How is tax allocated if working in both UK and USA?

Dear UKY!

I’m a little confused about how tax is reported if I work back and forth between the UK and US, and considered a tax resident of both countries.

I’ve previously just worked in the UK. I’m a dual citizen, and up to date on US tax returns.

I’ve previously paid tax to UK and then had none to pay to the US via Foreign Tax Credits.

I’m now planning to work self employed, back and forth in both countries.

I know both countries will want me to report worldwide income, but as hard as I try, I can't figure out how the double tax agreement works in this scenario.

Intuitively… I would pay tax to the US on money earned in the US, and to the UK on money earned in the UK. And then on each of the returns I’d show all foreign income too, then apply for foreign tax credits on the tax already paid.

Is this correct?

But I’ve also read that if you’re a dual tax resident you need to apply a tie-breaker to assign treaty residence to one country or the other. And one country gives up its right to tax on the other’s income.

How would that affect it?

I’m very confused..!  If anyone can simplify or clarify the process, that would be greatly appreciated.

Many thanks,

O

I'm in a similar situation, or will be, and like you I've come to the conclusion that it will be the tie-breaker that determines which country will be the primary taxing authority.

I asked the question recently and the discussion was quite interesting.

http://talk.uk-yankee.com/index.php?topic=87178.0

Where do you live? If you are going back and forth between the UK and the US doing work the place that you return to and call home will be important in determining residency and thus your primary taxing authority.

Thanks Nun,

I've looked at the standard residency tests for the UK, and to be honest I'm currently 50/50 between the two.

It has always previously been the UK. But say for example it turns out to be the US.

Either way, I was under the impression that tax earned in each country is paid to the country it was earned in. How would residency affect this? Am I missing something simple?!

I appreciate your help!

Thanks.

Thanks Nun,

I've looked at the standard residency tests for the UK, and to be honest I'm currently 50/50 between the two.

It has always previously been the UK. But say for example it turns out to be the US.

Either way, I was under the impression that tax earned in each country is paid to the country it was earned in. How would residency affect this? Am I missing something simple?!

I appreciate your help!

Thanks.

It all comes down to the tie breaker rules when you are resident in both the USA and UK, I'm pretty sure they don't share the taxes between them as you suggest, only 1 country becomes the primary tax authority. Have a read of the link below, which also discusses the US UK DTA. Work your own circumstances through the "centre of vital interests" paragraph to see where you end up. If still in doubt you may have to consult a pro.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/328986/hs302.pdf

Thanks Nun,

I've looked at the standard residency tests for the UK, and to be honest I'm currently 50/50 between the two.

It has always previously been the UK. But say for example it turns out to be the US.

Either way, I was under the impression that tax earned in each country is paid to the country it was earned in. How would residency affect this? Am I missing something simple?!

I appreciate your help!

Thanks.

Where is home.....exactly 50/50?....where do you have family? Are you filing state taxes? where do you get health insurance?

Hi Nun,

Currently home is the UK, have lived and worked here my whole life, over 30 years. That's where I'm based and live, but I'm planning to hopefully work in both countries going forwards. And may in the future live in the US, where my parents now are, but still work in both countries.

Previously I've paid tax to the UK via my UK returns, and then on my US return claimed foreign tax credits.

I suppose I wanted to know what happens if I also start working self employed in the US in this situation.

Thanks :-)

Which State?

Florida

Florida

Are you aware of the health insurance implications of residency issues?

Thanks Nun, yes I am. Been researching that and social security etc.

I'm going to try and simplify the question, because I realise its a little convoluted. And then I can work on from there.

Say I am currently a resident in the UK. I work self employed. This coming year I do some work in the USA, also self employed, back and forth at the same time.

I look at the residency requirements for both and discover that I am considered a resident of both. Given that I am a dual resident, I look at the double taxation agreement, apply the tie breaker questions and discover that I fall on the UK side.

Does this mean that I exempt all my US source income from US tax, and pay tax on this only in the UK? Is that what the purpose of the DTA is?

It seems that if it were the other way round and I found myself falling on the US side for DTA purposes, I would exempt myself from UK tax on UK source income and pay via my US tax return.

(thanks Durhamlad for the helpsheet).

I'm very new to this, so just wondered if anyone could confirm this is correct, or if not point me in the right direction...!

I appreciate your help :-)

Does this mean that I exempt all my US source income from US tax, and pay tax on this only in the UK? Is that what the purpose of the DTA is?

It seems that if it were the other way round and I found myself falling on the US side for DTA purposes, I would exempt myself from UK tax on UK source income and pay via my US tax return.

If it were the other way round and you found yourself with the US as the primary taxing authority then all your worldwide income would be taxable and you would not be subject to any UK tax. You would probably have to file something like the following form to explain to HMRC why you are tax resident in another country. (I am guessing here)
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/419993/sa109-2015.pdf

If the UK is the primary tax authority then the UK taxes your worldwide income and you take FTC's against your US taxes.  I don't know about earned income in the US as I have only passive (Pensions etc) but on IRS form 1116 when claiming FTC's for UK taxes paid there is a box to check that states the US income has been "resourced to the UK", so is eligible for FTC's to be claimed against it.

I would like to offer some thoughts to the debate over the issue of the taxation of self-employment income covering both the UK and the US.

Let me start with some history. The previous UK US double tax treaty included Article 14 covering independent personal services. (Broadly it provided that a UK resident performing services in the US would be taxable only in the UK unless either he was in the US for more than 180 days, or he had a permanent establishment in the US, and in either case was only liable to the tax on these profits.) There is no equivalent of Article 14 in the current treaty. Instead this appears to be dealt with under Article 7, which deals with business profits.

Article 7(7) says that business profits is to include the furnishing of services. However, in the last sentence it says that the term excludes the performance of personal services by an individual in an independent capacity. I would be interested to hear of views as to what this means. Does this cover the types of services typically delivered by a self-employed consultant? If so, where does that leave this income to be taxed? Article 22 deals with “other income”. But Article 22(2) says that Article 22 is not to apply to income from a permanent establishment.

Assume that Article 7 does apply. Perhaps matters would work as follows-
•   Under Article 7(1) a UK business is only taxable in the UK unless it has a PE in the US.
•   Suppose that Ontta would have a PE in the US. Then the US would tax this income.
•   Of course the income would remain taxable in the UK if Ontta were a UK resident.
•   The UK would tax the whole of the worldwide profits but give credit for US tax.
•   Article 24 deals with double taxation. Article 24(6) deals with the special requirements of UK resident US citizens.
•   Article 24(6)(2) says that the UK only requires to give credit against UK tax for the US tax that would have been paid on someone who was not a US citizen. So you would need to work out the US tax that would have been payable by someone who only had the US PE profits.
•   The US would then tax the worldwide income, including the whole of the self-employment income, and in doing so would give credit for the UK tax as computed having given credit for the limited tax on the US PE.
Does this make sense? Any comments or experience would be of interest.