As a US expat living and working in the UK, it is critical that you understand how IRS regulations work. The foremost factor to keep in mind is that regardless of where you live, you’ll file tax returns each year as long as you retain US citizenship or a Green Card. Non-compliance can cost you thousands of dollars in penalties. You’re liable to pay taxes to both, the UK where you live and the US. Further, you must pay taxes on worldwide income from all sources in both countries. The IRS has several provisions to help US expats avoid paying double taxation. It is advisable to work with an expat tax consultant or CPA for guidance on the forms you must complete and the exclusions you can claim.
Basic Exclusions You Can Claim
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) allows US expats to deduct a specified amount from their total annual income and pay taxes only on the balance. The IRS adjusts this limit each year for inflation. For the year 2020, the excluded amount was $107,600 per eligible person and raised to $108,700 in 2021. The FEIE can be claimed by any US expat living in the UK for 330 days in 12 consecutive months.
Foreign Housing Exclusion
The IRS awards US expats the Foreign Housing Exclusion (FHE) that lets them deduct reasonable living expenses from their gross annual income. Expenses for your spouse and dependent children are also eligible for deduction if they live with you. These costs may include rent, utilities, parking space rent, leasing household furniture, paying taxes on rental property, and other basics. Purchasing property or any other fixed assets in the UK cannot be included. You also cannot request exclusion for food and any housing provided by your employer.
Foreign Tax Credit
Since the US has a Double Taxation Treaty with the UK, you can claim Foreign Tax Credit (FTC) for the dues you pay to Her Majesty’s Revenue & Customs (HMRC). That’s the IRS equivalent in the UK.
Several Factors Influence these Exclusions
If you intend to claim exclusions, know that the IRS has conditions regarding combining them. For instance, if you request Foreign Housing Exclusion, you cannot also claim FTC and FEIE. Further, your living costs cannot exceed a specific amount, and this level is determined according to the location where you live. As a US expat married to a UK citizen, you can claim higher exclusions if you file joint tax returns as a married couple. You’ll provide identification for your spouse after getting the papers notarized via an online notary service in the USA.
US IRS regulations can be complex and challenging to understand for a layperson, especially when you’re also filing returns with the HMRC. Rely on the advice of your CPA, who is best qualified to help you navigate the intricacies of the taxation system in the US and the UK. Stay compliant with the requirements and avoid incurring hefty fines and penalties.