Whom do I owe for US-based income?

These are tax questions I asked earlier but because I muddled them up with spouse visa questions, they weren't answered. I'd also appreciate referrals. Thanks!

QUESTIONS
1.   At what point do I start paying UK sole trader taxes? Should I register as a sole trader on the HMRC site from that date? I arrived in late September 2019.

2.   Do I have to pay UK taxes on our US-based rental income and mutual fund dividends, if they are included in our US tax returns? For US tax purposes, I qualify for the foreign income tax exclusion in 2020 because I am domiciled in the UK. My husband will not because he had to return to the States to work.

3.   Do I treat the income I receive in the US and transfer to the UK as UK sole trader income for tax purposes and pay UK tax on that? My freelance clients pay me in USD in the US-based account, but this income was earned while resident in the UK.

4.   I want to change to a Transferwise borderless account for my income, which basically gives me a US bank account number and a UK account number in one “borderless account”. My husband’s US-based income would go to our US current account. Would this arrangement better facilitate my paying taxes in the UK than how we’re currently mixing UK-based & US-based income?

Thank you so much!

I can't answer your sole trader questions.

For 2), UK taxes on worldwide income so US rental income will be taxed I believe whether or not they are included in your US tax return. You would claim foreign tax credits on your US return to avoid double taxation. I'm not sure you will be able to exclude your UK income if it is not earned from an employer, in which case you would again take foreign tax credits. I say this because when my son excludes his UK earned income it appears on the 1040 where W2 income would be entered. Also, if you have other foreign income other than earned income then foreign tax credits are the only way to recover those taxes, and I don't think you can take foreign tax credits AND exclude foreign earned income (it is either form 2555 or 1116). I have to take foreign tax credits to recover taxes paid to HMRC on my UK pensions. Foreign tax credits definitely give more flexibility and you can carry unused tax credits forward.

For 4) I don't think it matters.  We have a UK and a US bank account, use our UK bank account to pay our UK taxes and US bank account to pay our US taxes.

Thanks! Yeah, I'm reading the tax treaty, and apparently, HMRC can tax foreign rent. They only have a public forum to ask questions, which makes me nervous.

Thanks! Yeah, I'm reading the tax treaty, and apparently, HMRC can tax foreign rent. They only have a public forum to ask questions, which makes me nervous.

For the first few years we lived in the USA the IRS taxed us on our UK rental home so figured that would be the same the other way round. One strange thing for us coming up in the next year or 2 is that we will both start drawing SS and OAP (UK version of SS). The UK taxes on both OAP and SS, the US taxes on OAP but not on SS, that is only taxed in the UK as per the treaty.

You should only pay tax on your income in one place. If the income originates in the US, then you should get a credit for taxes paid to the US when you file your UK return. For the income earned in the UK, that can be excluded from your income (capped at a certain amount) on your US return if you are a resident of the UK. 

For any questions, feel free to send me a message.

You should only pay tax on your income in one place. If the income originates in the US, then you should get a credit for taxes paid to the US when you file your UK return. For the income earned in the UK, that can be excluded from your income (capped at a certain amount) on your US return if you are a resident of the UK. 

For any questions, feel free to send me a message.

Maybe the OP's situation is different but I'm not convinced that what you say above is always the case.  I am a USC living in the UK and have income originating in the US in the form of private pensions, dividends, cap gains and interest. I pay HMRC taxes on all that US sourced income.  When filing my US return I claim foreign tax credits for the taxes on that income using form 1116 with the US income marked on the form as "Resourced By Treaty".  I use a dual US/UK qualified tax accounting firm in London.

Maybe the OP's situation is different but I'm not convinced that what you say above is always the case.  I am a USC living in the UK and have income originating in the US in the form of private pensions, dividends, cap gains and interest. I pay HMRC taxes on all that US sourced income.  When filing my US return I claim foreign tax credits for the taxes on that income using form 1116 with the US income marked on the form as "Resourced By Treaty".  I use a dual US/UK qualified tax accounting firm in London.

The foreign tax credit is only for income from foreign sources. For income from US sources, the tax is supposed to be paid in the US while the credit is taken on your UK return. I cannot speak for whomever prepares your return, but the timing on the tax depends on where it is earned.

I work with UK accountants when they ask me to prepare US tax returns for their clients and they verified their laws regarding the same issue you are referring to.

There are some exceptions, but each case is different.

The foreign tax credit is only for income from foreign sources. For income from US sources, the tax is supposed to be paid in the US while the credit is taken on your UK return. I cannot speak for whomever prepares your return, but the timing on the tax depends on where it is earned.

I work with UK accountants when they ask me to prepare US tax returns for their clients and they verified their laws regarding the same issue you are referring to.

If the IRS looks at your return and wonders why there are foreign taxes credits on US-sourced income, I don't think that's a battle that you can win.

The DTA states that the U.K. is the primary taxation authority for USCs living in the U.K.  That is why  the IRS form 1116 has the “Resourced by Treaty” option. Why is this an option if US income is only supposed to be taxed in the US and never  in another country. Where in the DTA does it state that income derived in the USA is only taxable in the USA if the recipient is living in the U.K.?

https://www.irs.gov/pub/irs-trty/uk.pdf

So far we have filed 4 US returns like this and no inquiries yet by the IRS.

On Form 1116, it says 'Income From Sources Outside the United States'. Also, some income can be re-sourced from a tax treaty. I apologize, I misread what you wrote originally.

The overall tax shouldn't change regardless of which method you choose. However, I think it's safer to pay taxes where the income originates.

The IRS looks at less than 1% of tax returns. Just because they haven't looked at it yet, it doesn't mean it's okay. Your accountants may be doing everything correctly, but I report taxes paid depending on where the income is earned. I work with several UK firms and we all think that's the safest way to file.

On Form 1116, it says 'Income From Sources Outside the United States'. Also, some income can be re-sourced from a tax treaty. I apologize, I misread what you wrote originally.

The overall tax shouldn't change regardless of which method you choose. However, I think it's safer to pay taxes where the income originates.

The IRS looks at less than 1% of tax returns. Just because they haven't looked at it yet, it doesn't mean it's okay. Your accountants may be doing everything correctly, but I report taxes paid depending on where the income is earned. I work with several UK firms and we all think that's the safest way to file.

 I’m still interested  where in the treaty it says that the U.K. is not entitled to tax US sourced income for a resident living in the U.K.  My main sources of income come from US private pensions and US SS,. Article 17 in the treaty seems to clearly state that the pensions  should be taxed in the U.K. 

Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.

I’m still interested  where in the treaty it says that the U.K. is not entitled to tax US sourced income for a resident living in the U.K.  My main sources of income come from US private pensions and US SS,. Article 17 in the treaty seems to clearly state that the pensions  should be taxed in the U.K.

I never said anything about the treaty.

If you are wondering about what is in the entire treaty, feel free to read the whole thing and report your findings.

I never said anything about the treaty.

If you are wondering about what is in the entire treaty, feel free to read the whole thing and report your findings.

The treaty exists to determine which country taxes which stream of income so it is extremely important.

I have read the treaty many times and discussed it here with others. Just like the excerpt above on pensions it says that HMRC is the primary taxing authority for most income originating in the USA including private pensions, IRA withdrawals, and annuities for tax residents living in the U.K.

US government pensions, federal and State, are only taxed by the US, not taxed at all by HMRC. Roth withdrawals are tax free in both countries. Social security is not taxed at by the US, only by HMRC. This is a bit of a pain on the 1040 because you enter negative “Other income” to exactly offset the SS that appears  fully taxable on the 1040 and have to file a treaty exemption on IRS form 8833 to explain the reversal.

These are all the things that pertain to my situation. The OP has a different scenario, and that also is covered in the treaty.

The treaty exists to determine which country taxes which stream of income so it is extremely important.

I have read the treaty many times and discussed it here with others. Just like the excerpt above on pensions it says that HMRC is the primary taxing authority for most income originating in the USA including private pensions, IRA withdrawals, and annuities for tax residents living in the U.K.

US government pensions, federal and State, are only taxed by the US, not taxed at all by HMRC. Roth withdrawals are tax free in both countries. Social security is not taxed at by the US, only by HMRC. This is a bit of a pain on the 1040 because you enter negative “Other income” to exactly offset the SS that appears  fully taxable on the 1040 and have to file a treaty exemption on IRS form 8833 to explain the reversal.

These are all the things that pertain to my situation. The OP has a different scenario, and that also is covered in the treaty.

I too have read the DTA many times and totally agree with Durhamlad.

Perhaps Bobcpa should have a glance through it and let us know his thoughts.

You should only pay tax on your income in one place. If the income originates in the US, then you should get a credit for taxes paid to the US when you file your UK return. For the income earned in the UK, that can be excluded from your income (capped at a certain amount) on your US return if you are a resident of the UK. 

For any questions, feel free to send me a message.

This statement reads very confusingly. The OP is UK resident. The UK has the right to charge tax on worldwide income and gains.  The UK gives a credit for US tax only on doubly taxed income that cannot be resourced under Article 24 of the US/UK treaty.  Please do not confuse the OP who has a genuine question.

You are alluding - although it unclear why - to the OP electing to claim the foreign earned income exclusion. This election frequently does not produce the optimum result.

These are tax questions I asked earlier but because I muddled them up with spouse visa questions, they weren't answered. I'd also appreciate referrals. Thanks!

QUESTIONS
1.   At what point do I start paying UK sole trader taxes? Should I register as a sole trader on the HMRC site from that date? I arrived in late September 2019.

2.   Do I have to pay UK taxes on our US-based rental income and mutual fund dividends, if they are included in our US tax returns? For US tax purposes, I qualify for the foreign income tax exclusion in 2020 because I am domiciled in the UK. My husband will not because he had to return to the States to work.

3.   Do I treat the income I receive in the US and transfer to the UK as UK sole trader income for tax purposes and pay UK tax on that? My freelance clients pay me in USD in the US-based account, but this income was earned while resident in the UK.

4.   I want to change to a Transferwise borderless account for my income, which basically gives me a US bank account number and a UK account number in one “borderless account”. My husband’s US-based income would go to our US current account. Would this arrangement better facilitate my paying taxes in the UK than how we’re currently mixing UK-based & US-based income?

Thank you so much!

1. Ideally you would have registered for self-assessment and paid some UK tax on business profits to HMRC by 31 December 2019 so you had foreign tax credits to claim in 2019.  The statutory deadline for registration is 5 October 2020. If you have not done this already, you will want to do so now.
2. The US has the primary right to charge US tax on US source rental profits. After claiming normal expenses and depreciation it is unusual to owe tax to the US.  The UK will charge UK tax on US source mutual funds dividends, giving a credit for US tax paid up to the 15% rate set out in the treaty.
3. The income you describe forms part of the profits from your UK based business. The business activities are reported to the IRS on Schedule C plus Forms 1116 and 8858.
4. Unless - very unusually - you and/or your husband are electing to claim the remittance basis, the UK has the right to charge tax on worldwide income and gains.  Using TransferWise - a UK based bank to receive worldwide income & gains- would mean you will have remitted all of the income and gains to the UK eliminating any chance to elect to claim the remittance basis.