Originally Posted by Bernie523
I've been told that UK has "first taxing rights" on our income - i.e. we pay tax to UK because we live here and must claim tax credit from US.
Lots of people use that terminology, but it's not exactly how the tax law (per the treaties) works. Basically, you are "tax resident" where you live.
It's because of the US and their "citizenship based taxation" that these things get so confusing. The US considers you "tax resident" no matter where in the world you live, as long as you are a citizen of the US. There are some specific provisions in the tax treaty (like the Foreign Earned Income Exclusion, if you are working in your country of residence) that allow you to exclude certain types of income from your taxable US base. And if you're drawing US Social Security while living in the UK, it's the UK that taxes your benefits. (Though in that case, you simply don't report your SS benefits on your US tax forms.)
For most other sorts of income ("unearned" income - like interest and investment income) the US allows you to claim a tax credit in the amount of the tax you paid to your country of residence using the form 1116 (Foreign Tax Credit).
I don't know enough about UK taxes to tell you how the UK taxes either partial years or if and how they give you credit for any taxes paid to the US, though my impression is that the UK tends to tax all your income once you're considered resident there. That leaves you taking the FTC against any tax obligation you run up on your US forms.
It's not easy doing two-country taxes, and most US expats can tell you horror stories of how much they have been charged for doing double sets of tax forms. The tax preparers also tend to be very conservative in their approaches. They almost have to be because the IRS does tend to look at who your tax preparer is - and if it's someone they feel they have had "problems" with in the past, it could result in greater scrutiny just because of the preparer.