How US expats living in the UK can avoid double taxation

Tom Griffiths shares his thoughts on the double taxation agreement (DTA) and how US expats living in the UK can avoid paying double tax on their worldwide income.

The double tax agreements come up a lot as an expat tax advisor to US citizens living in the UK. 

The US tax system can be challenging at the best of times, and the fear of paying double tax is the one that comes up most often. Thankfully, because America and the UK have a tax treaty, there’s little need to worry; it’s just a matter of being informed and prepared for what is required.

That being said, there may be changes ahead where the new US bill could threaten the way the double taxation is currently handled for US citizens under the Biden campaign to ‘build back better’.

All US citizens must file taxes to the IRS regardless of whether they were born there, have never lived there or even visited. It’s the filing of the taxes, individual circumstances and what taxation treaties are in place which determines whether a person will actually pay any taxes or not. There is no option but to file because not doing so is a criminal offence, and the tax authorities will find out.

US expat tax liabilities

US expats are required to report their foreign-registered bank accounts, any financial assets, business interests, and investments subject to minimum IRS value and ownership thresholds.

The tax treaties were put in place to ease the tax burden of US citizens living abroad in different countries worldwide. The US and UK tax treaty is one of these agreements which is in place to help protect expats from paying more than they need to.

The double taxation agreement helps to ensure global income is not compromised by being double taxed.

The US is fairly novel in that they tax based on citizenship rather than on residency, as most other countries do.

Changes were necessary for US expats living abroad

The changes implemented over the past few years were absolutely necessary because it was becoming impossible for expats living abroad to be treated fairly.

They were double taxed, some facing hefty fines and also charged with criminal offences in certain cases. Thanks to the DTA, streamlined processes and other allowances, Americans living abroad now have ways in which they can do so without the fears of their predecessors.

The Streamline Procedure which helps many Americans out

The Streamlined Procedure is particularly helpful to those who didn’t realise they still have to file taxes with the IRS even though they’re living abroad. It’s more common than one would think. 

This amnesty procedure helps US citizens who file their taxes late avoid paying penalties for their Report of Foreign Bank and Financial Accounts (FBAR), failure to file liabilities. Of course, anyone submitting their accounts using the Streamlined Procedure must qualify; that’s why it’s all made much simpler working with a US tax advisor.

Avoiding double taxation

Presently, it is possible to use the exemption method to avoid paying double the tax. Whether this will change at the tail end of 2022 or sometime in 2023 is yet to be revealed, but it is worth keeping an eye on this evolving narrative and certainly wise to be in touch with an expat tax expert to stay abreast of changing laws and regulations.

Exemption method

This method is there specifically to help protect US expats from double paying taxes for both their country of residence and their country of citizenship. A US expat living and working in the UK is liable to tax on their worldwide income; however, they are prevented from being taxed twice on the same income with the double taxation agreement.

Depending on individual circumstances, expats can either apply for partial or full relief before being taxed or a refund after filing and the income tax paid. Of course, it makes sense to take the former route.

The DTA explains which country you are liable for tax, which one you can apply for relief for and how much relief you can expect to get.

Foreign Tax Credit Relief

This method is another way for US expats living in the UK to reduce their tax liabilities by claiming the Foreign Tax Credit on paid foreign income tax on non-US income.

The applicant must have already paid tax via the same income earned to receive the credit. Expats can claim credit to the exact dollar amount of the foreign income tax they have paid.

Those who live in the UK but still work for an organisation within the US can refer to the Foreign Earned Income Exclusion. Filing is essential; doing so yourself is not. Things can become time-consuming really fast as an expat filing taxes, so using a tax advisor who specialises in US expats living in the UK is a wise time saver and provides double tax relief.

There are so many ways to reduce foreign tax liabilities. The best practices are to take the time to understand all of the tax treaties, utilise the tax saving options available and seek the help of a US tax specialist to help lessen the burden.

Tom Griffiths is a tax advisor and consultant specialising in US expatriate tax matters. He works with clients to structure and streamline taxes for investment, trading entities and owned businesses.

Tom Griffiths (Ingleton) – 3rd Party – 20th Dec 21 – How US expats living in the UK can avoid double taxation – V1

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