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Tax advice for British expats living in the United States

Written by E4E Editor on 14 June 2018

The United States is one of the most common destinations for British expats. The combination of similar lifestyles, a common language and a vast array of locations to choose from has meant that it has become home for over 1.3m British people.

However, while lifestyle and language may be similar, there are massive differences in both the financial and tax systems between the two countries and a failure to understand the obligations in the US could turn out to be a very expensive mistake.

This detailed guide has been created specifically with British expats in mind, whether they are already living in the US but are seeking clarification of their responsibilities, or if they are planning to move to the US and would like to know more about what they need to do. The information may also useful for expats of other nationalities living in the US.

As with any financial or tax based matter, this article should only be used as a general guide and the information contained within should not be used in isolation to make any financial decision. If you need further assistance, we have independent exerts available offering a free consultation to discuss your affairs and potentially provide further assistance to help you get your financial situation right.

To request a free consultation, simply enter your details using the form and we will arrange for a consultant to get in touch with you to arrange a suitable time to speak.

US tax basics for British expats

Whereas the UK tax system is relatively straight forward, in the US there may be multiple ways to file any taxes. There are also different tax rates for Federal (country wide) and Municipal (state, county and even city) and failure to pay the correct amount on time can lead to substantial fines, potentially up to 25% of the total tax due.

If you are employed in the US, it is also your responsibility to tell your employer how much tax to deduct by completing a W-4 form. However, if you are earning in the US for a US company, you will be taxed at source but you will still have to file a tax return to the IRS.

If your situation is not as clear cut, you will need to determine whether you are required to submit a tax return, the US has the Substantial Presence Test which is similar to the Statutory Residence Test in the UK. The basic principles of the Substantial Presence Test that will determine whether you need to file a US tax return are if you spend more than 31 days in the current tax year, or 183 days covering a three-year period (including the current tax year).

Similar to the UK, if you are deemed a resident of the US through the Substantial Residence Test, your worldwide income will be subject to US income tax. Unlike the UK if you become a permanent resident of the US, or become a US citizen, your worldwide income will continue to be subject to US tax rules, even if you move abroad.

Some states, for example Florida, do not require is residents to pay income tax locally, however, they will be subject to other tax rules, so it is important to have a local tax expert on hand to assist you with local tax rules. It is not recommended to file your tax returns yourself as the penalties of incorrect or late filings can be severe, so you should engage a tax consultant as soon as possible who will help get your US tax responsibilities in order.

The deadline for filing your taxes in the US is 15th April each year. You should also be aware that if you leave it until the last minute to get your taxes in order you are likely to incur a fine as the workload and demand for assistance increases to such a level that consultants are unlikely to take on new clients and will not commit to meeting the deadline. Therefore, you should always act as soon as possible to mitigate any risks of late filing.

Double taxation treaties

If you are subject to tax rules in the both the UK (or another country) and the US, you may be able to utilise a double tax treaty between the two countries to avoid having to pay tax twice. Tax treaties can be complex and you should always seek assistance from a tax consultant to ensure that the tax treaty is implemented correctly – otherwise you could also face fines in one or more countries.

There is currently a double tax treaty between the UK and US.

Federal taxes

Federal taxes are imposed by the IRS and all permanent residents and citizens are subject to them. As in the UK, the tax rates are graduated and begin at 10% of income and increase to 37% at the higher rate. The following table shows the breakdown of the tax rates in the US from January 2018:

Unmarried individuals, with a taxable income over

Married individuals filing joint returns with a joint taxable income over

Heads of households with a taxable income over

Rate

$0

$0

$0

10%

$9,525

$19,050

$13,600

12%

$38,700

$77,400

$51,800

22%

$82,500

$165,000

$82,500

24%

$157,500

$315,000

$157,500

32%

$200,000

$400,000

$200,000

35%

$500,000

$600,000

$500,000

37%

At the Federal level, income that has arisen from investments (for example dividends or capital gains) there are different, more beneficial rates of taxation. The rates of tax due will depend on whether the investment is deemed a short or long term investment and will also depend on whether the income is classed as capital gains or dividend income.

Typically dividend income will be taxed at your normal income tax rate, however it is possible for dividend income to be classified as long term capital gains and therefore taxed at a lower rate.

If your income is not straight forward, you should always seek advice to ensure you get the correct classification of your income and therefore get taxed and the most preferable rate.

State taxes

As previously mentioned most states have their own tax rules in addition to federal taxes. Currently there are seven states that have no additional income tax rules, including Florida, Texas and Nevada.

Different states and cities may impose additional income tax rates. For example in New York City, the additional tax ranges from 4% to 9%, while in New York State, the additional tax only ranges from 3%-4%.

Tax on sale of UK property

It is very common for British expats to have a property in the UK which may be used to generate a rental income.

If the expat decided that they wished to sell the property, even if it was not subject to capital gains tax in the UK, it may be subject to capital gains tax in the US. The exception to this would be if the property sale qualified for the “Home Sale Tax Exclusion” rule which enables individuals up to $250,000 and married couples up to $500,000 of tax free gain. As the average property price in the UK is over both thresholds, it is highly likely that US capital gains tax would apply to any UK property sale. It is also worth considering that you may also be subject the UK capital gains tax since the rule changes in April 2015.

For both countries, you should seek advice from a consultant with expertise covering taxation in each country to ensure you make the right financial decision regarding any property sale.

FATCA and non-US based investments

In 2010, the IRS introduced the Foreign Account Tax Compliance Act (FATCA) which is designed to gather taxes on non-US based investments and financial assets held by US-tax paying individuals, including British expats.

FATCA requires banks and other financial institutions to disclose information about the financial matters of tax paying US citizens and people subject to US tax rules including investments, pensions, savings and even divorce settlements.

A large percentage of British expats continue to hold financial assets in the UK, and potentially in other countries, and the financial institutions that hold these finances are obliged to report them to the IRS and the holder is potentially liable to pay tax in the US on them.

While double tax treaties may reduce the tax liability, they may not eliminate them.

Depending on the type of financial vehicle, the tax levels may be greater if it is deemed to be non-compliant with US rules.

For example, some common investments that are considered tax efficient in the UK (such as ISAs) are not considered as tax-free by the IRS and therefore any interest will be subject to tax in the US. Similarly, if the investments within the ISA or the individual uses UK Collective Investment Schemes, the IRS may deem the investment to be "toxic" and be subject to adverse tax treatment.

If you are a tax resident of the US, but unsure about any financial or investment that you have outside the US you should request a consultation with someone qualified and regulated to understand your potential tax liabilities and get advice on what actions you can take to minimise your tax liability.

Request a free consultation and ensure you know your tax obligations in the US and the UK

If you are a British expat living in the US and would like assistance and clarification around your tax affairs, we recommend that you request a free initial consultation with a qualified specialist from our network.

During the free consultation, which will last between 15 and 30 minutes, you will discuss your situation which will establish if you need additional paid professional services to resolve your situation. If, following the consultation, you feel that you would like additional assistance with any aspect of filing, calculating your tax liability, or applying any exemptions, the consultant will be able to provide a detailed quote for services you may need, and you can decide whether to proceed or not.

To request your free consultation, simply enter your details using the form. Once received, we will review the details and select the most appropriate specialist for you and confirm these details within 24 hours. Within the next three working days the selected specialist will be in touch directly to arrange a suitable date/time for your consultation.

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Submit your details using the form to request a free consultation from a qualified tax consultant who will be able to help you with your US tax and financial situation