How to file tax returns from outside the USA as an expat
A common question we get asked by US expats is how their taxes are filed now they are overseas.
1 - Reporting worldwide income
US citizens need to report all their income on the US return, even if that income has already been taxed in their new country.
When you add your wages, salaries and self-employed income from your current country, you can claim any taxes you have paid as a foreign tax credit on the US tax return.
If the tax rate in the foreign country is higher than the US tax rate, there will be no further tax to pay. If the tax rate is lower that the US taxes due, then there will be a top up of the difference.
You also have the option to exclude foreign wages, salaries and freelance income if you are resident outside the US. The foreign earned income exclusion is claimed on form 2555 and you can exclude up to $107,600 from US income tax - you do need to declare the income on the return and then it will be excluded after.
If you still have US tax to pay, you have a third option, the foreign housing exclusion.
As a US expat living abroad, the filing deadline is June 15 (for 2020 this has been extended to July 15 for filing and payment).
2 - Taxes if you are a US expat living in the UK
Unlike the US, the majority of people do not file tax returns in the UK.
If your employed income is under £100k, and you have no other income, then it is unlikely that you are required to file a return.
If you do have self-employed income, property rental income, foreign income, investment income or your salary is over £100,000 then HMRC will normally ask you to complete a return.
You need to register for self-assessment to file in the UK - you can use the link here.
The UK return covers the period 6 April 2019 to 5 April 2020 and the filing dates are 31 October 2020 if you file by paper, or the more common 31 January if your assessment tax return is filed online.
The tax liability is also due by 31 January and can be paid when you file your return online with HMRC.
3 - Double taxation for Americans living overseas
If you can show that you meet the residency test for your new country, and all your income is outside the US and from the new country, ideally there should be no US federal income tax.
As an example, if you are living in the UK, the tax rates are higher than the US and so there should be no US tax to pay when you file the US tax return.
Common exceptions are income that is tax free in the UK, like ISAs, premium bonds and selling your main home. The US will treat these as taxable income - if there is no UK tax charges, then there may be tax to pay on the US return.
If you have high income, there may be an additional tax, the Net Investment Income Tax (NIIT), that is charged on interest, dividends, capital gains and property income at 3.8% and is used to help with medicare in the US.
If you do have additional tax to pay in the US or the UK, you may be able to use the UK US double tax treaty. Tax treaties are there to stop you being taxed twice and also make it clear which country has the right to tax different types of income first. The general rule is that earned income is taxed primarily in the country that it is performed (irrespective of where that income is paid).
4 - Other tax tips for US expats
Once you move to the UK, as an employee you will be taxed by your employer each month under the PAYE tax system. If you join part way through the year, or change jobs during the year, always check the tax deducted at the end of the year (even if you don't file a UK return) as often people can find too much tax has been deducted and they are due a refund.
On the other side, if you receive a bonus towards the end of the UK tax year, especially if that bonus makes your total income over £100,000 - you may find that not enough tax has been deducted at source and HMRC may ask for additional tax.
A useful tax calculator is in the link here - you can check if you are due a refund or you owe any tax.
Finally, unless you are on a short term contract and have a waiver, you will be paying National Insurance in the UK and so there should be no social security when you complete your US tax return.
If you have any questions on filing your US tax return as an expatriate, claiming the tax reliefs, or catching up with your US tax returns - feel free to contact us here.