Helen, you are a Godsend...

Hello Helen,

I'm going to cut straight to the chase, ok?  US expat moved to UK in June 2002, for work under a UK limited company.  I lived in the US for 6 months in 2002, received my W-2's and 1099(?) for all pay earned in the US for 2002.  What forms do I need to get the filing in motion?  ha..

And, since I won't qualify as bona fide resident or physical presence test, I don't think I've been here long enough for that, so, do I owe on the full amount of income I received for 2002, even though I paid UK taxes on half of my years wages?  Do I have to figure the exchange rate, and add that sum to my year's gross income, then figure my tax from that?  Basically, do I owe on the full amount of my gross for 2002, until I send some sort of exemption form stating I paid 'x' amount of tax on 'y' amount of gross earned in the UK.  I'm so confused..

I'm confused because what I earned in the US puts me in one tax bracket, if you add my UK earnings that puts me in a whole new tax bracket.  Therefore, the Gestapo, sorry IRS puts me at a higher rate, and perhaps my refund(I made a point to overpay this year) won't be as high as it should be..  Or possibly no refund atall..

I've probably confused you as much as I am, so I'll leave you alone for now..

Thanks!

:-/ [smiley=!blank.gif] [smiley=!blank.gif] [smiley=!blank.gif]

Hi JR

First of all I am not sure why you think you will not qualify for the exclusion under the physical presence (PPT) or the bona fide residence (BFR) test!!  As long as you intend to be in the UK until June 2003 and do not have more than 35 days back to the US until then, you will certainly qualify for the PPT. If you fail the PPT (if you have more than 35 days), you will qualify under the BFR test provided your tax home remains to be UK (or any other foreign countries) until 31 December 2003.  Note that the $80,000 exclusion will be pro-rated for you in 2002 as you arrived halfway through the year.

As far as what you need to report on your US tax return is concerned, this should be income you received during the calendar year 2002 (regadless of the source, UK or US).  The UK portion of your income will be subject to the exclusion (as explained above) and foreign tax credit (if you paid UK taxes since June 2002). You can look at your monthly UK payslips to obtain your income and taxes paid to report on your US return.  You will not receive a W-2 for the portion of your income that you received in the UK. You do not need to send the IRS any back up regarding your UK source income. But I recommend that you keep them in case you are audited.    

As far the forms you need to file, they are the normal 1040 forms (together with the relevant schedules), form 2555 (to calculate your exclusion) and form 1116 (to calculate your foreign tax credit).

Note that if you meet the PPT test, you will not be able to file your return until after you qualify (i.e. around May / June 2003).  Therefore an extension form needs to be filed (although if you do not have a balance due in 2002, you are automatically extended to 15 June 2003).

By the way, the above is with the assumption that you are a US citizen.  If this is not the case, there are whole different set of rules that will apply to you.

Also, we probably need to apeak about State tax rules / returns.

I hope I have not confused you.  Please feel free to call or e-mail me if you need further explanation.  The PPT / BFR tests and the foreign tax credit rules are quite complex and not easily explained in writing. (I have back to back meetings from 12.00 noon tomorrow and Thursday, However, feel free to call me on Friday.

Helen
HT TAX
h.tanhaie@ntlworld.com
0208 466 9297

This just seemed to fall under the subject..i just wanted to say thank you Helen for answering all of our questions...i am going to definitely use the advice next year when i file taxes after working here in the UK....thanks for all of your help....we really appreciate it...you have made the process of taxes less stressful...

;Dcheers!!

I am pleased you find this forum helpful.  I am happy to answer any of your questions and take the stress of doing you taxes away.....

Many thanks for the feedback.

Helen