Personal Allowance

Hi all,

I’m a self-employed living in the UK.

I am a British and American citizen, so put in tax returns for each country.

I’m taking some time off next year, and expecting to earn max £15,000. In the UK, the personal allowance is £11,000 for this year, meaning I’ll only pay tax on £4,000.

Does the US Tax me on the full amount? Or am I only taxable on the UK taxable amount?

Basically any help with how the US deals with the UK personal allowance would be great.

Many thanks.

Hi all,

I’m a self-employed living in the UK.

I am a British and American citizen, so put in tax returns for each country.

I’m taking some time off next year, and expecting to earn max £15,000. In the UK, the personal allowance is £11,000 for this year, meaning I’ll only pay tax on £4,000.

Does the US Tax me on the full amount? Or am I only taxable on the UK taxable amount?

Basically any help with how the US deals with the UK personal allowance would be great.

Many thanks.

It depends. If you take the Foreign Earned Income Exclusion the US won't tax any of your
£15,000 of UK earnings. If you use Foreign Tax Credits you enter the £15,000 on your 1040, take the usual deductions and allowances off and apply any UK tax you've paid to offset your US tax bill.

Thanks nun,

Assume I'm not taking FEIE, as I'm not yet sure if I'll be eligible.

So effectively you're saying that using tax credits, if I've only paid say £800 of tax in the UK, as only £4,000 of income was taxable. I will have to indicate only this amount on my US return?

That's quite steep. In dollars: that's $22,000 on my return, about £12,000 taxable after deductions, and then $1,200 in foreign tax credit. So I'd have to pay an additional $1,500 or so to the IRS on the money earned in the UK.

Would be great if they somehow honoured the personal allowance in the UK.

You method of calculating is correct. You would owe US tax on the $12,000 but only have a minimal amount of UK tax paid to offset it. That's the problem with earning only slightly over The UK personal allowance, but more than the US (standard deduction + personal exemption) when using the Foreign Tax Credit option.

I notice on another thread you're asking about excess credits from past years. In the above, if you have $1,500 in excess credits from no more than the past 10 years, you may use those to add to the UK tax paid ($1,200), with the sum of the two then equalling the amount of US tax you would owe. A simple sheet showing where the excess credits come from is also required to be filed with the 1116. Check the IRS tables in Publication 17 to determine the amount of tax due in line with your filing status (single, married separate, etc.). The 2015 amount will be in the ball park, but much depends on exchange rates for the year.

Thanks nun,

Assume I'm not taking FEIE, as I'm not yet sure if I'll be eligible.

So effectively you're saying that using tax credits, if I've only paid say £800 of tax in the UK, as only £4,000 of income was taxable. I will have to indicate only this amount on my US return?

That's quite steep. In dollars: that's $22,000 on my return, about £12,000 taxable after deductions, and then $1,200 in foreign tax credit. So I'd have to pay an additional $1,500 or so to the IRS on the money earned in the UK.

Would be great if they somehow honoured the personal allowance in the UK.

I don't think your maths is quite right.

In the UK you'll pay tax on £4,000 at 20% so that's £800.....which is about $1200 (using 1.5 exchange rate for simplicity)

In the US you will enter $22,000 for your wages and if you take off the standard deduction ($6300) and one exemption ($4000) your taxable income will be $11700. The US tax on that will be $1294....apply the UK tax credit of $1200 and you have $94 to pay the US.

Of course this is just for income tax. I notice you say that you are self-employed. So you need to make sure you don't pay US self-employment tax on your UK earnings as you will be paying NICs in the UK.