Tax Freedom for Expats: A Practical Guide to Filing US Taxes in the UK

Life in the UK as an American can be the stuff dreams are made of afternoon tea, pedestrian-friendly cities, and a short hop to Europe. However, there is one thing that accompanies you across the water: your requirement to file US taxes in the UK.

The United States is one of the few nations on the planet that taxes on the basis of citizenship rather than residency. What that means is regardless of where you are living, if you're a U.S. citizen or hold a Green Card, you're supposed to report your worldwide income to the IRS annually, even if you're already paying UK taxes.

If this seems daunting, you're not alone. But fear not: this guide takes you through the fundamentals, outlines your choices, and shows you how to avoid double taxation. It's not about outwitting the system, it's about knowing it well enough that you can comply while keeping more of what's yours.

Why U.S. Expats in the UK Still Need to File

As an American expat, you are obligated by law to report a U.S. federal tax return each year if you earn over a set amount. This is the equivalent whether:

• You have not lived in America for decades
• You make all your money in the UK
• You pay income tax to HMRC already
• You owe the IRS nothing

Bypassing your U.S. tax reporting requirements can result in penalties, interest, and even disqualification for future tax benefits or immigration advantages.

Major Forms You'll Need to File

Here is a summary of the most popular forms U.S. expats in the UK are likely to need to file:

Your Two Main Tax-Saving Options

When filing US taxes in the UK, you'll probably not want to pay tax twice on the same income. To avoid doing so, you can use one of two main strategies:

1. Foreign Earned Income Exclusion (FEIE - Form 2555)

You can exempt as much as $126,500 (2024) of foreign-earned income from U.S. taxation if you're eligible. This is perfect for employees earning a salary overseas.

You become eligible if:

• Pass either the Physical Presence Test (330 days abroad) or
• Are a bona fide resident of a foreign country (e.g., the UK)
• Note: FEIE covers only earned income and not dividends, capital gains, or passive income.

2. Foreign Tax Credit (FTC - Form 1116)

If you're paying income taxes to the UK (most expats do), you can use the FTC to offset or wipe out your U.S. tax bill.

When to use FTC instead of FEIE:

• If you earn more than the FEIE limit
• If you have passive sources of income (rental income, investments)
• If you want to be eligible for refundable tax credits (such as the Child Tax Credit)

Filing Deadlines and Extensions

Although expats have an extension, interest does begin to accrue on any tax owed after April 15, so it's advisable not to procrastinate if you believe you owe.

Getting familiar with the UK-US Tax Treaty

The U.S.-UK tax treaty is designed to prevent double taxation and define which country has taxing rights over certain types of income. It doesn’t eliminate your obligation to file, but it can protect you from being taxed twice.

Key points:

• Pension income may be taxed differently depending on whether it's private, government, or state-based
• Some benefits or credits may be impacted by how your income is sourced
• Not everything in the tax treaty is automatic, you usually must affirmatively claim it on your return

What About State Taxes?

Depending on your most recent U.S. state of residence, you might have to file a state tax return. A few states, such as California and New Mexico, are notoriously "sticky" regarding residency rules.

See if you must file a state return if:

• You hold property or bank accounts in a state
• You're a voter or driver's license holder
• You haven't officially changed your state of domicile

Making Filing a Breeze

• Keep accurate records of income, foreign taxes paid, and bank balances
• Employ a currency exchange calculator or IRS's annual average rates when reporting GBP in USD
• Consult with a tax expert who works with expats, many general CPAs aren't aware of international regulations
• Look into e-filing to enhance processing and refund speeds

Conclusion

US tax filing abroad in the UK won't be the highlight of expat living, but it doesn't have to be a nightmare either. When you know your filing obligations, exclusion options, and tax credits, it becomes a routine process instead of a mystery.

The objective isn't to pay too much or report too little it's to file correctly and utilize every legal avenue to lower your tax burden. And with the proper resources or professional assistance, you can remain compliant without losing sleep (or your refund).

FAQs: US Taxes in the UK

Do I still need to file U.S. taxes if I've lived in the UK for years?

Yes. As a citizen of the United States or Green Card holder, you must file a federal tax return annually, regardless of where you reside.

Will I be double-taxed on the same income?

Not if you do it right. With the Foreign Tax Credit or Foreign Earned Income Exclusion, double taxation is prevented.

Do I have to report my UK bank accounts?

Yes. If the aggregate of all foreign accounts ever equals or surpasses $10,000 during the year, you have to file FBAR (FinCEN 114).

Am I still eligible to claim the Child Tax Credit if I live abroad?

Yes, but income and residence tests have to be passed. There is a switch to the Foreign Tax Credit in lieu of FEIE to qualify for the refundable part.

Can the filing of US taxes be eliminated altogether?

Only by giving up your U.S. citizenship, a severe legal and financial choice. While you're in possession of a U.S. passport or Green Card, you have to file each year.