US Taxes

Hi there guys, sorry to clog up the forum with another US Tax question but I just want an answer, after an hour long conversation with the US IRS yesterday, I seem more confused than when I started!

Just just been granted 2 years Leave to Remain as a Civil Partner of a person present and settle in the UK and now have permission to work, my big question is, while I need to know I need to file a US return reflecting my foreign earned income, will I actually need to pay tax on it.

Theres a great little chart on the IRS website that says I dont as long as I dont make over $91,500 but im still confused. 

Also, what sort of taxes am I responsible for paying in the UK and do I need to get a National Insurance Number sorted before I can work?

Thanks for your help in advance!!!

Hi

I'm going to leave the bulk of the US tax question for the more experienced members of the board.

I think you have to be a resident in the UK for a full US tax year to be able to claim the foreign earned income exclusion.  There is a residence test check if you search online.  Even if you don't qualify for this at the end of 2011 any UK tax that you pay on UK income will be counted as tax paid when you declare on your US tax return.  Usually UK tax is higher so there shouldn't be any extra to pay. 

As you won't have been working in the UK from 1 Jan 2010 to 31 Dec 2010 you only need to file your US income for that period.  So you don't have to worry about declaring your UK income until next year.

You need to apply for a National Insurance Number and it's best to do it while you are looking for work, see link:-

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/NationalInsurance/IntroductiontoNationalInsurance/DG_190057

Also I suggest you read up a bit about UK taxes.  If you are employed tax comes straight out of your wage - it's called PAYE pay as you earn.

This link gives a lot of information about tax:-

http://www.hmrc.gov.uk/incometax/tax-arrive-uk.htm

All the best.

I think you have to be a resident in the UK for a full US tax year to be able to claim the foreign earned income exclusion.

You can qualify for the foreign earned income exclusion using the Physical Presence Test, which requires you to be outside the US for 330 full days during any 12 month period. This qualifying period does not have to be the same as the US tax year, however! If your qualifying period begins in the middle of 2011 then you would get a prorated exclusion in line with the number of days in 2011 that were within your qualifying period.

Don't forget that you can also get "bonus days" for the first year - this means once you reach the 330th day of presence outside the US, you count backwards 365 days to find the start of your qualifying period. In other words you may be entitled to start your qualifying period up to 35 days before you arrive in the UK, which results in a larger foreign earned income exclusion amount.

Well I can safely say that I will have been in the UK for 365/365 days of 2011, but wont be starting for until the end of March/Beginning of April so I think I will quite easily qualify for the exclusion in the US, thanks for your replies!

Ive just applied for my national insurance number just have to go to Leeds for an interview now.

Also, what sort of taxes am I responsible for paying in the UK and do I need to get a National Insurance Number sorted before I can work?

Thanks for your help in advance!!!

UK tax will be taken out of your paycheck by your employer and if you have any UK savings accounts tax is taken out "at source" from any interest payments. Most UK tax payers don't have to file a tax return.

Your situation sounds relatively simple and if you qualify for the foreign earned income exclusion you won't be liable to US tax on the first $91.5k that you earn in the UK.
However, it's sometimes better to show earned income on your 1040 and take a credit for the UK tax you pay. This will probably still give you zero liability to US tax, but you can then contribute to a US ROTH IRA.

If you have savings, investments or pensions in the UK or the US the situation can quickly become complicated. For example the UK ISA is a great way to save. It's gains are free of UK tax, but you have to pay US tax on them. Also the IRS and US Treasury requires you to report foreign accounts over $10k and is looking at rules for other investment accounts and assets abroad too with FBAR and FATCA regulations. So I encourage you to get some professional advice for at least the first couple of years until you have things set up so that you can do you own taxes.

UK tax will be taken out of your paycheck by your employer and if you have any UK savings accounts tax is taken out "at source" from any interest payments. Most UK tax payers don't have to file a tax return.

Your situation sounds relatively simple and if you qualify for the foreign earned income exclusion you won't be liable to US tax on the first $91.5k that you earn in the UK.
However, it's sometimes better to show earned income on your 1040 and take a credit for the UK tax you pay. This will probably still give you zero liability to US tax, but you can then contribute to a US ROTH IRA.

If you have savings, investments or pensions in the UK or the US the situation can quickly become complicated. For example the UK ISA is a great way to save. It's gains are free of UK tax, but you have to pay US tax on them. Also the IRS and US Treasury requires you to report foreign accounts over $10k and is looking at rules for other investment accounts and assets abroad too with FBAR and FATCA regulations. So I encourage you to get some professional advice for at least the first couple of years until you have things set up so that you can do you own taxes.

Everyone says "IF YOU QUALIFY FOR" about the exclusion, well what qualifies you for it?  I thought you automatically qualified for it if you made less than $91,500 and were in the foreign country for at least 330/365 days a year?

This bank account information is worrying because I have about $16,000 that I want to transfer into my english bank account, so do I have to pay a US tax for having my own money in a savings account in England?  I dont have to pay tax on it when its in my american account so why should I have to pay tax on it in my british account?

Everyone says "IF YOU QUALIFY FOR" about the exclusion, well what qualifies you for it?  I thought you automatically qualified for it if you made less than $91,500 and were in the foreign country for at least 330/365 days a year?

From the IRS at http://www.irs.gov/publications/p54/ch04.html#en_US_2010_publink100047399:

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements.

    Your tax home must be in a foreign country.

    You must have foreign earned income.

    You must be one of the following.

        A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

        A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

        A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

If you meet those requirements then you can exclude up to $91.5k in foreign earned income, plus any housing exclusion you are entitled to. If you earn more than that, you can take a foreign tax credit on the part of your income that's above the threshold.

This bank account information is worrying because I have about $16,000 that I want to transfer into my english bank account, so do I have to pay a US tax for having my own money in a savings account in England?  I dont have to pay tax on it when its in my american account so why should I have to pay tax on it in my british account?

If your savings earn interest, the interest income is always subject to US tax, no matter whether it's a US or UK bank account. (If you are under the impression that interest is not taxable, you have been misinformed.)

Interest and dividends are considered unearned income and unlike wages or other earned income cannot be excluded. However, if you have UK interest income, you'll be paying UK tax on it, so you can take a foreign tax credit on your US return.

There are loads of previous threads on this forum on the same subject. I'd advise you to have a good read through them.

No, I know that you pay tax on savings interest, but I dont know any savings account that do not earn interest, ive already made 2p interest in my general savings account, guess I need to pay tax on that now.

You're only taxed above a certain threshold, but you still have to declare it even if it ends up you don't have to pay anything.

You're only taxed above a certain threshold, but you still have to declare it even if it ends up you don't have to pay anything.

Ah right I see, any clue what that threshold is or where I can find out?

This bank account information is worrying because I have about $16,000 that I want to transfer into my english bank account, so do I have to pay a US tax for having my own money in a savings account in England?  I dont have to pay tax on it when its in my american account so why should I have to pay tax on it in my british account?

As a US citizen the IRS will tax your money where ever it is in the world. So it taxes the interest on your money in a UK savings account. However, you will have already paid tax on the interest to the UK and to avoid double taxation the IRS gives you credit for that tax you paid in the UK. If that tax is larger than you'd pay in the US there is no tax due to the IRS. If it's smaller you pay the difference to the IRS.

If the account is a regular checking account with no interest...then there's no tax to pay.

On your 1040 you must include all your worldwide income and assets and apply the required exclusions or tax credits to come up with your US tax. You also have to send the US Treasury a form describing your foreign accounts over $10k, that's called FBAR and the penalties for not doing it are nasty, big fines.

For HMRC you need to know your current residency status and history and level of investment returns to decide whether you want to claim remittance status on your foreign monies or be taxed on an arising basis ie on your world wide income. Here is the HMRC regulations.

http://www.hmrc.gov.uk/cnr/hmrc6.pdf

So if you have money in the US and the UK things quickly get complicated.

I dont understand taxes  they do my head in!!!

The good thing is that most people in the UK do not have to file UK taxes at all; it gets taken out of their pay and their bank account interest automatically, and they don't have to think about it. You would have to file UK taxes if you were self-employed, had foreign income, and so on.

Also, the UK and US tax years are completely different, so if you do have to file taxes for both countries, you don't have to do them both at once.

It's not that bad. Honestly.

Yea I know its probably not that bad, I just need to budget somehow how much to set aside out of my UK paychecks to be able to afford to pay the US taxes at the end of the year.