British Expats and Paying Tax In The United States

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

4th August 2021

What are the basics of Expat Tax for Brits living in the US?

As UK/US Expat Tax experts, we help 100s of monthly-retained clients reduce or mitigate Expat Tax in the US.

We also help ex-pats with property investment interests in the US to reduce their tax liability in the US.

An expatriate is an individual living and/or working in a country other than their country of citizenship.

This can be temporary and is often for work purposes.

An ex-pat can also be an individual who has given up citizenship in their home country to become a citizen of another.

Once classified as an ex-pat, you will be taxed only on US-based income.

This could include property investment income or stock revenue that is based in the US.

To meet the Physical Presence Test, you must be able to demonstrate to the IRS that you have been physically present in the US for 330 days or more during a 12-month period.

US citizens and resident aliens are subject to income tax on worldwide income. You may be looking to move to America as a British expat and need to decide on the right type of USA VISA, which we have written in a separate article.

If you are a US citizen or resident alien the rules set down by the IRS for filing income are generally the same whether you are in the US or abroad.

Your worldwide income is subject to US income tax, regardless of where you reside.

The Federal Earned Income Exclusion (FEIE) allows qualified taxpayers to exclude from taxable income up to $107,600 of earned income. More is written about FEIE in this article below.

The IRS has provided useful inputs on US citizens and resident aliens abroad which is worth reviewing.

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Do British Expats have to pay US tax to the IRS?

British expats must pay US tax if they have income, received certain credits, or other specific situations apply.

If your worldwide income exceeds the filing threshold which varies by filing status, you must file an annual tax return to the IRS.

Income is included as wages or salary, interest, dividends and rental income.

If you are self-employed and filing as a single person, the taxable threshold is $12,400, regardless of filing status.

Other situations such as owing special taxes may lead to a requirement to file accounts.

Most ex-pats do not pay US Expat Tax because of the Foreign Earned Income Exclusion and Foreign Tax Credit benefits.

Ex-pats with gross worldwide income over the filing threshold will still need to files taxes annually.

In this situation even if you do not owe any tax to the IRS, you may still need to file.

Foreign income for ex-pats normally includes their ex-pat salary, meaning income earned as an employee abroad.

The income filing threshold is based on the standard deduction of each tax filing status as determined by the IRS.

The IRS has published a helpful guide to frequently asked questions about international individual tax matters that provides useful insight and information.

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When am I considered a US tax resident?

A British ex-pat will be considered a US resident for tax purposes when meeting the Substantial Presence Test.

To meet this, you must be physically present in the US on at least 31 days during the current year, 183 days during the three-year period that includes the current year and the two years immediately before that.

British investors buying an investment property in the USA

If you are moving to the United States as a British expat you may be interested to know how to invest in American real estate as a home owner or as a foreign property investor

What is the ITIN used for?

British people moving to the United States may need to file a 1040 tax return to the IRS or get a mortgage. Someone moving from the UK to the US may require an Individual Tax Identification Number often referred to as an ITIN. This allows British people to complete a 1040 tax return to the IRS in America.

Foreign Earned Income Exclusion Vs Foreign Tax Credits

Americans or British people that submit a 1040 tax return to the IRS may have foreign income. This foreign income is likely to be taxed by the IRS as you are taxed on your worldwide income. However, income may have been charged foreign tax by the country it was earned. It is essential to know which option is best for you a) foreign income tax credit or b) foreign earned income exclusion.

What are the two types of Tax Deduction strategies? 

Americans living in the UK or British people living in America will need to be aware of two deductions.

The first is a foreign tax credit on income earned in the UK or any other foreign country. There is an allowance for a tax credit to be applied against your US tax for the amount of tax already paid in the foreign country.

The second is the foreign earned income exclusion where a sum of money is deducted away from foreign earnings and will not give rise to a tax liability in the United States.

It is important to know which is best for you a) foreign tax credit or b) foreign earned income exclusion.

What Is FIRPTA and how does it affect British property investors selling US property?

You may have invested in real estate property that was based in the US. The attorney dealing with the sale that acted on behalf of the seller may have deducted 15% tax on the gross value of the property. That is to ensure that the IRS get their fair share of the taxable gain you make. This will be recessive and is likely to create a 1040 tax credit. The 15% tax withholding is often referred to as FIRPTA.

What are the basics of C Corporations in the United States?

It is possible for expats to own a C Corporation. One of the benefits that expats own C Corporations is because they are taxed at the corporation tax rates rather than income tax rates.

1040 tax filing in the United States

Once you understand the concept of being a tax resident in the United States you may have identified that you now need to file a 1040 expat tax return to the IRS. There are a number of forms within the main 1040 tax return, which may be daunting as a British expat living in the United States or an American living in the United Kingdom. Coupled with paying tax on one country may result in two tax systems. One is in the UK under HMRC and the other in America under the IRS.

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