Streamline Procedure for new filer

Hi,

I am new to this forum and new(ish) to US taxes.
I recently learned of my obligation to file US tax return. I was born in the USA but moved to the UK as a very young child so have never had any financial ties with the USA but am looking to become compliant through the streamline process.

I think that I have largely got my head around the process and various forms which need to be filed but have a few specific questions which, I was hoping, someone on here might be able to answer.

Just to briefly outline my position, I am employed in the UK and pay all my income tax through PAYE. I have no other significant source of income and have not made any significant capital gains (e.g. through the sales of investments or property). I have not sold any property (although purchased one last year). I have no children/dependents and recently got married to a non-us citizen. I also do not file tax returns in the UK.

As a first stab, I used TaxAct to help prepare the return but I have been reviewing the output to make sure I fully understand everything that goes on the forms.
My US tax liability is $0 (as expected)

I am filing the following forms: 1040, 8965, 1116 (For General income).
Also 6251 - Alternative Minimum Tax with additional 1116 for the AMT form for General Income

So my questions!

I don't really understand the AMT form (6251) which was attached by TaxAct, is it necessary?

I have very small amounts of income that don't fall under the general category. This is in the form of current account interest (typically less than £10 per year) and am also paid very small dividends on a number of shares that I was allocated by my employer (typically less than £50) per year. So my passive income is typically less than £60 per year. Do I need to file a form 1116 for this? Do I need to mention this elsewhere on my tax return? I would rather avoid this as reconciling the interest will be extremely challenging!

As an additional question, I'm not sure how to handle my pension. I have a defined contribution plan through my employer (salary exchange). Typically, I contribute $2500 per year and employer contributes about $4500. I'm in my late 20s so being able to get to any of this is a while off but I'm aware that the fund has seen some growth over the past few years. So far I have ignored the pension but feel it should be mentioned somewhere.

Finally, I have put my marital status down as "Married - filing separately". Presumably this is the best option for me as my wife is not a US citizen (or greencard holder).


Any advice offered would be very gratefully received. I would love to be able to contribute something back and would be very happy to share my (hopefully correctly) completed tax return as an example (with personal information removed).

Sorry one more question:

I am opting to take a tax credit against taxes I've paid in the UK with form 1116. Having worked through the form, I understand that the maximum tax credit that I can claim through this form is 100% of my US income tax liability. i.e. if I pay more tax in the UK than the USA, then I can't build up/carry over additional tax credits on the difference between the two. Is this correct?

Many thanks

Have you considered using the foreign earned income exclusion? Tax credits are often better if you can use them cleverly, but FEIE might be easier

To answer a few of your additional questions, if you got married in 2014, then yes it is easiest to just file as married filing separately. Although your standard deduction drops when filing this way, it is still often better as you do not have to report or pay tax on any of your spouse's income. It will also save you from having to get an ITIN for your spouse.

As far as your pension goes, perhaps these articles will help shed some light:
http://www.greenbacktaxservices.com/blog/us-income-tax-impact-foreign-pensions-retirement-plans/

http://www.greenbacktaxservices.com/blog/5-things-us-expats-need-to-know-about-uk-taxes/

I hope this helps and good luck!

Thank you for the advice. I am considering the FEIE route but would rather take the credits if possible as I do feel these offer slightly more "control" over my situation (or not, as it may be!).

It sounds like my company pension won't cause any problems but I'm still slightly at odds as to how/where to report it and whether mine or my employer's contributions (4% of my salary contributed by myself with 8% by employer) need to be included in the wages & salaries total (line 7) of form 1040.

You could include the employer contribution on Line 7 - it depends if you think it is compensation for employment or includable under section 402(b). There are valid opinions in both directions.

The employee contributions are part of your basis that you'd want to be tracking.

In practice, however, most folks these days simply make a treaty claim for employer, employee and growth and some of them file an 8833 each year for clarity.

Hi again,

I have just returned from the very helpful IRS office at the US Embassy. I know that  the rules are always open to interpretation but thought I'd share the advice they offered on my situation:

Regarding the pension, the advice was to deduct personal contributions from my gross pay amount (since it is deducted before tax) and make no mention of employer contributions as they never go through my personal books.

They suggested that I do make mention of Interest and dividend income, even if the amounts are extremely low (less than $2) and that these do not need to be itemised due to them coming in under the threshold. As such, I also need to file a form 1116 in the passive category.

The agent agreed that, given my intention to live in the USA, it makes more sense to use the FTC and carry over additional credits, rather than using the FEIE.

The agent also mentioned that on line 61 of form 1040, I could tick the box indicating that I had full year health coverage and needn't bother filling in form 8965 as the foreign status is obvious from other parts of form 1040.

So my complete filing will include:
Form 1040 (including Schedule B)
Form 1116 (general)
Form 1116 (passive)
Form 6251

I hope this helps some others in a similar boat to me.

Since you plan on living in the US when you draw benefits would it not more sense to report salary gross and report employer contributions as currently taxable - so you have basis in the plan - rather that reply on the treaty claim you are planning on making?

Guya, thanks for the reply.
I don't understand 100% your advice but my interpretation (please correct me if I'm wrong!) is that I should report the pension contributions as taxable income now (and likely still be able to fully offset US taxes due with the FTC) as this would allow me to reduce income tax when I come to draw my pension (assuming I'm still in the USA at this stage). Assuming I have booked all pension contributions as taxable income, then I guess I would only be due to pay CGT on the capital growth???

In terms of my personal comfort level, if going down this route I would probably still exclude employer contributions as I'd find it hard to justify that I have paid these. I appreciate this is a grey area.

I would still have a few reservations against this based on the below but again, this may be a mis-interpretation:

Although I plan on living in the states, currently in my mid-late 20s and with no other family in the USA, I am unsure how likely I would be to retire there.

Given that I will spend a number of year working (and being taxed) in the USA, it is in my favour to maximise carryover tax credits while I'm still in the UK. Since my UK income tax is a fixed amount, by reducing my US taxable income, I am effectively increasing my carry-over, which will be of some benefit in the short-term. Is this correct? I appreciate that this is a somewhat short-sighted view...

Guya, thanks for the reply.
I don't understand 100% your advice but my interpretation (please correct me if I'm wrong!) is that I should report the pension contributions as taxable income now (and likely still be able to fully offset US taxes due with the FTC) as this would allow me to reduce income tax when I come to draw my pension (assuming I'm still in the USA at this stage). Assuming I have booked all pension contributions as taxable income, then I guess I would only be due to pay CGT on the capital growth???

In terms of my personal comfort level, if going down this route I would probably still exclude employer contributions as I'd find it hard to justify that I have paid these. I appreciate this is a grey area.

I would still have a few reservations against this based on the below but again, this may be a mis-interpretation:

Although I plan on living in the states, currently in my mid-late 20s and with no other family in the USA, I am unsure how likely I would be to retire there.

Given that I will spend a number of year working (and being taxed) in the USA, it is in my favour to maximise carryover tax credits while I'm still in the UK. Since my UK income tax is a fixed amount, by reducing my US taxable income, I am effectively increasing my carry-over, which will be of some benefit in the short-term. Is this correct? I appreciate that this is a somewhat short-sighted view...

Sadly, there is nothing grey at all. Either (on a tax year by tax year basis) you follow US domestic law which requires that you include the vested accrued benefit of the UK pension plan each year under IR Code Section 402(b) or - alternatively - you elect into the terms of the tax treaty.

You can of course not report all of your income - as you are suggesting - but that is simply not lawful.  

Most folks these days elect each year into Article 18 of the treaty; but you know this already as this is what you are planning to do.  Some folks file an 8833 each year to avoid IRS questions, as the return won't otherwise match the assets disclosed on Form 8938.

You can of course not report all of your income - as you are suggesting - but that is simply not lawful.  

That was my point to the IRS agent in London. His view (again, I appreciate this is one opinion!) was that as it is a salary exchange pension, although my contributions are referenced on my payslips, they never actually go through my own books in order not to attract tax in the UK. My interpretation from the UK side is that the capital contributions only hit my books once I draw my pension.

Given the relatively small amounts and ability to fully offset the american taxes due either way, I don't see this as something which is likely to cause problems but am obviously keen to take the most tax-efficient route.

From a technical perspective, on form 1116, what date do you use under line 8, for when tax payments have been made? I have made 12 throughout the year through PAYE (and converted to USD on those payment dates). Presumably, it doesn't make sense to reference all of these individually?

My intention was to include a single entry with a nominal date of 31 Dec. Is this acceptable?

Returns filed today. Many thanks to everyone for their help.
As a final point, the (different) agent at the IRS office in London noted the previous advice I had been given regarding line 61 and suggested I still file form 8965.

Hopefully I can give something back to the forum. I'm happy to share (limited) experience and advice I've received to date.