Frequently Asked Questions
Q: Do I need to file a US return?
If you are a U.S citizen or resident alien (green-card holder), then you are by definition a US taxpayer and may be required to file a US tax or information return, even when you are not living in the US. Generally, you must file a Form 1040 tax return for TY 2021 if your gross income from worldwide sources is above your filing threshold. Your filing threshold is determined by your “filing status” which appears on your tax return and is generally determined by your marital/family situation. The threshold for single US taxpayers is $12,550. For US taxpayers married to US persons and filing jointly their filing threshold is $25,100. For US taxpayers not filing with their US spouse or if married to an NRA (non-resident alien) the threshold is only $5. If your earnings are above your threshold then you must file a return.
A US taxpayer may also be required to file an annual Foreign Bank Account Report (FBAR). The FBAR needs to be reported if the US person’s foreign bank and financial accounts, that they either own or control, exceed $10,000 in aggregate value at any time during the year.
A US taxpayer may also be required to file an annual Foreign Bank Account Report (FBAR). The FBAR needs to be reported if the US person’s foreign bank and financial accounts, that they either own or control, exceed $10,000 in aggregate value at any time during the year.
Q: I have forgotten to file a return for a few years, what do I do?
In many situations like these you can use the IRS “Streamlined” procedures to catch up, correct prior year returns or start filing US returns for the first time, while minimising your exposure to potential penalties. It is important to deal with these issues promptly and before the IRS approaches you first. Please see our Streamlined page for more information or contact us to discuss.
Q: I recently found out I am a US citizen and have never filed a US return, what do I do?
In many situations like these you can use the IRS “Streamlined” procedures to catch up, correct prior year returns or start filing US returns for the first time, while minimising your exposure to potential penalties. It is important to deal with these issues promptly and before the IRS approaches you first. Please see our Streamlined page for more information or contact us to discuss.
Q: I didn’t report my worldwide income on my US returns since living overseas, what do I do?
In many situations like these you can use the IRS “Streamlined” procedures to catch up, correct prior year returns or start filing US returns for the first time, while minimising your exposure to potential penalties. It is important to deal with these issues promptly and before the IRS approaches you first. Please see our Streamlined page for more information or contact us to discuss.
Q: I do not have any bank accounts that contained more than $10,000 in a year, do I need to file an FBAR?
You are required to file an FBAR if the aggregate value of all foreign bank and financial accounts that you own or have a financial interest in exceeds $10,000 at any one time during the year, so you may need to file an FBAR even if none of your individual accounts contained more than $10,000. Remember that non-US pensions, ISAs and other savings products, and some insurance policies can be considered “financial accounts” for the purposes of FBAR reporting. See our FBAR & FATCA page for more information.
Q: What are the deadlines to file US tax returns and FBARs?
18 April 2022 – Tax payment and first Form 1040 filing deadline.
15 June 2022 – Automatic extended Form 1040 filing date for taxpayers living abroad. Form 4868 extension deadline for taxpayers living abroad.
17 October 2022 – Form 1040 filing deadline if Form 4868 extension filed. Final deadline for the 2020 FBAR to be filed.
Mid-November 2022 – Suspension of the e-file system.
15 December 2022 – Potential final filing deadline if special extension requested for taxpayers outside the US.
15 June 2022 – Automatic extended Form 1040 filing date for taxpayers living abroad. Form 4868 extension deadline for taxpayers living abroad.
17 October 2022 – Form 1040 filing deadline if Form 4868 extension filed. Final deadline for the 2020 FBAR to be filed.
Mid-November 2022 – Suspension of the e-file system.
15 December 2022 – Potential final filing deadline if special extension requested for taxpayers outside the US.
Q: Why do I have to file US tax returns if there is a US/UK tax treaty?
The US/UK tax treaty is used to mitigate double taxation, not remove the requirement to comply with both country’s tax laws. It generally determines which country (or “contracting state”) has the first taxing rights on various types of income according to where individuals and companies are resident, and provides for the other country to allow a tax credit to prevent double taxation. It also includes “tie-breaker” rules for deciding residence if a taxpayer is considered resident in both countries. The treaty also does not cover every situation or type of tax. Reading one part of the treaty in isolation can be misleading as the treaty contains a “savings clause” that states that the US generally has the right to tax its citizens as if the rest of the treaty had not come into effect.
Q: I am a US citizen working in the UK on a UK payroll. Will I owe tax to the US on my earnings as well?
As a UK resident US taxpayer, you will generally not owe tax to the IRS on the wages you earn in the UK, either because of the “Foreign Earned Income Exclusion” or simply because the UK’s tax rates are generally higher than those in the US. For example, if you have a UK salary you will normally pay PAYE withholding tax, which can be claimed as “foreign tax credits” on your US tax return against your potential US liability. Since UK rates are on average higher than US tax rates, it is unlikely you will owe US tax on this income (see Your US Tax Liability).
Q: Am I going to be double taxed?
One of the main reasons to use a tax adviser specialising in both US and UK tax is to minimise the amount you may be taxed twice on the same income. US tax law contains complex rules for allowing credits for foreign taxes paid to offset the US tax that would otherwise be due. The system works well for many types of income, however there are also many situations where taxpayers can find themselves paying more than expected (to the US or the UK). This is especially true in connection with investment income as some types of income will be tax-free in one country but not the other. For example, gambling income is tax exempt in the UK, but not in the US, and US municipal bond interest is tax exempt in the US, but not in the UK. This is not double taxation as such, but rules such as these often catch taxpayers out.
Also, both countries have anti-avoidance rules that can affect ordinary investment activities for residents of the other country (the US “Passive Foreign Investment Company” (PFIC) or the UK “Offshore Fund” rules). Please see our pages for more information about PFICs and Offshore Income Gains. These regimes often lead to unexpected tax problems and domestic US or UK investment and tax advisers may not even be aware that these rules exist. We can work with your financial advisers to help navigate these issues.
Also, both countries have anti-avoidance rules that can affect ordinary investment activities for residents of the other country (the US “Passive Foreign Investment Company” (PFIC) or the UK “Offshore Fund” rules). Please see our pages for more information about PFICs and Offshore Income Gains. These regimes often lead to unexpected tax problems and domestic US or UK investment and tax advisers may not even be aware that these rules exist. We can work with your financial advisers to help navigate these issues.
Q: I only have wages less than the Foreign Earned Income Exclusion – do I still have to file a US return?
In short, yes. The Foreign Earned Income Exclusion (FEIE) needs to be claimed on a tax return in order to apply.
Q: Will I owe tax if/when my wages start to exceed $100,000?
Even those earning substantial amounts won’t necessarily owe US tax. This is because you can use Foreign Tax Credits alongside or as an alternative to the FEIE. If your foreign income is above the FEIE amount ($108,700), you can still offset the US tax liability on this income by obtaining a credit for tax that you have paid to a foreign government. (see Your US Tax Liability)
Q: Am I going to have to pay tax to the IRS if I sell my home?
Please see the separate page for more information about the US and UK tax consequences of selling your home.
Q: My children are also US citizens, do they need to file returns?
There is no minimum age for filing a US tax return or FBAR. This means if your children meet the requirements then they will be required to file a US tax return or FBAR.
Filing requirements for dependents are very complicated and depend on multiple factors, such as their earned and unearned income and marital status. If your child qualifies as a dependent (See the IRS definition of Dependents) then they may need to file a tax return if their unearned income exceeds $1,100. Up to a certain level, it is possible to elect to include their income on your (the parent’s) tax return rather than their filing a whole return themselves.
FBAR filing requirement does not depend on age, so US children may still be required to annually file an FBAR
Filing requirements for dependents are very complicated and depend on multiple factors, such as their earned and unearned income and marital status. If your child qualifies as a dependent (See the IRS definition of Dependents) then they may need to file a tax return if their unearned income exceeds $1,100. Up to a certain level, it is possible to elect to include their income on your (the parent’s) tax return rather than their filing a whole return themselves.
FBAR filing requirement does not depend on age, so US children may still be required to annually file an FBAR
Q: I have received a gift or inheritance, do I need to pay tax on this?
If you have received an inheritance or gift this amount is not taxable in the US. You will of course be taxable on any income generated from the inheritance once received.
If the gift or inheritance is from a non-US person (NRA) and exceeds $100,000 then you are required to file a Form 3520. Great care must be taken with filing this form as the penalty for late filing without reasonable cause is 25% of the value received.
The calculation of capital gains on the later sale of assets received by way of a gift can be different in the US and UK because a gift can be treated as a disposal for UK purposes but is generally not so treated for US purposes.
If the gift or inheritance is from a non-US person (NRA) and exceeds $100,000 then you are required to file a Form 3520. Great care must be taken with filing this form as the penalty for late filing without reasonable cause is 25% of the value received.
The calculation of capital gains on the later sale of assets received by way of a gift can be different in the US and UK because a gift can be treated as a disposal for UK purposes but is generally not so treated for US purposes.
Q: Do I need to pay tax on gifts I make?
Probably not, as both the US and UK have systems that allow gifts to be made tax-free to family members, third parties and charities.
Very briefly, the US requires a gift tax return to be filed if you make gifts exceeding $15,000 to any one recipient (excluding charities). For gifts to a non-US spouse this threshold is $159,000 in 2021. Each taxpayer has a lifetime credit of $11.7m which is applied to gifts and their estate on death.
In the UK, most gifts are either exempt or considered to be “Potentially Exempt Transfers” which only give rise to an Inheritance Tax (IHT) charge if the donor dies within seven years of making the gift. The UK does not require a tax form to be filed for gifts not giving rise to an IHT charge.
Note that certain gifts of assets are treated as disposals and may be subject to UK Capital Gains Tax (CGT). This means that the basis for calculating the recipient’s capital gain on a later sale is the value at the date of gift for UK purposes, whereas for US purposes in most cases the basis will be carried over from the donor.
This is a very complex area of taxation and you should consider obtaining specific advice before making gifts, setting up trusts or drafting wills if you or the beneficiaries may be subject to both US and UK tax.
Very briefly, the US requires a gift tax return to be filed if you make gifts exceeding $15,000 to any one recipient (excluding charities). For gifts to a non-US spouse this threshold is $159,000 in 2021. Each taxpayer has a lifetime credit of $11.7m which is applied to gifts and their estate on death.
In the UK, most gifts are either exempt or considered to be “Potentially Exempt Transfers” which only give rise to an Inheritance Tax (IHT) charge if the donor dies within seven years of making the gift. The UK does not require a tax form to be filed for gifts not giving rise to an IHT charge.
Note that certain gifts of assets are treated as disposals and may be subject to UK Capital Gains Tax (CGT). This means that the basis for calculating the recipient’s capital gain on a later sale is the value at the date of gift for UK purposes, whereas for US purposes in most cases the basis will be carried over from the donor.
This is a very complex area of taxation and you should consider obtaining specific advice before making gifts, setting up trusts or drafting wills if you or the beneficiaries may be subject to both US and UK tax.
Q: I am self-employed, does that mean I have a foreign branch? Do I need Form 8858?
A foreign branch for US purposes is a division that operates a trade or business in a foreign country and maintains a “separate set of books and records”. This condition is not clearly defined in the legislation so this form may or may not be required. We can help with this issue so do contact us to discuss if you need assistance.
A Form 8858 needs to be filed if the taxpayer is the owner of a Foreign Disregarded Entity (FDE).
A Form 8858 needs to be filed if the taxpayer is the owner of a Foreign Disregarded Entity (FDE).
Q: I operate a business as a limited company/partnership in the UK, what do I do?
In addition to any UK tax return and annual accounts requirements, you may also have US information returns to file. These may be required annually or only when certain events occur, relating to acquiring 10% shares or investing more than $100,000.
There are complex indirect and constructive ownership rules for these forms so the consequences may be different if spouses or family members also participate. See our separate page for more information about “Controlled Foreign Corporations”.
The US “Subpart F” and “GILTI” rules can give rise to additional tax and/or income recognition issues between the US and UK. These can be mitigated in various ways but the rules are very complex. We can help with the issues so do contact us to discuss if you need assistance.
There are complex indirect and constructive ownership rules for these forms so the consequences may be different if spouses or family members also participate. See our separate page for more information about “Controlled Foreign Corporations”.
The US “Subpart F” and “GILTI” rules can give rise to additional tax and/or income recognition issues between the US and UK. These can be mitigated in various ways but the rules are very complex. We can help with the issues so do contact us to discuss if you need assistance.
Q: Do I need to keep filing US tax returns forever?
As long as you continue to be a US person and exceed the filing threshold then you will be required to file US tax returns and be subject to US tax rules on your worldwide income. It is possible to renounce your US citizenship and leave the US tax system, but this has various tax consequences.
Q: Can US citizens abroad claim the child tax credit?
A US Taxpayer can claim the Child Tax Credit while abroad. The maximum amount of the credit is $3,600 per qualifying child under five ($3,000 for children between six and 17). For 2021, the amount is potentially fully refundable (depending on income limitations). The credit can only be claimed if the child is younger than 17 on the last day of the tax year (Dec 31st), a US citizen, a US national or a US resident alien and a dependent. No amount can be claimed for a child who does not have a Social Security number.
There is a $500 non-refundable credit for dependents who do not qualify for the child tax credit. This includes older children that still satisfy the other dependent conditions.
There is a $500 non-refundable credit for dependents who do not qualify for the child tax credit. This includes older children that still satisfy the other dependent conditions.
Q: I heard I do not need to file a tax return if I don’t earn more than $80,000, $90,000 or $100,000?
This is a common misconception. You are required to file a tax return if your gross income is above the relevant threshold. You are still required to file a tax return even if all of your income is excluded using the FEIE.
Q: Do I have to pay state taxes while abroad?
Each state has their own rules, but generally you only need to pay state tax if you were a resident in the tax year or have income from that state. State sourced income includes employment income earned physically in that state, income from rental properties and partnership income from that state. In general, you may be able to use the state tax paid as foreign tax relief on your UK tax return.
Some states have additional rules which may mean you continue to be taxed as a resident even if you are not physically present there or present only for a short time, if you are “domiciled” in that state.
Some states have additional rules which may mean you continue to be taxed as a resident even if you are not physically present there or present only for a short time, if you are “domiciled” in that state.
Q: I didn’t receive my third stimulus check (Economic Impact Payment) but I was eligible. How can I claim my payment?
Any amounts not received can be claimed as a Recovery Rebate Credit (RRC) on the TY 2021 tax return. You may receive a letter from the IRS regarding the payment (Letter 6475) which may be needed to ensure the correct amount of credit is claimed on your TY 2021 tax return.
Our motto: "Never ignore a letter from the IRS (or HMRC)"