The US taxes can be quite confusing, more so for American expats living elsewhere. So, we’ve tried to piece together some of it here. This will give you a brief idea on paying US taxes while living in the UK.
The first & foremost thing that you need to know, before we dive into double taxation US UK policies/ rules, is that all American expats in the UK are required to file US taxes. Yes, you read that right! The rule is applicable to all US nationals. This includes Green Card holders, & dual nationals, irrespective of whether or not you earn income in the USA.
Well, to put it simply, almost every US citizen staying in the UK has to file US tax returns.
Here’s a quick rundown of who needs to file taxes and who doesn’t.
Apart from all this, if you are self-employed, and earn over $400 annually, you will have to file US taxes as well. It doesn’t matter from which country you do that or in which currency!
You’d be pleased to know that there are notable tax benefits for people who qualify for the Head of Household tax filing status. Here’s some info for you to know if you match the criteria.
For instance, you will be considered the Head of Household if and when you are single but living with a dependent child. The status allows you to claim significant standard deductions and even the Child Tax Credit Refund – particularly when your income isn’t too high.
There’s a high chance that you haven’t heard of the Totalization Agreement, and that’s fine! Because, we at Expat Global Tax are here to explain everything pertaining to UK tax treaty with USA and the nuances of American expat tax filing.
Simply put, the Totalization Agreement between the two countries – US and UK, prevents the taxation of social security twice. As per the rule, if you plan on staying in the UK for five years, you will have to pay US Social Security and Medicare taxes. However, if you are unsure about the duration or expect to stay longer, you are supposed to pay the UK National Insurance contribution.
There’s more! If you are working for an US employer in the UK or are self-employed, you are expected to pay the US social security contributions. On the other hand, if you are working for a foreign firm, you do not need to pay for US social security contributions.
The Totalization Agreement thus prevents double taxation for US expats in the UK. This is part of the settlement under UK US double tax treaty and covers anything and everything under capital gains tax and income tax.
If you are a US citizen staying in the UK, knowing the basics of the double tax agreement UK USA is of help. This is a bilateral treaty between two major economies. It acts as a protection/ cover for individuals against the complexities of international taxation.
In simple terms, the United Kingdom US tax treaty prevents double taxation of income. How does it do that? Well, it does so by making sure that US expats aren’t unduly burdened by the tax laws of both the nations.
Wondering how does the UK US double taxation treaty help? Well, it is of significant importance, here’s why!
Like mentioned earlier, it prevents double taxation of income. In fact, without the treaty, a US citizen living in the UK, may have to pay taxes in both the US and the UK. Why? Because, US levies taxes on citizens on their worldwide income, while the UK government taxes people on the income they earn while residing in the UK. This is what the treaty protects people from.
But there’s more! The double taxation agreement UK and USA offers reduced withholding tax rates on certain income types. This includes royalties, interests, and even dividends. This is of great help to US expats who have investments in the UK. It lowers their tax burden on the income generated from such investments.
Last but not least, the double tax treaty UK USA comes with provisions that help define the tax residency status of businesses and individuals. This defines which country has the right to tax specific types of income and prevents conflicts between countries.
At Expat Global Tax, our team helps US expats living in the UK take advantage of the UK US double tax treaty. As a US citizen, you will of course have to file a US tax return, and based on the specifics, you may need to fill out a few different forms.
Form 2555 is for the Foreign earned income exclusion and you will have to submit it with the US tax return.
Form 1116 is for the Foreign Tax Credit. It is for US expats who pay UK taxes – helping lower their US tax liability. For this, you will first have to convert all taxes paid into US dollars either by the transaction rate or depending on the annual average exchange rate.
If you are hoping to obtain reduced withholding tax rates on royalties, dividends, and interests, you must fill up the Form W-8BEN.
However, all this can be a tad difficult to navigate for most individuals, and that’s where our expertise comes in.
Both the US and the UK have their own criteria through which they determine who is a resident for tax purposes. So, it is possible that someone meets the residency norms in both the countries. Thus, to prevent the problems that dual residency could pose, the double taxation agreement UK and USA includes a series of tie-breaker rules. These rules help decide which nation has the primary right to tax the individual’s income.
Navigating US citizen resident in UK taxes can be overwhelming particularly due to the complexities of the US UK tax treaty. That’s why it is better to seek professional help. At Expat Global Tax, we specialise in simplifying this process for US expats living in the UK. We make sure that you stay compliant with both US and UK tax laws, while also maximising your tax benefits and minimising liabilities.
At Expat Global Tax, we understand the nuances of double taxation and foreign income exclusions, thereby helping our clients avoid costly mistakes. Connect with our experts now!
For your Get Free Quote on any tax related matters, please contact us via the phone number or email listed below or request a call back using the forum.
