Should I file tax - I've never lived in the US and I have no assets in the US

To cut to the chase:

Son of US citizen and UK citizen - hold dual nationality
Born in Norway
Have never lived in US. No family or assets there.
Was holding US citizenship in case it would help my children but this would not appear to be the case. I have always felt privileged to have inherited my US citizen from my mother, but I have never needed to use it, except for a work America stint in 1994.

Have no intention of working or living in the States but may want to visit for holidays in the future

Am capable of filling in forms. I guess it's the streamlined process that is daunting me (suddenly an 8398 has joined the ever drowning list!). An FBAR and a 1040 a year for the rest of my life... I can handle.

Thank you all of you. I hope that clarifies.
Josh

Thank you for the update, Josh. It gives us a better idea of your exact situation. I'll take your reply as an indication you wish to retain US citizenship and to file with the IRS. Great, now we know how to proceed.

robnw has given you an excellent outline of what to do. As you've already discovered, you'll likely need to start with the Streamlined Foreign Offshore Procedure along with filing 6 years of past FBARs. You can download the appropriate forms for each past year from the IRS site. Using a 2015 form for all years will not work, the tax laws change yearly.

When filing, as RW has pointed out, you'll need to be very aware of your types of savings, investments, and pensions. There are no restrictions on any of these when filing a US return, but some come with punitive filing requirements. You'll need to understand what those requirements are. It may also have consequences as to how you treat these savings, investments, and pensions in the future.

The "basic" pack for anyone filing from the UK consists of the 1040, a schedule B (simple to complete), either a form 1116 of form 2555 or both, and form 8965 to avoid penalties for not having US health insurance (again, simple). Depending on other sources of income or amounts of assets, you may have additional forms such as 8938 to file every year.

You will want to learn more about what "a 1040 a year" means. The tax systems of the US and the US have some major misalignments which are not relieved by the UK-US taxation convention. For example, the UK allows you to sell your principal residence without payment of any capital gains tax. This can leave you with a US capital gains tax liability - which is apparently what has outraged London Mayor, Boris Johnson. Pensions and UK tax free savings, like ISAs, can also create complications. The 1040 form is just two pages, but other forms which accompany the 1040 can, in some cases, run to over 100 pages.

Also US PFIC rules mean that you must avoid buying UK investments funds like unit trusts and ETFs. Endowment policies and some insurance policies can also be problematic.

The OP might wait a year as there'll be a regime change. BO can't mention us without saying tax evader in the same sentence. If a Republican wins and controls congress, there could be significant changes to tax laws that affect us. If a Democrat wins, at least it will be someone new. Bernie Sanders' brother lives in London so at least he'd be aware of our problems.

Like you hinted to, I think of the candidates for President Hillary Clinton will be the least favorable when it comes to expats and taxes.

Bernie Sanders' brother lives in London so at least he'd be aware of our problems.

Larry Sanders is 81 years old and has lived in the UK since 1968. Yes, he should know how US tax affects expats  - especially as he is also a politician. There is an interesting report about how he responded to a question at a London meeting recently.  Asked, "Have you spoken to your brother of this matter? When will he express his stance on addressing the problems that citizenship-based taxation is causing for the little guy overseas?”

His response (as well as I remember):  “Well, I tend to take the simplest approach to those things and just ignore it all [audience laughs for 10 seconds]. No, but that’s bad tax advice. Seriously, it’s not something I have discussed with Bernard. I will try to remember to bring it up and ask him about it for you, if I can.”

You can read more here:

OK, I'm going for it!
1040, 1116 and 2225-ez for 2012 to 2015 downloaded.

Following Rob's helpful route - pay slips, bank accs, etc...

Does the Streamlined Foreign Offshore Procedures require a form as well, or do I just fill in all of these and add a statement explaining that I just found out that I should be filling them in?

OK, I'm going for it!
1040, 1116 and 2225-ez for 2012 to 2015 downloaded.

Following Rob's helpful route - pay slips, bank accs, etc...

Does the Streamlined Foreign Offshore Procedures require a form as well, or do I just fill in all of these and add a statement explaining that I just found out that I should be filling them in?

Since you're new to filing a US return, we'll try and walk you through some of the basics.

Start with the Streamlined programme itself. If you've not already found the following, here's the overall view:
https://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures

And, the specifics for the Foreign Offshore returns:
https://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

It's assumed, given your NRA spouse, that you will want to file as "married filing separate". There is no need to drag your spouse into US reporting and by her not reporting to the US, your family will have significant opportunities to save and invest which may be denied you as a US Person. You may also want to explore filing HOH instead (Head of Household) to see if you qualify.

Having the 1040 for all 3 years is correct. As for the 2555EZ and 1116, check the restrictions for those filing the "EZ" version of 2555 and make sure you meet those restrictions. The 2555 is for "earned income" only. It excludes earned income up to the limit, but income such as benefits (child tax credits, job seekers allowance, etc.) or interest from bank accounts, dividends, etc. can not be included on 2555.

It's possible to need both a 2555 and a 1116 (your salary is over the 2555 limit for example), but in certain circumstances only. If your unearned in come is below the total of the personal exemption plus the standard deduction, then you may want to skip 1116. On the other hand, if you have "unearned" income on which you paid UK income tax, then using 1116 may help build up excess credits for future (or 1 past) years. Be aware of the different "baskets" and their meanings for 1116.

You'll also need a Schedule B for all years, paying attention to Part III.

For 2014, you'll also need a 8965.

Do you have any other income/investment types ? Stocks and Shares ISA? Personal pension other than a defined benefit pension with an employer? Any "pooled" funds? Any shares in a company? Have you sold a house in the last 3 years? Have you closed a mortgage in the last 3 years? Specified foreign accounts totalling over $200,000 (includes bank accounts, pensions, etc.)? (The list goes on, and others may add to it.) If so, you may need additional forms.

Lastly, FBAR (FinCIN 114). This is filed separately to your income tax return and is an "information" form required by the US Treasury. Does the aggregate value (total) of all accounts which you have signature authority over (including many pensions, bank accounts, employers accounts, local boy scout troop, etc.), using the highest amount at any one time in each account during the year as a factor, total more than $10,000 (using the Dec. 31 Treasury rate as the exchange rate)? If so, you must file a FinCIN 114. It is filed online from the Financial Crimes Enforcement Network site.
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

I'll leave it at that. I'm sure some may want to add more and I invite their corrections if I have any of this wrong.

 

That's a good summary in the post immediately above. In filing the Streamlined Foreign Offshore there is one other special form you will need, Form 14653. There is a more information about finding and completing this form on a previous thread: http://talk.uk-yankee.com/index.php?topic=85325.0

At the top of each of your three years of tax returns you are requested to write "Streamlined Foreign Offshore" in red to indicate that the returns are being submitted under these procedures.

One other big one, are you self-employed?

Employed by local government authority.

This whole thing is making me queasy. How on earth does the average person do this? It's absolutely crazy!
OAP - thanks.

Employed by local government authority.

This whole thing is making me queasy. How on earth does the average person do this? It's absolutely crazy!
OAP - thanks.

The average person in the United States buys specialist software (eg TurboTax). The average person outside the United States does not know yet that s/he is required to file.

I can certainly understand "queasy". This is typical, except for those, who as guya says, do "not know yet that s/he is required to file."

One of the professional tax preparers who contributes to the Facebook group "US Expat Tax Questions" writes, "I always recommend my clients to try to do it themselves first." He recommends TaxAct.  If you are pretty good with reading, numbers, installing and running computer software, and your sources of income are fairly simple, this might be the way to go.

TaxAct has some versions that you can use online in a Q&A format. But I think it is easier to work directly with the forms. To do that you can buy the $29.95 "Plus" download version of TaxAct to install on a PC. You will find it has all the forms you need, ready to fill in (1040, B, 1116, 2555, 8965, possibly 8938), and other forms mentioned by forum members above. The TaxAct program includes all the form instructions.

Start by finding records of all your sources of income for the calendar year, say 2015, and converting them to dollars. This may mean going back through your month payslips and bank statements. You can use the IRS year average exchange rate found here https://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates.

Now fire up TaxAct and fill in your general information (name, address, etc). Next create a W2 for your wages, say £30,000 (before deduction of any tax or national insurance). TaxAct will insert the right numbers on line 7 of your 1040. You can then exclude this earned income from US tax using 2555, or or take a tax credit for your UK tax paid using a 1116 general (1116 Worksheet - manual entry). If you also have, say, £100 gross bank interest in 2015 and you are taxed at 20% in the UK, you put this in a worksheet called 1099-INT. It will then automatically show up correctly in Part I of schedule B and line 8a of the 1040. You can then take a tax credit for the £20 UK tax which you have paid by selecting a Form 1116 worksheet for 1099-INT, and this will create the appropriate Form 1116 passive, and put a tax credit on line 48 of the 1040. Alternatively, you can just ignore this Form 1116 if you think taking a small tax credit is not be worth the candle. You would do similarly for interest from a cash ISA, except that you will not be able to take a tax credit.

The first time around there will be overhead in reading and learning how to complete  these forms, and deciding which ones you need. If your sister's circumstances are similar to yours, maybe she would let you see her returns, and you can learn a lot from that as an example. Dividends, buy-to-let income, income from UK investment funds, capital gains, ... will require additional forms. One possible strategy is to hire an well-qualified accountant to do it for you. At the end of the first year you can decide whether you could do it yourself in subsequent years.

It helps to keep very good records throughout the year. Keep a spreadsheet, and update it each time you receive any income (end of month pay, bank interest, etc), making a record of any UK withholding tax that has been deducted.

You asked about finding forms for years other than 2015 so you can prepare for 3 years of tax returns for streamlined. Try googling "1040 2012", for example. You will find it. Also TaxAct lets you buy previous years' programs, which will then compute the right tax, exemption amount, etc, for that year. If I were you, I would start by doing the 2015 return (not for streamlined), and once you have learned how to do that, then go back and do the 2012,13,14 (for streamlined).

Long term, you will want to decide whether or not you want to keep US citizenship and continue making US tax returns for the rest of your life. Some people have written that coming into compliance is not really the problem - it is remaining in compliance that is the problem. This includes the annual hassle of filing US taxes, and accepting the fact that you cannot benefit from those things from which ordinary sole-UK taxpayers benefit - such as the annual tax free £1000 interest, £5000 dividends and £11000 capital gains allowances, inability to invest in UK funds, filing returns about gifts to a non-US spouse, etc. ...

I'd also recommend TaxACT. I have used TurboTax for the past 10 years and it works well. But it is getting expensive, $80 for me this year, so I tried out TaxACT and found it to be just as easy to navigate as TurboTax and about a third of the price. It also has a better way to check out the actual forms.

If you are finding the whole US tax compliance issue a troubling worry and you don't really need the US citizenship than I'd look into renouncing. It's not cheap, but it will make your life a whole lot easier and allow you to fully benefit from UK tax and financial products.

Thanks for such a clear and helpful response RW, and all of you guys. It is very daunting, which is a surprise for me as I've just completed my Mum's probate and inheritance forms myself with few issues, but I really can't believe the time and commitment you are giving to support me. It's really appreciated. Thanks.

So I have the 1040, 1116 and 2555ez for the last four years and I think that, as suggested, I'll start with 2015 and work backwards. I'll try without a tax program first, although it sounds like the computer knows better than I what to do!

May I ask, what's the difference between 1116 and 2555ez (2555ez rather than 2555 as I live in my own, mortgaged home). Do I use one, or both? I have no ISAs, no shares, no rental properties, neglibable interest earned on bank accounts (I've put all my savings into an account offsetting my mortgage so it reduces mortgage interest rather than earning interest itself), and no other sources of income beyond my salary, although I have just received a one-off lump sum (approx £33,000) from an assurance in trust left to me by my mum.

Read at the top of Form 2555EZ, where it explains who can use it. It sounds as though you can. It might be worth using Form 1116 instead if you would like to build up a record of tax credits, which accrue when you have paid more UK tax than is your US tax liability. For some people these tax credits can be helpful in reducing US tax in later life. But you might not want to bother - especially if you are thinking to renounce. Just exclude all your earned income using 2555EZ.

I think I will let others help with regard to the offset account mortgage and whether or not the interest you receive is taxable and whether your mortgage interest payments are deductible. (Please note that I am a Neophyte on this forum. There are others with the rank of Guru.)

If it is a repayment mortgage there can be issues due to exchange rates fluctuations. Imagine you took out a £100,000 mortgage when the exchange rate was $1.50 per £1. The IRS view this as you having borrowed $150,000. If at some future date you pay off £10,000 of the mortgage, and the exchange rate is $1.40 then the IRS think you retired $15,000 of mortgage for a cost of only $14,000. So you "made" a gain of $1,000, and that is US taxable. Crazy, no? There is potential here for a lot of complicated month-by-month calculations that will not actually affect your US tax liability by more than a few dollars.

That's a good summary in the post immediately above. In filing the Streamlined Foreign Offshore there is one other special form you will need, Form 14653. There is a more information about finding and completing this form on a previous thread: http://talk.uk-yankee.com/index.php?topic=85325.0

I don't know whether you've noticed yet or not, but a new post has come up on the IBS site. It relates to new IRS information (Jan. 2016) for form 14653. More can be found here:

http://blogs.angloinfo.com/us-tax/2016/02/17/streamlined-foreign-offshore-latest-scoop/