Importance of pre-paying UK Tax
There are many factors that determine an individual’s need to prepay UK tax in the year the income arises. These include, but are not limited to, the taxpayer’s filing basis, existing foreign tax credits, and sources of income. It is also important to consider which country tax must be paid to first.
Generally, you can offset a US tax liability on foreign-sourced income by obtaining a foreign tax credit for the tax paid to a foreign government, which is reported on Form 1116 (the “paid basis”). You can also get a credit for foreign taxes that have accrued in the foreign tax year ending in the US tax year, but have not yet actually been paid (the “accrued basis”).
In some cases, when a taxpayer has received income from various sources, they may need to pay UK tax before the end of the year. This is a pre-payment, and it is only relevant if you are on the paid basis for foreign tax credits.
The act of pre-paying UK tax in the calendar year it is incurred is often overlooked, but it can prevent a US taxpayer from being subject to double taxation. If you are taxed in the UK on your worldwide income (the “arising basis”), it is important to prepay your UK tax liability by December 31st in the year your tax liability arises. This ensures that a foreign tax credit can be applied to any foreign-sourced income in the same year the income arises.
Understanding your reporting method can help determine the most advantageous period to pay your UK tax and how it will affect your US tax liability.
In an ideal situation, a taxpayer on the paid basis who realizes a capital gain from the sale of property (e.g., shares, real estate, etc.) should pay the capital gains tax within the same year to ensure that the UK tax paid can be used to offset their US tax liability through foreign tax credits.
In cases where a taxpayer has not paid their tax within the same year, they will effectively be double-taxed. This happens because the foreign tax credit will only be applied in the following year, leaving a shortfall in the current tax year.
To resolve double taxation, the taxpayer will need to file an amended return to carry back these credits and cover the taxes accordingly.
Excess foreign tax credits can be carried forward for up to ten years, but they can only be carried back one year. Therefore, early payment of foreign taxes is generally advisable.
Generally, you can offset a US tax liability on foreign-sourced income by obtaining a foreign tax credit for the tax paid to a foreign government, which is reported on Form 1116 (the “paid basis”). You can also get a credit for foreign taxes that have accrued in the foreign tax year ending in the US tax year, but have not yet actually been paid (the “accrued basis”).
In some cases, when a taxpayer has received income from various sources, they may need to pay UK tax before the end of the year. This is a pre-payment, and it is only relevant if you are on the paid basis for foreign tax credits.
The act of pre-paying UK tax in the calendar year it is incurred is often overlooked, but it can prevent a US taxpayer from being subject to double taxation. If you are taxed in the UK on your worldwide income (the “arising basis”), it is important to prepay your UK tax liability by December 31st in the year your tax liability arises. This ensures that a foreign tax credit can be applied to any foreign-sourced income in the same year the income arises.
Understanding your reporting method can help determine the most advantageous period to pay your UK tax and how it will affect your US tax liability.
In an ideal situation, a taxpayer on the paid basis who realizes a capital gain from the sale of property (e.g., shares, real estate, etc.) should pay the capital gains tax within the same year to ensure that the UK tax paid can be used to offset their US tax liability through foreign tax credits.
In cases where a taxpayer has not paid their tax within the same year, they will effectively be double-taxed. This happens because the foreign tax credit will only be applied in the following year, leaving a shortfall in the current tax year.
To resolve double taxation, the taxpayer will need to file an amended return to carry back these credits and cover the taxes accordingly.
Excess foreign tax credits can be carried forward for up to ten years, but they can only be carried back one year. Therefore, early payment of foreign taxes is generally advisable.
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