US & UK taxes - File separately or jointly?

Hello,

My husband (UKC) and I got married in Dec 2010 in the US. I'm currently in the UK on a spousal visa and getting ready to file my US taxes (got an extension). Do I file as I normally have in the past as single? Or do I file as married?

No idea how UK taxes even work here, but do we file jointly here? I haven't worked or received an income here. But might be hired soon as an independent contractor. Right now the only activity in my bank account is when DH transfers money into my bank account for household expenses or when my dad (in the US) deposit gifts for birthdays and such.

Any help would be greatly appreciated. Advice as to what to read to get started on UK taxes would be helpful as well.

Thank you in advance!

Unless you are making a ton of money UK taxes are taken directly out of your paycheck and you don't need to do anything.  AFAIK, there is no filing jointly here.  You don't get a tax break for being married.

As for the US, you are married and he doesn't have a ss# or an id number then you can not file married jointy.

Hello,

With regards to your first question (how to file in the US); it depends if you have children. Assuming you don't, then you have the choice of filing as Married Filing Separately, or Married Filing Jointly. (You cannot file a Single). Which one is better for you depends on your circumstances, as if you choose to file as MFJ then you'll need to report (and pay tax on) all your husband's income too. The advantage is that you get a double Foreign Earned Income exclusion, if your income is too low to qualify for Additional Child Tax Credits then you can use your husband's income to possibly qualify etc. It all depends on the circumstances. If you have children, then you can either file as Head of Household, or MFJ. If you do want to file as MFJ then he'll need to obtain an ITIN on a W-7.

The UK works differently. There is no option of choosing a status; for Income Tax, (if you need to file) you must file separately, and for Tax Credits (if eligible) then you must file jointly. Tax Credits are the UK equivalent of Making Work Pay/EICs/Additional Child Tax Credits etc, but are not filed together with a tax return, and can be dealt with by telephone mainly.

Also, unlike the US, most people in the UK do not need to file tax returns. Generally you only need to file if you are self-employed, have property income, large amounts of savings income, you earn over £100,000 pa, or if you have tax to pay that wasn't deducted at source, or need to claim a refund above a certain amount.

If you do become an independent contractor then depending on how you trade (i.e. self-employed, through a limited company, or through an umbrella company), you may need to file a tax return. You mention that you may be "hired" as an independent contractor; the UK is quite strict as to "deemed employment" (Where people are employed, but claim to be self employed in order to save on National Insurance contributions etc), so you need to check you are IR-35 compliant.

What to read to get starting on UK taxes: www.hmrc.gov.uk is quite useful.

Just to point out that if you are UK resident, you'll be taxed by the UK on worldwide income (unless you choose the remittance basis of taxation), and as a US Citizen you'll be taxed also on worldwide income. Foreign Tax Credits, the Totalization agreement, and the DTA mean that you only rarely have to pay tax twice on the same money.

If you are not earning this year then you won't need to file a US tax return either.

Common traps for US citizens in the UK:

1) UK ISAs/Pensions - tax free in the UK but taxable in the US, also beware PFIC (passive foreign investment companies) issues.
2) Trading through a limited company - whilst this is very tax efficient in the UK, if not done properly, can be disastrous from a US perspective.
3) UK bank accounts - not a problem per se, but if you have over $10,000 in foreign bank accounts, this needs to be reported (not on tax return)

This list is not exhaustive, but from experience these are common issues that get people tangled up, and where they to be sorted out beforehand, could have been straightforward.

All the best

Andrew

But they want to file jointly her husband needs to:

Taxpayer Identification Number
Each taxpayer who files, or is claimed as a dependent on, a U.S. tax return will need a social security number (SSN) or individual taxpayer identification number (ITIN). To obtain a SSN, use form SS-5, Application for a Social Security Card. To get form SS-5, or to find out if you are eligible for a social security card, contact a Social Security Office or visit Social Security International Operations. If you, or your spouse, are not eligible for a SSN, you can obtain an ITIN by filing form W-7 along with appropriate documentation.

So if she needs to file now then the question is how long will it take to get the ITIN.

http://www.irs.gov/businesses/small/international/article/0,,id=96734,00.html

If you decide to file seprately then you just write NRA (for non-resident alien) in the space for his ss#. 

So if she needs to file now then the question is how long will it take to get the ITIN.

You don't need to wait for the ITIN to file the tax return; you just leave the space for SS number blank, and file it together with the W-7, and when the IRS issue the ITIN, they'll fill it in for you. If fact, with some exceptions, you always need to file a tax return together with the W-7. The W-7 is a one-time process; next year you'll have the ITIN.

It takes about 6 weeks to get the ITIN, although, as mentioned there is no rush because it is filed with the tax return. Easiest way is through an Acceptance Agent: http://www.irs.gov/individuals/article/0,,id=111081,00.html (I'm the bottom one on the list)

If you want to file jointly you both need to elect to file jointly. This election continues for all future years unless revoked.

As Andrew says one can apply for an ITIN for a fee through an Acceptance Agent. The Acceptance Agent must interview the applicant under the Acceptance Agent agreement and also identify the client to comply with UK anti-money laundering rules. The Acceptance Agent will of course need an engagement letter signed as well.

The IRS at the Embassy in Grosvenor Square deal with ITINs and W-7 forms for free if you can't afford the acceptance agents fee.

If you want to file jointly you both need to elect to file jointly. This election continues for all future years unless revoked.

As Andrew says one can apply for an ITIN for a fee through an Acceptance Agent. The Acceptance Agent must interview the applicant under the Acceptance Agent agreement and also identify the client to comply with UK anti-money laundering rules. The Acceptance Agent will of course need an engagement letter signed as well.

The IRS at the Embassy in Grosvenor Square deal with ITINs and W-7 forms for free if you can't afford the acceptance agents fee.

Although depending on where you are in the country, the cost of train fairs/ petrol/ parking/ congestion charge mean for many it may work out cheaper to use an acceptance agent.

Not to mention the x-ray machines, security, limited hours etc of the Embassy. Some Acceptance Agents will interview you at midnight if necessary! Plus, if there are any issues, you're dealing with a person you can reach on the phone, and who will chase up the issue for you. Not a recorded message and no staff.

Sometimes, "cheaper" isn't better and you get what you pay for.

Thank you very much for all the info. It's a lot to process, so we'll sift through all the details and see what we end up with.

What's the most common practice? Just for me to file married but separately in the US regardless of my income? And he continues to file his as usual in the UK. Then if I make over £7485 a year, then and only then do I file my UK taxes?

We might one day move back to the US, but I don't think it's anytime in the near future.

What's the most common practice? Just for me to file married but separately in the US regardless of my income? And he continues to file his as usual in the UK. Then if I make over £7485 a year, then and only then do I file my UK taxes?

There is no "most common" practice. Everyone has different circumstances.  You may want to file even if you are not required to, just to claim any refundable credits you may be entitled to.

Regarding UK filing; if you are self employed, you'll need to file taxes in the UK regardless of whether you make money. In the US you'll need to file if you make $400 from self employment.

Otherwise, unless you make £100,000 pa, have been asked by HMRC to complete a tax return, need to claim certain refunds, have capital gains tax or other tax to pay not taken care of at source, or need to claim the remittance basis of taxation, you won't need to file a return. If you are a company director then HMRC say you need to file, but most accountants feel it is not legally required.

Now for some practical advice - based some of your wording, it looks like you earn very little and I don't think you have kids based on some of your previous posts.  If this is correct, then you get no benefit from MFJ and just a lot of hassle.  MFS is quick and easy.  At the end of the day, you are recording that you don't owe any tax.  Don't overcomplicate the situation if it isn't necessary.

Now for some practical advice - based some of your wording, it looks like you earn very little and I don't think you have kids based on some of your previous posts.  If this is correct, then you get no benefit from MFJ and just a lot of hassle. 

Agreed. With no kids, filing as MFJ is only likely to gain around $800 pa (due to Making Work Pay credit). So probably not worth the hassle for just $1600 (being 2009 and 2010, and assuming USC has no income and UKC has income of between $12903 and $150000).

For some folks getting an ITIN for free at the US Embassy, electing to file jointly and getting up to $1,600 is worth while.

It requires a load of paperwork and time and in some circumstances the $1,600 will be taxable in the UK so it will work at as less than $1,600 after tax...

Sara is spot on ... us tax people can quickly over-complicate - let's all vote fopr a simpler tax system, please!

For some folks getting an ITIN for free at the US Embassy, electing to file jointly and getting up to $1,600 is worth while.

It requires a load of paperwork and time and in some circumstances the $1,600 will be taxable in the UK so it will work at as less than $1,600 after tax...

Guya, I'm puzzled. As far as I'm aware, both Additional Child Tax Credits and Making Work Pay credits are completely exempt from UK tax. (as per ITEPA 2003 s681, cf ibid s677, being that MWP is broadly similar to WTC and ACTC is similar to CTCs. Neither are related to anything in Table A ibid s660)

 In what circumstances is it taxable?

Foreign social security payments are what the UK government call "relevant foreign income". This kind of income is neither exempt under UK domestic law or the UK/US tax treaty, but could be excluded from UK tax for anyone who claims the remittance basis and does not remit that income to the UK.

Sadly the interaction between the two tax systems leads to jargon words like "remittance basis" which are not intended to bamboozle, but demonstrate that these rules are open to interpretation.

Okay, so the consensus is to file MFS for now. And it sounds like when we have kids and lots of income then go the MFJ route?