Double tax?

Not so much paying taxes as filing a return. There are tax treaties between the US and UK that deal with the risk of double taxation.

If you check with the consulate in London (there is an IRS office there), they'll generally tell you to file the last 3 years' tax returns and that should absolve you from any difficulties.

As a US citizen resident abroad, you're entitle to take the Overseas Earned Income Exclusion, which effectively eliminates the first $90,000 or so of earned income (i.e. salary) from taxation. If you have other sources of income not considered "earned" then you take a tax credit based on taxes you paid at the time on this income.

Go to the IRS website Forms and Publications and download Publication 54 for the basics on filing from overseas. You'll definitely need a 1040 form, with a Schedule A/B (if you have overseas bank accounts that need to be reported) and a form 2555, which is what you need to claim the overseas earned income exclusion.

If your husband is not a US citizen or green card holder, you'll have to file as "married, filing separately" and you should only report your own income for the years in question. You do not have to split income in both names or in joint accounts - details on this are included in publication 54. If your income falls under the filing thresholds, you actually don't need to file in a given year, though the threshold for "married, filing separately" category is pretty low.

The chances that you'll actually have to pay any taxes are small, and filing those back 3 years should clear your record. They've implied or stated for years that they "check" your tax filings when you renew your passport, but I've found absolutely no evidence that they actually do so.
Cheers,
Bev

Similarly I am due to renew my passport in April and have decided the Christmas break is time to come clean and catch up my US tax returns - I have lived in the UK all my working life.

Following some research 3 years (2006, 7, 8 and 2009 when due) all seem a logical place to start so I have prepared my spreadsheets from my wage slips and the like. As my wife and daughter have no US connections (both British) I have opted for Married, filing separately (although there will not be a return for my wife filed) and not included my Daughter as a dependent.

2006 went relatively well as I was just under the Foreign Earned Income Exclusion and could file 2555-EZ with the 1040. Simple.

2007 I am slightly over the Foreign Earned Income Exclusion limit and therefore I have had to complete 1040, 2555 and a separate note to explain my calculation for the taxable value of the company car (I used the UK tax calculation basis, found on my P11D). However I thought I would have to complete the 1116 (an in fact did so) however this doesn't seem to be required as the Standard Deduction and Exemptions ($5,350 and 2x$3,400) plus the Foreign Earned Income Exclusion ($85,700) covers all my earnings. Does this sound right?

I'd appreciate any thoughts / experiences anyone else has had before I go onto complete 2008 and 2009. A few other points I would also appreciate clarification on if anyone again has any useful experiences:

1. Should a 1116 be required, I assume this will only include UK tax deductions (i.e. not National Insurance contributions)?
2. Should Medical and other benefits be given a taxable value (like the company car)?
3. If I am over the Foreign Earned Income Exclusion limits I presume I should still claim up to the maximum and then look to other deductions / 1116 to cover the rest (to maintain continuity of filing the 2555)? Current economic climate and exchange rates I would be expect to be below the limit for the next couple of years.
4. Do I really not need to declare Bank Account interest (my only other 'income' - will be pence each
   month, relates to joint accounts and is UK tax deducted at source)?

Be really useful for me and others no doubt to get clarifications on the above.

Tim

TimT99 said:

2007 I am slightly over the Foreign Earned Income Exclusion limit and therefore I have had to complete 1040, 2555 and a separate note to explain my calculation for the taxable value of the company car (I used the UK tax calculation basis, found on my P11D). However I thought I would have to complete the 1116 (an in fact did so) however this doesn't seem to be required as the Standard Deduction and Exemptions ($5,350 and 2x$3,400) plus the Foreign Earned Income Exclusion ($85,700) covers all my earnings. Does this sound right?

Click to expand...

Sounds right. You don't need to file the 1116 unless you are claiming tax credits for UK (or other foreign) taxes paid against any US tax liability. Only "trick" is that filing the 1116 usually triggers the AMT (alternative minimum tax) calculation, which is a royal PITA.

I'd appreciate any thoughts / experiences anyone else has had before I go onto complete 2008 and 2009. A few other points I would also appreciate clarification on if anyone again has any useful experiences:

1. Should a 1116 be required, I assume this will only include UK tax deductions (i.e. not National Insurance contributions)?
2. Should Medical and other benefits be given a taxable value (like the company car)?
3. If I am over the Foreign Earned Income Exclusion limits I presume I should still claim up to the maximum and then look to other deductions / 1116 to cover the rest (to maintain continuity of filing the 2555)? Current economic climate and exchange rates I would be expect to be below the limit for the next couple of years.
4. Do I really not need to declare Bank Account interest (my only other 'income' - will be pence each
   month, relates to joint accounts and is UK tax deducted at source)?

Click to expand...

In order:

1. You can only take UK (or other foreign) income tax on the 1116 form. This can sometimes get hairy, but check the US Consulate in London website. There is an IRS office there and they often publish guides to doing taxes from the UK.

2. Don't bother trying to work up a value for medical benefits or other social insurances included in your pay. You can't deduct your share of the cost, but you don't have to include additional income for your employer's share. (All bets are off if/when the US finally gets health care reform passed, but even that won't kick in for another couple years.)

3. Claim up to the max for the earned income exclusion, then you have to apportion your income in order to take income taxes already paid to the UK. (Instructions are part of the form 2555 instructions or see publication 54 on the IRS website.)

4. Technically, yes, you do need to declare "all" worldwide income, though joint accounts are subject to special rules. Check pub. 54 for details on how to handle that.

Be sure you also file the Treasury form to declare your foreign bank accounts (even if they are joint accounts), if the total balance of your non-US "financial accounts" (includes investment accounts and any company accounts you have signature authority over at work - unless your employer reports them for you) exceeds $10,000 at any time during the year.
Cheers,
Bev

Sehnsucht said:

I am US citizen by birth, and did not live in US.

I have been living in UK for two years (before that I have been living in some other country - not US),
Anyway, in UK, I have dependent Visa because of my husband, and I have been working nearly a year.

Recently I found out that, since I am a US citizen, I need to be paying tax to America.
Since I did not live in US, I did not know this before.

Anyone knows, what should i do about that? and for example how much should i pay?

I will be extending my US passport in a year, and I do not want any problems when I am extending my passport.
So any suggestions, what should I do about this?

Click to expand...

There are millions (some say six million) Amcits abroad and most don't in fact file tax returns; probably most don't earn enough to pay tax but in view of the new crackdown on unreported foreign accounts and investment income and the draconian penalties for not filing form 5471 (foreign companies), 3520 (foreign trust, etc.), and TD F 90-22.1 (FBAR) it remains to be seen what will become of them. (Think, for example, of Canadian residents of Stansted Québec who happen to have been born in the days before the Québec Health Insurance Plan in the maternity clinic in Newport VT.)

By and large the IRS is uninterested in failure to file for tax years more than 6 years past.

While there is not supposed to be double taxation, in fact there often is - especially for highly-paid persons. In Europe (and to a lesser extent the UK) more tax is collected as sales tax (VAT) and wealth tax and social taxes (NIC) than in the USA and none of these is covered by tax treaty (except that FICA/SET is relieved under totalization agreements for the UK and most European countries; that said it is advisable for Amcits to contrive to get 40 quarters of Social Security coverage even at a minimum level so as to be eligible for Medicare at 65).

It is generally unwise to approach the IRS directly rather than a tax lawyer or accountant because whereas IRS policy ignores certain minor offenses, once these come to the attention of the IRS there may be no alternative to enforcement. That said, qualified cross-border tax advice - except where it is pro bono - is usually expensive.

The best advice I can give is to buy TurboTax or TaxCut (or use their online versions) and try to work out what, if anything, you might owe to the IRS. That software may not deal properly with FICA/SET, nor does it properly exclude Social Security income from tax: you have to do this manually or tweak the result. But it's more efficient and far less time consuming than working with paper forms.

Foreign earned income exclusion is less generous than it once was (you no longer get the benefit of lower brackets on the first dollar taxed); on the other hand its benefit is no longer denied to late-filers (except in certain circumstances where the IRS gets to you first; in which case you are limited to treaty benefit and Form 1116). There are also various dangers arising from exchange rate fluctuations: you can owe capital gains tax on the sale of a UK home even though you borrowed 100% of the cost and sold at a loss: Rev. Rul. 90-79; Quijano v. United States, 93 F.3d 26 (1st Cir. 1996).

There are also state tax issues: if you left a tenacious US state (such as VA or MD) you may have an argument as to whether and/or when you lost local domicile and ceased to be subject to state tax.

Estate taxation is another horror if you become wealthy. If US estate tax is abolished (as at least temporarily this year) there is no step-up in basis for CGT at death and heirs need to keep cost basis information in perpetuity. Estate tax elimination could cost heirs Google "QDOT" for the rules that apply to inheritance by a non-US spouse from a US one: something virtually impossible to arrange with respect to UK real property.

There are so many issues it's hard to know where to start. No wonder so many US green-card holders living abroad, and some citizens, are abandoning US status. A broker I know who is married to an American and living in Paris saved $30,000 a year in tax by abandoning his green card. Renunciation of citizenship - Wikipedia, the free encyclopedia

The most curious situation of all applies to those who are US citizens at birth but whose birth was never registered with a US consulate and who have never claimed any attribute of US citizenship. And those who lost US citizenship due to naturalization abroad but who had it restored retroactively by the US Supreme Court (international law prevents the USG from restoring it involuntarily and the IRS recognized that: Rev. Rul. 75-357, PLR 8138071).

As for passport renewal: while social security number needs to be put on the application and while the IRS may be informed, I have never seen enforcement action taken against nonfilers as a direct result. On the other hand, the immigration computers now record an ever-wider range of issues and offenses, though it's unlikely the IRS would flag anyone without first having opened an audit and enforcement action.

Those intending to evade large amounts of US tax would be well advised to get a foreign nationality: quite a number of wealthy US citizens in the UK have not bothered to renounce US citizenship, instead they've taken UK nationality, abandoned any connection with the USA and taken out any assets there, and fallen off the radar. (Marc Rich has a Spanish passport and tried to do that with mixed success. One assumes he will not leave his assets to his US-based children since there would be transferee liability for tax if he did. There are clever ways to legally pass assets to children in such cases but i won't go into them here as they don't apply to the OP. Yet.)

Thanks for the heads up, Punktlich, though most of the more dire issues you raise are only going to affect those in the upper tax brackets. For the vast majority of us US expats, getting and staying square with the IRS is fairly easy, if perhaps a little bit annoying.

A couple comments I'll add to what you've already mentioned:

The IRS personnel stationed overseas are generally far easier to deal with than the ambitious agents still working their way up the ladder back home. Or, if you don't want to face the IRS in person, check with the local US expat groups. They often run a VITA program (VITA = Volunteers in Tax Assistance) or have information about where you can get free or relatively low cost tax preparation assistance.

Or you can contact either AARO - Association of Americans Resident Overseas or ACA American Citizens Abroad - international expat groups for Americans that do considerable research on tax issues and how they affect expats.

One big caution, however, on the idea of renouncing your US citizenship in order to avoid taxes. There is a law dating back to 1996 whereby renouncing your citizenship "for tax purposes" (even if it's only suspected that is your reason) will subject you to 10 more years of filing returns and you can be denied any sort of visa ever again for entering the US. There are also a few more recent penalties they can invoke.
Cheers,
Bev

Bevdeforges said:

Thanks for the heads up, Punktlich, though most of the more dire issues you raise are only going to affect those in the upper tax brackets. For the vast majority of us US expats, getting and staying square with the IRS is fairly easy, if perhaps a little bit annoying.

A couple comments I'll add to what you've already mentioned:

The IRS personnel stationed overseas are generally far easier to deal with than the ambitious agents still working their way up the ladder back home. Or, if you don't want to face the IRS in person, check with the local US expat groups. They often run a VITA program (VITA = Volunteers in Tax Assistance) or have information about where you can get free or relatively low cost tax preparation assistance.

Or you can contact either AARO - Association of Americans Resident Overseas or ACA American Citizens Abroad - international expat groups for Americans that do considerable research on tax issues and how they affect expats.

One big caution, however, on the idea of renouncing your US citizenship in order to avoid taxes. There is a law dating back to 1996 whereby renouncing your citizenship "for tax purposes" (even if it's only suspected that is your reason) will subject you to 10 more years of filing returns and you can be denied any sort of visa ever again for entering the US. There are also a few more recent penalties they can invoke.
Cheers,
Bev

Click to expand...

I have known as colleagues IRS reps in London. They generally are here as a reward for long, good and faithful service and will retire. But my warning stands: don't bring to their attention anything you would later want to deny or hide. You risk volunteering information that is best not volunteered if you present your case, unedited, to any IRS official.

The law on tax effects of Expatriation to Avoid Tax only applies, and can apply, to us-source income. Most of those planning to renounce expatriate all their assets and pay capital gains tax (or not, as the case may be) before renouncing.

Some technical references: Health Insurance Portability and Accountability Act of 1996 (H.R. 3103), Pub. L. 104-191, 110 Stat. 2093, § 511, 26 U.S.C. § 877 (2005); see JOINT COMMITTEE ON TAXATION, REVIEW OF THE PRESENT-LAW OF TAX AND IMMIGRATION TREATMENT OF RELINQUISHMENT OF CITIZENSHIP AND TERMINATION OF LONG-TERM RESIDENCY (JCS-2-03), Feb. 2003; Richard A. Westin, Expatriation and Return: An Examination of Taxdriven Expatriation by United States Citizens, and Reform Proposals, 20 VA. TAX REV. 75 (2000).

As for denial of re-entry thereafter: that is deemed by many (probably most, and certainly including State Department) lawyers unconstitutional and State has refused to implement it.

The practical problem is that many of those who would like to expatriate have US assets and income. Think of Norman F. Dacey:
Norman F. Dacey v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1992-187, Docket No. 24512-88., Filed March 30, 1992 - ?????????? ????????
In re Petition of New York County Lawyers' Ass'n v. Dacey
427 F.2d 1292

The most interesting issue these days for me is those Americans who moved their money into secret Stiftungen and Anstalten in Liechtenstein banks, lived abroad quite happily but then died -- and now their heirs want to get the money but face transferee liability for unpaid tax and penalties. They can disclaim, but then what? I am also working on situations where the tax amounts to 100% or more of the income and assets. Often assets are just abandoned in such cases unless there is a generation outside the scope of the taxes in question.

Yes, issues such as these are probably irrelevant to persons who want free advice from a forum such as this. But they are nevertheless interesting and serve as warnings as to what could happen. Often people present only enough facts ... to get a wrong answer.

Sehnsucht said:

Thanks for answers,
I already have my social security number..
My earnings in UK is below the Foreign Earned Income Exclusion. So does that mean I only need to fill 2555-EZ and 1040?
My husband is not American, so I will be showing just my own income.. Do I need to show bank account details? We have joint account.

Click to expand...

The main reason for needing to file if your income is at a low level is to be able to check the box on the bottom of Sched B that says you have a foreign account. If the balance in all foreign accounts is less than $10,000 equivalent, that's all you need to do.

When you file, submit your 2555-EZ and 1040. If you don't yet have ten years of Social Security coverage there are ways to contrive to subject enough income ($4,480 NET of deductions, so about $5,000 is right Quarter of Coverage ) to SET so that when you reach 65 you and your spouse will be covered by Medicare if you happen to visit or live in the USA. The SS totalization agreement exempts you from paying both NIC and FICA/SET - but the IRS does not object to your effectively waiving that by filing some of your UK salary as if it were self-employment income Sched C-EZ. Nobody is going to say that officially, but lots of people do it.

I remember the schoolteacher who retired to the USA from the American School in London, and while she got her National Insurance state pension was shocked to find she was ineligible for Medicare.

Sehnsucht said:

Thanks for answers,
I already have my social security number..
My earnings in UK is below the Foreign Earned Income Exclusion. So does that mean I only need to fill 2555-EZ and 1040?
My husband is not American, so I will be showing just my own income.. Do I need to show bank account details? We have joint account.

Click to expand...

Given that you're filing simply to fulfill the requirement as a US citizen, and to avoid any hassle on renewal of your passport, you should be fine with the 2555 (-EZ or not) and the 1040. You should also file a Schedule A/B but unless you have substantial interest income in your own name, you only need to fill out the little part at the bottom of the B side of the form to declare your foreign bank account. It's just a yes/no question, and you give them the name of the country where your account is located. If you don't meet the $10,000 threshold figure (though that would include any balances in joint accounts held with your husband), you won't need to bother with the Treasury form.

I'm going to disagree with Punktlich2 here and say that you should forget about US social security altogether. Should you decide to move to the US later in life, there are ways (involving the social security treaty) to have your time worked in the UK count toward the qualifying time you need in the US if you come up short. But if you're not planning on taking up US residence, it's a moot point anyhow.
Cheers,
Bev

Punktlich2 said:

The OP should do as he/she sees fit. My posting is based on years of experience. TotalizTion does NOT apply to MEDICARE. Every Amcit should try to acquire 40 quarters of US SS credits by age 65. Credits acquired in 2 countries in the same calendar year are never totalized. But the fact that you get a small pension (reduced by WEP, which you can Google) is not the point. Medicare entitlement us precious. Even if you are absolutely, positively sure now you will never, ever visit the USA again.

Click to expand...

In general, totalization is less advantageous than qualifying for separate, partial pensions from two countries, especially because it's not possible to totalize a year in which you worked in both countries, so contributions may easily be lost. And I repeat: Social Security totalization does not at all apply to MEDICARE. If (as not infrequently happens) a retired Amcit returns unexpectedly to live in the USA after age 65, it would take years of contrived work to accumulate 40 quarters of coverage. Medicare Part A is priceless. One can "game" various state pension schemes to benefit from those (like the US and UK, but the WEP will limit chances for this in the US) systems which skew benefits in favour of the low-paid. What you cannot do is game Medicare. But to qualify means paying a 'volutary' SET of between $500-$600 a year for ten years (assuming zero quarters of coverage have been accumulated in the past).

I find it hard to tell people in their 20s and 30s how important this is. But people in their 60s who have benefited are grateful. The information is free; use it now, later or never. But don't forget it.

Note that travel insurance and US private health insurance plans are designed to take into account, for example, entitlement of EU/EEA/Swiss citizens to emergency health care in other EU/EEA/Swiss countries, and that US-based health insurers presume eligibility for Medicare Part A at age 65. As citizenship may be relevant to qualifying for such benefits, always read the fine print when buying a policy.

OK, once again, I beg to differ. Medicare is often completely useless to a US citizen living permanently outside the US. I would not advise anyone in their 20's or 30's to make "voluntary" social security payments to the US, even if they believed they might want to return there later in life.

The US social security system is unique in that it only requires 40 quarters (i.e. 10 years) of participation in order to "vest" in the system. Most European systems require at least 40 years of participation in order to qualify for a full pension. For someone to relocate to the US at the age of 40 or even 50, there is still plenty of time to accumulate sufficient quarters to qualify for both a pension and Medicare.

But Medicare benefits are worthless outside the US, except for a few specific instances in the border areas of Canada and Mexico. Travel insurance gets a good bit more expensive once you hit the magic age of 65, but it does factor in the medical benefits you are entitled to from your country of residence. It seems a real false economy to pay thousands of dollars into the system on the off chance you might move back to the US in your old age.
Cheers,
Bev

Bevdeforges said:

OK, once again, I beg to differ. Medicare is often completely useless to a US citizen living permanently outside the US. I would not advise anyone in their 20's or 30's to make "voluntary" social security payments to the US, even if they believed they might want to return there later in life.

The US social security system is unique in that it only requires 40 quarters (i.e. 10 years) of participation in order to "vest" in the system. Most European systems require at least 40 years of participation in order to qualify for a full pension. For someone to relocate to the US at the age of 40 or even 50, there is still plenty of time to accumulate sufficient quarters to qualify for both a pension and Medicare.

But Medicare benefits are worthless outside the US, except for a few specific instances in the border areas of Canada and Mexico. Travel insurance gets a good bit more expensive once you hit the magic age of 65, but it does factor in the medical benefits you are entitled to from your country of residence. It seems a real false economy to pay thousands of dollars into the system on the off chance you might move back to the US in your old age.
Cheers,
Bev

Click to expand...

This is your forum, and you're entitled to make policy and state whatever advice is official or "better" regardless of the experience of others. I can only say that one can easily fall ill while in the USA as a tourist and encounter huge, unpayable hospital bills that would have been at least partially covered by Medicare; that even if you don't subscribe to Medicare Part B you may get the benefit of the limits on what a doctor can charge (assuming s/he has not opted out of Medicare).

Finally, if (and only if, because if you pay into NI you fall under the Windfall Elimination Provision) you are a nonworking spouse, Social Security is the biggest bargain around: paying in SET at minimum level for ten years gets you at least 3 times the pension value you have actually paid for. And you get that anywhere in the world.

I find most people think the way you do. And that goes too for Brits working abroad whom I advise to pay voluntary Class 3 contributions. And over 40 years have found many who are sorry ... too late to do anything about it. Bear in mind also that quarters of coverage become more costly over time. Quarters of coverage I "bought" for my daughter in the 1970s cost pennies. Today a quarter of coverage "costs" about $150.

People in their 20s, 30s, 40s just don't think they will ever need that stuff. They should reflect on this: most pension schemes are today insolvent. The kind of defined-benefit inflation-proof pension I have scarcely exists. Not even for those who today have my old job. And I today get state pensions from four countries in addition: legitimately (each knows about the other), although my US SS is reduced by 2/3 under the WEP it is still a bargain.

A friend of mine and his wife, both recently deceased, had a better old age because when I first met them in Africa in the late 70s I told them to pay voluntary NICs. And to buy a house.