UK self assessment - US foreign taxes paid

This is my first year back in the UK (I'm a dual citizen married to US citizen).

I'll be self-assessing in the UK both because of level of income and also due to untaxed interest income from UK and US banks.   Obviously I won't know the exact amount of UK tax due on earned and interest income received in 2015 until I self-assess in the UK.

So the question is what to put for foreign tax paid on the US return ?   Do I make an estimate of what HMRC will take, use that for the April 15 deadline, pay what's due and then get an exact amount when I eventually file (up to 6 months after April 15 since I plan on filing an extension) ?

I'm concerned about unrecoverable double taxation, because I know what I've paid in UK tax on 2015 income is probably insufficient to prevent US federal tax being due, but I know that HMRC will be getting more money when I self-assess, so it appears that there is a potential double tax trap.

Why not get your UK Self Assessment for 2015-2016 done promptly? File it online on or shortly after 6th April!

So the question is what to put for foreign tax paid on the US return ?  Do I make an estimate of what HMRC will take?

I can appreciate the OP's point and it has always puzzled me. Even after seeing how a professional prepares a US return, I remain rather perplexed.

Suppose, for example, one has a newly opened UK bank account that pays its first annual interest, say £1,000, on 1 December 2015. Logically, one should record this on the 2015 1040 and take a foreign tax credit for the 20% UK tax which has been deducted at source by the bank. If the tax payer has UK marginal rate of 40%, and UK Self-assessment is then completed promptly, say in mid April 2016, then there will be a further 20% UK tax computed on this interest, but this is only a "tax accrued," and need not be paid until 31 January 2017. So should a tax credit to be taken on the 2016 1040 (if UK tax is paid in April 2016) or on the 2017 1040 (if paid 31/01/17), or can - as the OP suggests - this be taken as a credit on the 2015 1040, "by estimating"? I suppose that by paying the UK tax earlier than required, say May 15, then it can be marked down as paid on the 2015 1040 which you are going to file by June 15. I appreciate that there exist tax credit carry forward provisions, that can smooth this problem once the OP has been paying UK tax for a few years and has built up credits in all 1116 baskets, but the OP says this is the first year that he or she is back in the UK.


To complicate things further, there may have been a payment to HMRC made "on account" in January 2015 for tax that will be due for UK tax year 2015-16. Payments will be made 31/01/15 and 31/07/15. but it is hard to disentangle what part of the "on account" payment is for the higher rate tax that HMRC is estimating will be owed on the bank interest (if income were to turn out to be the same), and should this be taken as a credit on the 2015, or 2016, 1040?

On top of all this there is the wrinkle that for the 40% marginal rate UK tax payer, tax on wages and bank interest both flow to Form 1116 (general basket). Suppose that in 2015-16 UK tax year someone has £10600+21785 wages and £15000 interest. She will pay 20% on the basic rate amount of 31785, and 40% on 5000. But what part of this is tax on wages and what part is tax on interest? Is the UK tax charge on wages 20% x 21785, and on interest 20% x 10000 + 40% x 5000? Or should the total tax be allocated between them proportionally? Does the interest now go on 1116 general or passive?

Is the UK tax charge on wages 20% x 21785, and on interest 20% x 10000 + 40% x 5000? Or should the total tax be allocated between them proportionally?

The UK Self Assessment is on the total income for the tax year. Accordingly I think it is logical that the total tax is indeed "allocated between them proportionally".

I'm concerned about unrecoverable double taxation, because I know what I've paid in UK tax on 2015 income is probably insufficient to prevent US federal tax being due, but I know that HMRC will be getting more money when I self-assess, so it appears that there is a potential double tax trap.

I'm not sure we've fully answered the OP question.

The general rule for a US tax return is to be sure to include all income received, including interest, during the US tax year. If you have statements listing interest payments, IMHO, include them. If no interest payments were made do not manufacture them simply for the return. Also, generally, if you calculate using the 'cash basis' then you would include any tax paid or withheld during the US tax year, but again, under this method do not manufacture tax paid.

Little is made of the two most versatile tools in the professionals' tool box, 1) filing an extension (such as form 4868), and 2) form 1040X.

You've made an honest attempt to complete a tax return to the best of your knowledge. If later you discover either an overpayment (double taxation) or underpayment, you may file a 1040X to correct the error.

The attempt to tax via two completely different tax systems will never yield satisfactory results. The aims are the same: revenue for the State, but the methods are vastly different. Despite what many claim, "you will not suffer double taxation", the reality may be different. It's the price of retaining a US passport. Nonetheless, you do everything possible to avoid it including the use of 4868 and 1040X.

I spoke with a US/UK tax adviser yesterday who told me that if you have underpaid on UK income tax (for example if your PAYE is messed up, as mine was) or if you receive gross interested (such as NS&I accounts) then yes, you will be double taxed - the US will first take a cut, and then you'll pay to HMRC when you self assess.

However in his opinion is it merely a cashflow issue since the extra payment to HMRC will appear as a large foreign tax credit on the following year's US tax return, and these can be carried forward for up to 10 years, or, crucially carried backward for up to 1 year.

If we don't return to the US then in future years I expect we'll be owing nothing on our US returns, and I think this is where the carry-back could be used, to get a refund of part of the prior year's US tax payment.

So that's my understanding now - you can be (pretty severely) double taxed during the first year in the UK, but it should be possible to claw most if not all back in subsequent US tax returns.     This is still very annoying as I'll have to float many thousands of dollars/pounds and hope to claw them back.

However in his opinion is it merely a cashflow issue since the extra payment to HMRC will appear as a large foreign tax credit on the following year's US tax return, and these can be carried forward for up to 10 years, or, crucially carried backward for up to 1 year.

That's a good summation. As you discuss, the following year will be a 'plus' amount, but it's likely since the UK has higher tax rates it would already have been a plus amount. In other words, instead of having, say, $1,000 in excess credits, you will now have, say, $3,000 in excess credits.

For following years, creating excess credits on 'passive' FTCs now requires some careful planning due to the tax free element on even normal 'taxable' UK passive income, but you'll now have excess credits to last for a while to prevent taxation by the US on passive income. 

Thanks OAP - if I understand you correctly you're saying that having a large excessive of foreign tax credit will help prevent US taxation on things like savings in a cash ISA  (it would also help since all our accounts are joint, and my wife is below the UK threshold for tax, so when I self assess in the UK I'll only be declaring half of the interest earned so effectively 20% tax on the interest even though I'm personally in the 40% band).

Quick update: finally got a quote to prepare US federal and MA state returns by a chap in the UK: £1300 for Feds, £350 for state - I nearly fell off my chair.   Is this a normal rate, because compared to US preparers it seems extortionate.

They also offered to do my UK self assessment for £950 - are UK self assessments really that difficult  (even for a partial year - we arrived in the UK at the end of July)

In terms of selecting an adviser, as there are no legal requirements to have passed any exams before offering tax advice, the IRS offers a very helpful Directory which lists the only individuals who are qualified to advise on US tax matters; and which can be found here:
http://irs.treasury.gov/rpo/rpo.jsf. The IRS list is  an excellent tool that is designed to help check if any adviser or proposed adviser has any tax credentials within the United States.

Thanks Guya,  the chap in California who I've used for the past 10+ years is on the IRS list- I trust him, and I thought this year's return might be a little beyond him, but I just spoke with him on the phone and he seemed to feel that between us we could get through it, for about 1/3 of the cost of the chap in London.

Can anyone advise me on how complex the US self-assessment is ?   I have US and UK interest income, we moved to the UK mid way through the tax year, and my income puts me in the 40% bracket - but other than the partial year it doesn't seem like it should be that complicated - certainly not to where I'd pay someone nearly £1000 to do it for me.

Your UK self-assessment should be straightforward and I recommend you try it yourself using the web site that HMRC provide. https://www.gov.uk/log-in-file-self-assessment-tax-return

Read here: https://www.gov.uk/tax-foreign-income/residence and specially under Your residence status when you move.

Thanks RW - I'm inclined to give the self assessment a go - it shouldn't be too complex, even with the split year.