Duel Citizenship - Tax on UK property rental income

Hi all,

I have 2 questions - The first one is nice and easy.

1. When completing the tax forms, do I enter income as a pre UK tax figure of post UK tax figure?
The reason why I ask is that it seems there is no where on the forms for them to take into account the money the UK tax man has already taken.


2. I was born in the states and am therefore a citizen with a SSN and passport. I have lived in the UK since I was 2 months old and both my parents are from the UK (UK citizen).

I have recently discovered that I am required to complete US tax returns.  I have literally spent ALL DAY doing 1 year as I am going through the streamlined process.

I am a little confused though as my annual income (including rental income) is under the current 2013 threshold of $97,600 but when I get to the end of the form, they want to tax me on my property rental income which I find really unfair as I have already paid tax on this income in the UK.

Are the able to do this?

Is anyone able to point me in the right direction?

Thanks
Jon

Enter all income as gross - that is, before UK tax has been taken off.

The $97,600 threshold relates to the foreign earned income exclusion, which only covers earned income (salary/wages) so it won't help you with unearned income (rent, interest, dividends, etc.). However, you can claim a foreign tax credit for what you've already paid HMRC on your rental income. Check out Form 1116 and mark the "passive" income category.

While you're at it, you might find that it works better to also claim a foreign tax credit on your salary, rather than using the foreign earned income exclusion. You'd file a second copy of Form 1116, this time marking the "general" income category. You'd then not need to file Form 2555.

By using foreign tax credits, you should find that you owe the IRS very little or even nothing.

Hope this helps.

Thanks for the super quick reply.

I will follow you advice and update the thread to let you know the result.

Jon

Jon - hopefully you have read the pack page of all of the relevant IRS instructions and will have gathered that each return is expected to take more than 24 hours to complete.

Don't overlook claiming the mandatory depreciation for the UK rental property as an expense on Schedule E.

The streamlined program is only one option for delivering all of the paperwork to the IRS. You may prefer to file using a reasonable cause argument.

Jon, It's good that you are getting into compliance. Politicfool has nicely answered your questions. I'll just add a couple of heads up for you.

Watch out for FBAR and 8938 filing. These are informational forms for you foreign accounts above defined thresholds.

Be careful if you own UK investments like unit trusts and ETFs as these fall under the US Passive Foreign Investment Company (PFIC) and they are taxed heavily. Stocks and shares ISAs would probably fall under PFIC and they are also not US tax free.

Finally UK pension contributions must be carefully handled on your US taxes.

In your situation it might be worth considering renouncing your US citizenship once you 've been in full tax compliance for 5 years as it will greatly simplify your financial life.

Jon - hopefully you have read the pack page of all of the relevant IRS instructions and will have gathered that each return is expected to take more than 24 hours to complete.

Don't overlook claiming the mandatory depreciation for the UK rental property as an expense on Schedule E.

The streamlined program is only one option for delivering all of the paperwork to the IRS. You may prefer to file using a reasonable cause argument.

I cannot believe that they deem it acceptable to take more than 24 hours for EACH return - No wonder I am struggling, I feel like I need to know and understand way too much to be able to complete the forms with certain accuracy.

I dont understand the depreciation on my investment property as if anything it will have gone up in value?

I believe the streamlined is the best approach for me given me relatively simple status.
e.g. Wages & Rental income. No other investments or anything like that.

Jon, It's good that you are getting into compliance. Politicfool has nicely answered your questions. I'll just add a couple of heads up for you.

Watch out for FBAR and 8938 filing. These are informational forms for you foreign accounts above defined thresholds.

Be careful if you own UK investments like unit trusts and ETFs as these fall under the US Passive Foreign Investment Company (PFIC) and they are taxed heavily. Stocks and shares ISAs would probably fall under PFIC and they are also not US tax free.

Finally UK pension contributions must be carefully handled on your US taxes.

In your situation it might be worth considering renouncing your US citizenship once you 've been in full tax compliance for 5 years as it will greatly simplify your financial life.

Just about to start on the dreaded FBAR

My wife has suggested that I send them my passport with the forms saying keep it....I have explained that its not that simple.
I am renouncing it as soon as I can as this is leaving a really bitter taste in my mouth.

In relation to the advice about, I have completed 2 1116 forms (1 general and 1 passive) and both seemed to wipe out my full tax liability that I had got on the 1040 - Once put all together, I was left with 0 tax liability but I am conceded that I have not done it correctly due to not being able to understand everything I am reading.

Is it worth getting everything checked by a professional before sending it off or if I want to do that is it a case that you may as well pay them to do it all?

Thanks
Jon

You haven't understood the concept of depreciation correctly. In the case of a rental property you can spread the cost of it out over a number of years of use and take that as a tax deductible expense.

You are right not to send your passport in with your taxes.....you'd be sending it to the entirely wrong agency anyway. You need to get at least 5 years of taxes done to be able to renounce anyway. You should be looking at filing some back taxes to get in full compliance and so maybe some professional help would be useful if you are feeling worried or overwhelmed. You are not the first or only person in your situation.

Having zero tax due does not surprise me.

You haven't understood the concept of depreciation correctly. In the case of a rental property you can spread the cost of it out over a number of years of use and take that as a tax deductible expense.

You are right not to send your passport in with your taxes.....you'd be sending it to the entirely wrong agency anyway. You need to get at least 5 years of taxes done to be able to renounce anyway. You should be looking at filing some back taxes to get in full compliance and so maybe some professional help would be useful if you are feeling worried or overwhelmed. You are not the first or only person in your situation.

Having zero tax due does not surprise me.

No I clearly didn't - If my tax is coming out at Zero then there it is probably not worth worrying about.

I am going approach a firm of experts for them to check what I have done (Just the basics of it) before sending of just to be sure I haven't made a total hash of it

In relation to being compliant for 5 years, does this declaration count as 1 or 3?  I assume 1 as I will only now be compliant so need to do another 4 years.

Thanks

In relation to being compliant for 5 years, does this declaration count as 1 or 3?  I assume 1 as I will only now be compliant so need to do another 4 years.

One US tax return for one US tax year always counts as 1. Thus, if 3 returns for 3 separate years are filed, even if filed together, would count as 3 years worth of returns filed.

IMHO, if you are filing 2011, 2012, and 2013 together, you could also file 2009 and 2010 to arrive at 5 years worth of returns, or wait and file returns for 2014 and 2015 to arrive at 5 years worth of returns (or 2010 and 2014).

Is income derived from a PFIC exempt under the terms of the US-UK Treaty or does it fall outside the treaty?

Be careful if you own UK investments like unit trusts and ETFs as these fall under the US Passive Foreign Investment Company (PFIC) and they are taxed heavily. Stocks and shares ISAs would probably fall under PFIC and they are also not US tax free.

The treaty does not exempt PFIC income specifically, but it does exempt certain pensions which can then hold PFICs.

.