Help With First US/UK Tax

I've offered to help a friend of mine with his first UK/US tax filing, so I'm hoping someone can outline the basics for me.  His situation is not complicated and I guess it happens to everyone who moves from the US to the UK.  In short, he's a US citizen, but moved to the UK in September with a LTE visa (so is going to be here for some years - maybe longer than that!).  He worked in the US until September and has worked in the UK since then.  UK income has been taxed as PAYE.  Tax and other deductions were withheld from the US income (Jan -Aug) as normal.

So firstly, my understanding is that he doesn't have to file his US tax return until June 15th - as he gets an automatic extension.

Secondly, I've read about FEIE but I'm not sure it applies in this case, since he hasn't been resident in the UK for long - must admit the 330 days in any year to qualify for Physical Presence confuses me slightly, but he's a long way off 330 days anyway.  Am I right in thinking the FEIE can't be applied?  If so, what does this mean in practice?  Will he pay US tax on his first three months income in the UK?  If that's the case, he'll have been double taxed - how is this resolved?

Thirdly, what forms does he need to submit?  1040, 1040NR or both (seeing as he was only partly NR)?  Then there's FBAR - not sure this applies though because his total in the UK is less than $10K.  Anything else.

Not sure whether he'll have to file in the UK (self-assess), unless it's to resolve the double-taxation in the UK, but that can be much later anyway.

Would appreciate any help/advice on his situation.  Thanks.

My son was in a similar position, moving to the UK in September 2017 and starting work a few weeks later. To use the FEIE you have to have been out of the country for 330 days as you say.

When he filed his US taxes he filed for an extension until October 15, 2018. Using TurboTax he then filed his taxes end of September after he had fulfilled the 330 days requirement. He filed electronically and got his tax refund paid into his US bank.  Note that filing an extension is free but you you need to have paid all taxes due, as taxes owed will attract interest charges.

Based on what you say, the individual should easily be able to file much sooner by claiming foreign tax credits for UK tax paid. Forms 1040 & 1116 & Schedule B all come to mind.

My son was in a similar position, moving to the UK in September 2017 and starting work a few weeks later. To use the FEIE you have to have been out of the country for 330 days as you say.

When he filed his US taxes he filed for an extension until October 15, 2018. Using TurboTax he then filed his taxes end of September after he had fulfilled the 330 days requirement. He filed electronically and got his tax refund paid into his US bank.  Note that filing an extension is free but you you need to have paid all taxes due, as taxes owed will attract interest charges.

Thanks - that's very interesting.  I'd read about requesting an extension but hadn't grasped how it worked in practice.  So, if I may delve a little further - the trick is to request an extension to file until you've been in the UK for 330 days?  My friend does have an added complication that he's committed to visiting the US for 3 weeks this summer, so he'd have to aim for a filing date 351 days (330+21) from the day he first arrived in the UK?

Could you also clarify - with regard to the refund, did you mean he got refunded the whole of the US tax paid in 2017 prior to his departure? And if so, was that federal tax and state tax?

And when you say "need to have paid all taxes due", do you mean that you must have already paid (had withheld) the correct amount (by the US equivalent of PAYE?) or does one have to make a payment without filing (like a self-assessment payment on account in the UK?) in order to settle the balance.  Not sure how you'd know how much was due without filing but that's maybe a separate question.

Sorry for the extra questions, but the more I understand, the more I don't understand!

Based on what you say, the individual should easily be able to file much sooner by claiming foreign tax credits for UK tax paid. Forms 1040 & 1116 & Schedule B all come to mind.

Thanks - I hadn't seen your answer before replying to @durhamlad.  So, am I hearing two different approaches here?  I'm trying to get my head around whether they're genuinely different approaches and whether they end up ultimately being the same result.  @durhamlad's seems to be reclaiming all the part year tax paid in the US, but I guess there's no free lunch here, so the tax has to be paid somewhere.  The different tax years in the US and UK isn't helping either!

Thanks - that's very interesting.  I'd read about requesting an extension but hadn't grasped how it worked in practice.  So, if I may delve a little further - the trick is to request an extension to file until you've been in the UK for 330 days?  My friend does have an added complication that he's committed to visiting the US for 3 weeks this summer, so he'd have to aim for a filing date 351 days (330+21) from the day he first arrived in the UK?

Could you also clarify - with regard to the refund, did you mean he got refunded the whole of the US tax paid in 2017 prior to his departure? And if so, was that federal tax and state tax?

And when you say "need to have paid all taxes due", do you mean that you must have already paid (had withheld) the correct amount (by the US equivalent of PAYE?) or does one have to make a payment without filing (like a self-assessment payment on account in the UK?) in order to settle the balance.  Not sure how you'd know how much was due without filing but that's maybe a separate question.

Sorry for the extra questions, but the more I understand, the more I don't understand!

I buy TurboTax for myself and my son every year and use it to estimate and pay taxes. When my son filed for an extension in 2018 (for his 2017 return), through TurboTax he knew exactly how much tax he owed on his 2017 income, he just couldn’t actually file until end of September. If there had not been enough tax withheld from his US pay then he would have sent the balance in with a check when he filed for the extension.

So, the procedure was to set up his tax filing in TurboTax before the normal tax deadline and not click the “submit return” button. Then print off the form to file for an extension and mail it in. As soon as the 330 days had passed he clicked “submit”.

Thanks - I hadn't seen your answer before replying to @durhamlad.  So, am I hearing two different approaches here?  I'm trying to get my head around whether they're genuinely different approaches and whether they end up ultimately being the same result.  @durhamlad's seems to be reclaiming all the part year tax paid in the US, but I guess there's no free lunch here, so the tax has to be paid somewhere.  The different tax years in the US and UK isn't helping either!

I have to file and get tax credits using form 1116 each year because I don’t have earned income in the UK, I have UK pensions etc.

My son uses FEIE because it is very easy to use and he has no other UK income.

I have to file and get tax credits using form 1116 each year because I don’t have earned income in the UK, I have UK pensions etc.

My son uses FEIE because it is very easy to use and he has no other UK income.

Thanks for those explanations.  Forgive me though, I'm now more confused, so I need to get back to basics and ask some pretty basic questions.

In an ideal world, you'd think for a split year, the US would tax the portion spent in the US and the UK would tax the portion spent in the UK.  But I'm guessing things are not as simple as that.  From reading various expat tax websites, there's an implication that taxation for a split year can be reduced and maybe eliminated altogether - don't know if I've mis-read though.

From your first answer, it would appear that if my friend delays filing until he can satisfy the Physical Presence Test, then he can be refunded the whole of the tax deducted in the US for the tax year 2019 (the Jan-Aug period).  Is that correct?  I'm assuming though, that that income has to be taxed somewhere (that would have to be the UK).  So, given that the UK tax year starts in April, what happens to the Jan-March period - that would need to be reported to the UK as income in the 2018-2019 tax year?  And the rest in the 2019-2020 year?

Then there's @guya's answer.  If I understand that correctly, it's saying that the US will want to tax the whole of 2019, but that the tax paid in the UK can be used as credit.  Does this mean that income for the whole of 2019 has to be reported (both US and UK) but that the tax paid in the UK takes care of the UK income, and the tax already withheld in the US takes care of the US income?

In the second case, I'm wondering if there's the complication that the amount of tax paid in the UK might be (eventually) minimal, given that a good portion of the income will be covered by the personal allowance (I'm thinking emergency tax codes, or incorrect tax codes).  Trouble is, this may not become evident until April when there may be a chunk of tax refunded - by which time the tax forms may already have been submitted in the US.  How would one account for the tax rebate in the UK, when that tax has already been used as credit in the US?

Or maybe I've misunderstood completely.

As far as a US citizen is concerned there is really no such thing as a split year in the eyes of the IRS, we are taxed on our worldwide income regardless of where we reside for the whole of every tax year Jan through December.

HMRC recognizes a split year so taxation does not start until you become tax resident in the UK which is often the day you arrive with the intent of becoming resident.

The Double Taxation Agreement (DTA) between the USA and UK is there to ensure that you are not double taxed on your income, but as a UK tax resident then HMRC is the primary taxing authority and foreign  tax credits are used to avoid this double taxation. The FEIE is a simple and useful tool to exclude earned income and if foreign earned income is the only foreign income then it is the easiest way to go,  but  even so, tax pros will advise doing foreign  tax credits as it is possible to carry forward excess foreign credits into future years.

If you decide to use foreign tax credits for the 3 months of earnings  in the UK then I’m not sure how you would estimate UK taxes on that because  of the reasons you mention.

When doing taxes for HMRC if there is any income from the USA after becoming UK resident then an HMRC self assessment must be completed to determine the UK taxes. With the example I gave for my son his situation was simple in that he moved all his income generating US savings to the UK prior to his move back so he hasn’t needed to file a SA with HMRC since he has no foreign income.

The situation for my wife and I is much more complicated so we have to file SA with HMRC and use foreign tax credits for those taxes paid to HMRC  when filing our taxes with the IRS.

In an ideal world, you'd think for a split year, the US would tax the portion spent in the US and the UK would tax the portion spent in the UK.  But I'm guessing things are not as simple as that.  From reading various expat tax websites, there's an implication that taxation for a split year can be reduced and maybe eliminated altogether - don't know if I've mis-read though.

Yes, we do need to go back to basics.

You've stated your friend is a US Citizen. As such, the US will tax all income; derived from anywhere in the world (including UK income), and derived at any time (at all times) during the US tax year. All that income must be declared on their US tax return including all UK income.

You've also stated your friend is now a permanent resident of the UK. As such, the UK has first rights to tax all income derived from anywhere in the world (including the US if on the arising basis) during the UK tax year, for the periods they were a permanent UK resident.

Is this double taxation? Yes, it is. It's the same for any USC resident in the UK.

In order to compensate, the US (second in the cue now that your friend is a UK resident) allows two ways to permit income taxed, or tax paid, by the UK to be offset for the US return - FEIE and FTCs.

I see the durhamlad has responded while I'm typing, so there may be duplication. 

From your first answer, it would appear that if my friend delays filing until he can satisfy the Physical Presence Test, then he can be refunded the whole of the tax deducted in the US for the tax year 2019 (the Jan-Aug period).  Is that correct?

No, absolutely not true.

Does this mean that income for the whole of 2019 has to be reported (both US and UK) but that the tax paid in the UK takes care of the UK income, and the tax already withheld in the US takes care of the US income?

Yes. You've got it!, provided you use the FTC method.

The FEIE - For 2019, as stated many times above, is not allowed until your friend meets the 330 days requirement - so an extension is needed. For 2020 US tax year, it won't be a problem.

FEIE is a simpler way of offsetting UK income for US tax - but it comes at a cost. First, it includes only earned income. Income from UK interest, the sale of assets, etc., can not be taken via FEIE. Second, it slots into a US return prior to the standard deduction and calculation of tax. Therefore, unless the US income plus the UK unearned income is below the standard deduction, the UK unearned income will be taxed by the US. Given that scenario, it may mean whilst the interest may be tax free in the UK, it is taxed by the US. Third, there is at least one deduction allowed on a US tax return which is not allowed if the FEIE is used.

FEIE requires a foreign residence test.

FTC is more complicated, but overall, it is superior in protecting the taxpayer against double taxation of UK income. All tax paid in the UK against US equivalent income will offset any tax due the US on the same income. The allowance is made after the standard deduction and tax calculation has been made. It gives a one to one offset against US tax. By using the passive basket as well as the general basket, tax on any UK interest can be offset. The UK tax rate is higher than the US rate. All normal deductions as allowed on a US return are allowed when using FTC.

FTC requires NO foreign residence test. This is why, along with the carryover/back excess tax ability, guya suggested your friend use the superior FTC route. A more complicated form, but a much cleaner solution.

I'll leave it to durhamlad to explain the extensions involved with FEIE during the first tax year. I'll only add that if using the FTC any UK tax paid during Sept. to 31 Dec., 2019 to HMRC can be used for FTCs for US 2019 tax year on a 1116. It has nothing to do with the estimated 2019/20 UK tax year total.

@OAP

Great reply, and I was wondering about one question the OP made. How does one calculate the UK tax made for the FTC? His friend will only have earned UK income for 3 months so how much UK tax could that be unless he is earning a large amount. When my son returned end of September he got a job by mid October earning about £25k/year. By the end of the UK tax year, April 5th he actually paid no HMRC tax because his income in those few months was below the personal allowance.

If the person in question by the OP had earned £20k by April 5th, (6 months earnings from his arrival September the previous year) does one take the UK tax paid by April 5th and divide it by 2?
Also, the UK tax paid for those 3 months of UK earnings may well be less than the US tax paid because those 3 months of UK earnings would  all be taxed at the OP’s US marginal rate of tax.

I was wondering about one question the OP made. How does one calculate the UK tax made for the FTC? His friend will only have earned UK income for 3 months so how much UK tax could that be unless he is earning a large amount. When my son returned end of September he got a job by mid October earning about £25k/year. By the end of the UK tax year, April 5th he actually paid no HMRC tax because his income in those few months was below the personal allowance.

Yes, I did try to give a simplified answer for the benefit of the OP, but unfortunately we both know there are always a number of if's, but's, what if's, circumstances, not always, exceptions to the rule, and on and on.

If the OPs friend has not earned enough UK income by 5 April 2020 to pay any UK tax, due to the personal allowance, then the only and right solution is to use the FEIE, wait for the 330 days, and then file. No contest.

If they have paid a very minimal amount of UK tax, but would owe the US tax on some of the UK income, they would be best using the FEIE, waiting the 330 days, and then file. No contest.

As is always said,........always, always do a comparative analysis by calculating US tax both by the FEIE method and by the FTC method unless you're absolutely certain of a slam dunk no UK tax paid position.

If the friend does end up paying sufficient UK tax, they will know or can easily calculate their final position come 6 April 2020 for the UK 2019/20 tax year. If they have taken your advice and used TurboTax, for FTC simply adjust any 1116 figure in TT to reflect the actual amounts and/or the balanced (prorated) amounts pertaining to income received in 2019, giving an amount due to the US for the 2019 tax year. As long as they remit any tax due as a result of 1 Jan. 2019 to 31 Dec. 2019 by 15 April 2020, they will be protected from additional interest amounts.

If the person in question by the OP had earned £20k by April 5th, (6 months earnings from his arrival September the previous year) does one take the UK tax paid by April 5th and divide it by 2?

No, for FTC you may only offset UK tax actually paid during the US tax year (Sept to Dec). If HMRC had been collecting on an emergency basis starting in Sept., the tax code should have been adjusted at some point and by 5 April 2020, an accurate tax amount for the Sept to Apr period should have been collected (please note my liberal usage of the word 'should'). At this point, the taxpayer may wish to 'apportion' amounts for Sept to Dec for the US return. The following is my opinion - If the amounts are smaller than the actual tax paid during those months, they could use the new, smaller figures (to avoid any need for a 1040X if HMRC give a refund instead of adjusting the tax code). Use the excess amount for 2020. (NOTE: The pros may well disagree with my comment and instead say report the actual amounts paid only for each year, and then use excess credits from 2019 to make up for any loss, if needed, for 2020, and file a 1040X for 2019 if a refund is due come 6 April 2020.)

Also, the UK tax paid for those 3 months of UK earnings may well be less than the US tax paid because those 3 months of UK earnings would  all be taxed at the OP’s US marginal rate of tax.

Yes, no argument there. In the world of dual US/UK tax reporting, anything is possible. If the US income were high, it may well be a problem. But, if using FEIE for the UK income, and given a high US income situation, don't forget the stacking rule. It could take you into an equally higher marginal rate similar to that of the FTC method.

Thanks everyone for those replies, it's much appreciated.  There's a lot of detail there, and it's going to take my a while to fully digest, so I may be back in a bit to ask more questions.  Sounds like FTC is the way to go but I need to get more info about income from my friend.  Of course they may not want to share that much so all I'll be able say is "file this and this and this".  There's no complicated income from the UK as far as I understand - no savings interest, no ISAs, no capital gains or dividends, etc.  The one simple question I have is: should he file a 1040 or a 1040NR?

Thanks everyone for those replies, it's much appreciated.  There's a lot of detail there, and it's going to take my a while to fully digest, so I may be back in a bit to ask more questions.  Sounds like FTC is the way to go but I need to get more info about income from my friend.  Of course they may not want to share that much so all I'll be able say is "file this and this and this".  There's no complicated income from the UK as far as I understand - no savings interest, no ISAs, no capital gains or dividends, etc.  The one simple question I have is: should he file a 1040 or a 1040NR?

Being a US citizen he cannot use 1040NR which is for a Non Resident Alien. As a USC he is always considered tax resident in the US no matter where he lives.

Being a US citizen he cannot use 1040NR which is for a Non Resident Alien. As a USC he is always considered tax resident in the US no matter where he lives.

So, in terms of forms, he should file a 1040 and 1116?  @guya mentioned Schedule B - what exactly is that? Is it a separate form or another part of one of the two mentioned?