The United States and the United Kingdom have a mutually agreed-upon tax treaty in place. The treaty provides options to mitigate tax liabilities for Americans live in the UK, meaning that it eliminates the possibility of double taxation - as long as you file your U.S. federal tax return.
This tax treaty contains a wealth of valuable information, such as:
- What constitutes the definition of residency
- What types of taxes need to be paid to the resident country and home country
- What kinds of provisions are in place to protect against double taxation, such as the Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Tax Credit
- What information can be shared between the two countries to guard against tax evasion
- Penalties or consequences for not living up to tax responsibilities
Perhaps the most important thing the treaty does, from an expat’s point of view, provides the means to reduce tax liabilities to the United States. It does not eliminate the requirement to file though, and as long as you retain your American citizenship, you will need to file tax documents in both the UK country you currently reside in and the U.S.
The bad news
Following the complicated tax codes and filing deadlines of two different countries is no easy task. If you meet minimum income requirements – which can be as little as $5 for married Americans who file separately from their foreign spouse – then you must file a United States Form 1040. Many times this isn’t the only form to file, either. Americans with substantial assets apart from their home also need to file a Form 8938 and those with more than $10,000 in foreign bank and investment accounts also need to file a FinCEN Form 114.
If you’re an expat who is unfamiliar with filing your taxes with two different countries, consult with a tax professional who specializes in expat services.