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Discussion Starter · #1 ·
How would you handle UK National Insurance Contributions for U.S. tax purposes?

I am a bonafide resident of the UK making 86k GBP. I understand quite well how the foreign income exclusion works along with the foreign housing deduction. However, the NIC is a quandary to me. Do I have to report to the IRS my enitre gross income as Foreign Earned Income (FEI) (including the NIC amounts that have been directly debitted from my paychecks)?

Here's the example:
Gross income: 86,000 GBP/yr
National Insurance Contribution: 5100 GBP/yr

Is my FEI for U.S. tax purposes 86000 GBP or can I report only 80,900 GBP as FEI to reflect the NIC deduction? Seems only fair that I should be able to exclude NICs from FEI since Social Security is taken before tax on US earned income.

If I have to report the entire 86000 GBP as FEI, can I deduct the NIC any other way? I know I can take a tax credit for INCOME taxes paid, but NICs are not income taxes. I assume there is a different way to handle NICs. Schedule A?

Thanks in advance for your comments. By the time I am done filing this year, I may know more about FEI than most accountants!
 

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How would you handle UK National Insurance Contributions for U.S. tax purposes?

I am a bonafide resident of the UK making 86k GBP. I understand quite well how the foreign income exclusion works along with the foreign housing deduction. However, the NIC is a quandary to me. Do I have to report to the IRS my enitre gross income as Foreign Earned Income (FEI) (including the NIC amounts that have been directly debitted from my paychecks)?
Yes you do.

Here's the example:
Gross income: 86,000 GBP/yr
National Insurance Contribution: 5100 GBP/yr

Is my FEI for U.S. tax purposes 86000 GBP or can I report only 80,900 GBP as FEI to reflect the NIC deduction? Seems only fair that I should be able to exclude NICs from FEI since Social Security is taken before tax on US earned income.
Um, no it's not. Your FEI is 86,000 GBP converted to US$. According to the instructions I found at the IRS website, box 1 of the W-2 form is for total income before ANY payroll deductions (including social security). Unlike most governments in Europe, the US does not allow you to deduct any social insurance fees from your income for tax purposes.

If I have to report the entire 86000 GBP as FEI, can I deduct the NIC any other way? I know I can take a tax credit for INCOME taxes paid, but NICs are not income taxes. I assume there is a different way to handle NICs. Schedule A?
Not really. It may be possible to deduct the health care portion only of your NICs on Schedule A as "health insurance" however only if it is more than 7.5% of your total income (and then only the amount that exceeds 7.5% of your gross income), which appears not to be the case.
Cheers,
Bev
 

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Discussion Starter · #3 ·
Yes, but, I don't receive a W2 because my employer is UK-based and I have to come to a figure of FEI on my own....Seems to me there should be a way to handle NIC as some sort of deduction from FEI before the foreign earned income exclusion is applied.

In the context of FEI reductions, a pension contribution should also receive some relief up to the amount that would be allowed under a similar arrangement in the US (like a 401k whose maximum contribution for 2012 is $17,000).

So, in my case, if I make 86,000 GBP, I should report that amount minus the pension deduction (10692 GBP = $17000 x 1.59 USD/GBP exchange rate) which would be 75308 GBP. So my question is can I now deduct the 5100 GBP for NICs before calling that my freign earned income (75308-5100 = 70208 GBP total FEI).
 

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Discussion Starter · #5 ·
I get 30k a year and im very happy anlike some ;)
Awe, c'mon. That's not a fair statement. I plan to file my taxes taking advantage of every deduction and credit that is available by law in the UK and the USA. Who can fault me for that? I'm sure the HMRC and the IRS would agree!
 

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Yes, but, I don't receive a W2 because my employer is UK-based and I have to come to a figure of FEI on my own....Seems to me there should be a way to handle NIC as some sort of deduction from FEI before the foreign earned income exclusion is applied.
Sorry, but there isn't. Gross income is as it is defined by the IRS and they don't make allowances for foreign plans and insurances that are "similar to" the US plans. Period.

In the context of FEI reductions, a pension contribution should also receive some relief up to the amount that would be allowed under a similar arrangement in the US (like a 401k whose maximum contribution for 2012 is $17,000).
Write your Congresscritter and complain. But right now, the only retirement plan contributions which warrant special treatment are US recognized IRAs and 401Ks (plus a few other specifically defined plans covered by other tax code sections).

So, in my case, if I make 86,000 GBP, I should report that amount minus the pension deduction (10692 GBP = $17000 x 1.59 USD/GBP exchange rate) which would be 75308 GBP. So my question is can I now deduct the 5100 GBP for NICs before calling that my freign earned income (75308-5100 = 70208 GBP total FEI).
Officially, no. You can always try and see if you get away with it. (Actually they don't really have any way of checking what you declare as your foreign income.) But if you get caught, you'll have the penalties and interest to pay on any taxes due on the difference.
Cheers,
Bev
 

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Have you figured it out?

Hi - I have the same issue as the original question. Can one deduce National Insurance contributions for purposes of figuring out your US taxable income? If so, where on the 1040?

I am a US green card holder living as expat in UK. If you have figured out an answer, please let me know.
 

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Hi - I have the same issue as the original question. Can one deduce National Insurance contributions for purposes of figuring out your US taxable income? If so, where on the 1040?

I am a US green card holder living as expat in UK. If you have figured out an answer, please let me know.
The answer is simple: No.
Cheers,
Bev
 

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Hi - I have the same issue as the original question. Can one deduce National Insurance contributions for purposes of figuring out your US taxable income? If so, where on the 1040?

I am a US green card holder living as expat in UK. If you have figured out an answer, please let me know.
Thanks for the straight answer! At least I know. What about health insurnace premiums to the private halth insurance offered through the employer? They are deducted before tax from my paycheck. I suppose same question with life and disability insurance. All of these have a required minimum.

Last but not least - does anybody know if there is a foreign tax credit for state taxes? Thanks a million again.
 

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Thanks for the straight answer! At least I know. What about health insurnace premiums to the private halth insurance offered through the employer? They are deducted before tax from my paycheck. I suppose same question with life and disability insurance. All of these have a required minimum.

Last but not least - does anybody know if there is a foreign tax credit for state taxes? Thanks a million again.
The private health insurance is only deductible if you are itemizing deductions and your health care expenses exceed 7.5% of your gross income.

Life and disability insurance have never been deductible as itemized deductions to my knowledge. Technically, you should gross up your income for those amounts paid on your behalf. Depending on how much is involved, however, the IRS doesn't really have too many ways of checking whether you reported your grossed up income or your "taxable income" playing under another country's rules. You plays the game and you takes your chances.
Cheers,
Bev
 

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Thanks a bunch Bev - you seem to be knowledgable so I'll push my luck and ask one more crucial question - how do you treat state taxes? They don't seem to have a foreign tax credit, so it woudl mean a huge tax bill for a state like NY. The only way I know of is say you aren't a resident there? i.e. simply not file?! even though I do have a property there. What's your take on how to best handle the state?
 

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Thanks a bunch Bev - you seem to be knowledgable so I'll push my luck and ask one more crucial question - how do you treat state taxes? They don't seem to have a foreign tax credit, so it woudl mean a huge tax bill for a state like NY. The only way I know of is say you aren't a resident there? i.e. simply not file?! even though I do have a property there. What's your take on how to best handle the state?
State taxes are a bear, because each state has its own take on what they consider income and even what they consider a "state resident."

Basically, if you are filing your Federal taxes and taking the FEIE based on the bona fide resident criteria, I would simply assert that you are non-resident in any state in the US. If you have to file something (say, to declare rental income on a property you own in the state), file as a non-resident. That way, you should only normally have to declare your income from the state and you can get on with life.

There are rumored to be a couple of states (Virginia is the one I have heard about) that cling pretty tenaciously to their "residents" - but I don't know how hard core they are about going after someone who claims to be resident elsewhere, especially if that elsewhere is outside the US. Under Federal law, they cannot claim you as a state resident if you only vote through that state.
Cheers,
Bev
 

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International Tax Attorney

Hey all,

Generally speaking, payments to a social security system "financed though national health insurance contributions" though taxes that are "calculated on a percentage of the worker's gross income" are creditable as a Foreign Tax Credit for U.S. federal income tax purposes. Eshel v. C.I.R., 142 T.C. No. 11 (2014). However, because of 42 U.S.C. § 433 and the existence of a Social Security Totalization Agreement between the U.S. and U.K., the payments are not creditable as a Foreign Tax Credit. Instead, the wages or self-emplyment income subject to said foreign payments are exempt from U.S. social security taxes. IRC §§ 1401, 3101, 3111.

I hope this helps!

Sincerely,

John
 
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