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Common tax mistakes British expats make when living in the United States

The US tax system is a complicated affair, especially for expats. With the US tax filing deadline on the 15th April, we look at some of the common, and costly, tax mistakes expats make

Written on 1 January 2022

Some people view the UK tax system as a complicated beast. However, compared to the tax system in the US, the UK is as enjoyable as a walk in the park.

With the US tax return deadline this week, we’ve collated some of the common tax mistakes British expats make when filing a US tax return.

Assumption is the mother of all mistakes

Far too many expats make the assumption that because they are an expat they do not have to pay tax, either in the UK or abroad. The US is no exception and typically you will have to pay US tax if you’ve spent more than 31 days in the US in any tax year, or 183 days in the previous three years.

Your actual tax status is defined by the US Substantial Presence Test, but in a nutshell, if you spend a decent amount of time in the US, you are likely to be required to pay tax in the US.

You are responsible for the tax you pay in the US, not your employer

Unlike in the UK, if you are working in the US it is your responsibility to tell the government how much tax you need to pay, not your employer.

To do this you will need to complete a W4 form which tells your employer how much tax to deduct from your wages. The form itself is not very straightforward and it is relatively easy to either overpay or underpay tax – neither of which you particularly wish to do.

At best, if you overpay, you will be out of pocket for a year. At worst, if you underpay you will face a hefty tax bill and the potential for a significant fine as well.

Don’t miss the tax filing deadline

In the UK, we are used to £100 fines for late filing. While this isn’t pleasant, it’s not exactly a deterrent and means that hundreds of thousands are late with their tax returns.

In the US, the penalty for late filing is much more significant. You may be required to pay up to 25% of your tax bill.

The tax deadline in the US is the instantly forgettable: April 15th 2015

Don’t forget your worldwide earnings

The US has a number of tax treaties with other countries, however, wherever possible the IRS want you to pay tax on your worldwide earnings, not just those made in the US.

Say, for example, you draw an income from a UK pension or you receive an income from a rental property elsewhere in the world. You may have to pay local tax on it, the last thing you want to do is pay US tax on it as well.

The tax treaties are designed to avoid double payment, however there are opportunities to be made to minimise your tax, but specialist advice should always be sought. It may cost a few extra dollars, however, that tax savings could be significant.

Saving money may not be cheaper in the long run

We all know that accountants can sometimes be expensive, however, it may be far more cost effective to seek professional advice if you are to minimise your tax bill or avoid hefty fines.

Some people will opt to use online software to help them file their tax return, however these pieces of software are really designed for the simplest situations (or people who know exactly what they are doing). Given expat affairs are rarely the simplest, when taking into account foreign investments and income, this could be a costly error.

Similarly, with the variety of tax options available to US citizens, knowing each of them and which is most suitable requires an expert knowledge of US tax to avoid over or underpaying.

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