British Expats and Paying Tax In The United States

simon

Simon Misiewicz

4th August 2021

The frequently asked questions about a US Visas for British travellers 

As US/UK ex-pat tax experts, we know that the subject of a US Visa can be confusing for some of our clients who are looking to invest in property in the United States. This also applies to people that are looking to move to the United States, moving away from the rainy United Kingdom.

Visitors entering the US from all countries need a passport on arrival regardless of their country of citizenship. A US visa may also be required for permanent residents and foreign nationals.

US visas must be applied for and obtained before the trip commences.

A US visa is an endorsement placed within a passport that gives the holder permission to enter, leave or stay in the US for a defined period of time. The most common US visas are business, work, tourist, student and transit visas.

The Department of State suspended routine US visa services in March 2020 because of the Covid-19 pandemic. A gradual resumption of US visa services is beginning as the global situation develops in 2021.

The frequently asked questions we answer about a US visa usually include one or more of the following:

“Why you might be paying too much tax in the United States.”

“Understanding the basics of US visas.”

“What are the benefits of having a US visa?”

“How long can I stay in the US without a visa?”

“How do I apply for a US visa?”

“What is the quickest way to get a US visa?”

“Which US visa is the right one for me?”

“When to US visa holders pay tax?”

“What are the tax implications for a relative when applying for a US visa?”

“If I pay income tax in the UK, do I need to submit a tax return in the US?”

“What is the taxation of non-immigrant US visa holders?

“As a British ex-pat, do I need to have an Individual Tax Identification Number (ITIN)?”

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Understanding the basics of US visas for British citizens

There are 185 different types of US Visa that fall into two main categories. The non-immigrant US visa for temporary stays to include purposes such as business, study, work, tourism, family visits or transit.

The immigrant US visa covers permanent residency in the US. The Immigration & Nationality Act (INA) allows the United States to grant a maximum of 675,000 annually across all the various visa categories.

In 2020, the US State Department issued four million non-immigrant visas.

According to industry sources, more than 678,000 Brits have moved to the US, with 20% of the total population living in New York City.

The average income for British ex-pats working in the US is $101,125 (£77,747) a year, significantly higher than back home in the UK (£26,500).

The US has complex non-immigrant visa procedures with tax obligations that vary considerably depending on each visa category.

If you are looking to invest in property in the US, it is critical to obtain the correct visa so that your tax liabilities are accurate about the residency rights allocated through your visa.

There are 20 non-immigrant visa categories with different requirements and restrictions relating to employment type, marital status, citizenship, occupation, residency and purpose of visiting the US.

There are also different types of taxation of aliens by visa type and immigration status in the US.

Tax in the US is more complicated than in the UK.

There are seven instead of three tax brackets, although the highest tax rate never exceeds 40% of earnings.

Earning the equivalent of £50,000 would put you in the 22% tax bracket in the US.

Health insurance is private in the US, so the broader economy and population can afford a lower tax rate.

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The frequently asked questions about British Expats living and paying tax in the United States

As property accountants, we are regularly asked about British Expat Tax in the United States. We will look to answer the below questions in this Article.

“Are you paying too much Expat Tax?”

“What are the basics of Expat Tax?”

“Who has to pay Expat Tax?”

“When do I have to pay Expat Tax?”

“What is the Foreign Earned Income Exclusion (FEIE)?”

“How can I use the Foreign Tax Credit allowance?”

“Can I use a tax treaty to prevent double taxation in the US?”

“Must ex-pats declare rental income on a US tax return?”

“When am I considered a US resident for tax purposes?”

“Does living abroad mitigate US taxes?”

“How can I avoid paying Expat Tax?”

“How does this affect our UK readers?”

Moving to the US from the UK tax advice

You may be interested in services where we help British people move to the United States. There are a number of legal matters and tax issues that you need to consider. See how we can help you

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What are the benefits of having a US visa as a British traveller?

Having a US visa allows you to travel to a port of entry, airport or land border crossing, request permission of the Department of Homeland Security (DHS), and a Customs and Border Protection (CBP) inspector to enter the United States.

Another significant benefit of having a US visa is that it is a multiple entry visa, granting permission to enter and leave the country as needed. You will need to provide a passport and supporting documents.

How do I apply for a US visa as a British expat?

A US Embassy or Consulate issues a visa. It entitles the holder to travel to the United States and apply for admission. It does not guarantee entry. An immigration official at the port of entry determines the visa holder’s eligibility for admission into the US.

The purpose of your intended travel and other factors will determine the type of visa required under US immigration law.

When applying for a US visa, you need to meet all the requirements to receive the visa category for which you’re applying.

Anybody who is not eligible to enter the US free under the VWP, or is not a citizen of Canada or Bermuda, will need a visa to gain entry into the United States.

Are you paying too much British Expat Tax in the United States?

As US/UK Expat Tax experts, we know that many of our clients find the subject of ex-pat taxes complex and confusing.

It is an area that can be further complicated when property investment in the US is included.

There are many reasons why British people living in the United States pay far more Expat Tax than they need to. This is because:

-They do not know what they do not know.

-They have not spoken to a tax specialist that knows all the UK and US tax laws.

-Their accountants in the UK are not knowledgeable when it comes to the US tax laws under the IRS.

-Their CPAs are not knowledgeable when it comes to the UK tax laws under HMRC.

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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.

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.

When do I have to pay British Expat Tax to the IRS in the United States?

A US citizen or resident alien residing overseas are allowed an automatic two-month extension to file a tax return and pay any amount due, without requesting an extension.

For a calendar year tax return, the automatic two-month extension is to 15 June.

If you qualify for the two-month extension but are unable to file a tax return to the IRS by the automatic extension date, you can request an additional extension to 15 October by filing a Form 4868 before the automatic two-month extension date.

If you are allowed extensions to 15 June and/or 15 October, you will owe interest on any unpaid tax from the original due date of the tax return.

Outline your filing requirements so you can meet them, including filing the FBAR to report foreign bank accounts, filing a state tax return in the US if required to do so, or filing a tax return for your business.

If you’re behind on ex-pat taxes, make arrangements as soon as possible to get up-to-date.

Once you know the filing requirements, handling ex-pat taxes becomes much easier.

Moving to the US from the UK tax advice

You may be interested in services where we help British people move to the United States. There are a number of legal matters and tax issues that you need to consider. See how we can help you

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We will answer your questions about what an Individual Tax Identification Number (ITIN) is for British Expats

– What is an Individual Tax Identification Number?

– What is the ITIN used for?

– What US US benefits do I receive for having an ITIN?

– What is the difference between a Social Security Number (SSN) and the ITN?

– How do you apply for an ITIN?

– Where can I find my ITIN once I have one?

What is the ITIN used for?

An ITIN is used for British Expats to submit a 1040 tax return to the IRS in the united states. You will need to submit a 1040 tax return to the IRS as a British citizen if:

– You have taxable income in the US irrespective if you live there or not

– You are a resident alien (reside in the US for more than 183 calculated days)

– You are married to an American citizen and it makes sense from a tax perspective for you to submit a 1040 return to the IRS

Please note that you need to use the ITIN to submit tax returns. The ITIN number may be revoked by the IRS after three years if not used. If your ITIN has expired you will need to reapply.

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What US US benefits do I receive for having an ITIN?

There are no real benefits for you to have an ITIN. British people obtaining a ITIN must not be confused with it being connected to a VISA. There are many different types of VISAs that allow British citizens to visit and stay in the US. We will not get too bogged down in the detail.

Please review the VISAs section under the American Embassy website.  if you wish to know more about VISAs and having the ability to visit or live int he US as a British expat.

Let me please explain that having an ITIN does not provide you with the following benefits as American Citizens:

– You will not be allowed to stay in the United States just because you have an ITIN

– You will not be able to work in the United States just because you have an ITIN

– You will not be able to own a business without other supporting documentation

What is the difference between a Social Security Number (SSN) and the ITN?

A Social Security Number (SSN) is a number given to US citizens and green cardholders. This allows SSN holders to live, work and have the full enjoyment of being in the United States of America. People with a SSN may also vote.

British expats may be able to obtain an SSN with the appropriate VISA, which there are many.

As mentioned above that the ITIN does not provide you with any of these benefits. You may exchange the ITIN with the SSN through the appropriate VISA application.

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How do you apply for an ITIN?

You may apply for an ITIN through the W-7 application for IRS Taxpayer identification number form. The IRS W-7 form may be submitted to the IRS via

– You can go into an IRS office and meet with the officials with the said application form

– By post (you will need to send your original IDs such as passports and drivers licence)

Internal Revenue Service
ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342

Where can I find my ITIN once I have one?

You can find your 9 digit ITIN on all correspondence that you have with the IRS. If you do not have any paperwork from the IRS then you may be able to contact the local IRS office.

You may be interested in services where we help Americans move to the UK with tax in mind. There are a number of legal matters and tax issues that you need to consider. We have also written a useful article about people moving from the US to the UK and getting a VISA.

What is the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion (FEIE) is an Expat Tax benefit allowing qualifying ex-pats to exclude up to $107,600 from their taxable US income.

Ex-pats should use the FEIE if they pay low to no income tax in their host countries.

Income earned in the US is not classified as foreign earned income, and cannot be excluded from US taxation using the FEIE.

If you are required to pay taxes on that income in another country, you could be eligible to use the Foreign Tax Credit as a dollar-for-dollar credit to offset US taxes owed.

The FEIE is the most common way ex-pats reduce or completely mitigate their US tax liability.

It is also possible to exclude specific housing expenses such as rent and utilities by using the FEIE.

Once you elect to use the FEIE it remains in effect and you will need to include it on your annual tax return every year thereafter.

Should you decide that you no longer want to use it, you cannot claim the exclusion for five years without IRS approval.

The Physical Presence Test requires that you are physically present inside a foreign country for 330 of any 365-day period.

You must have lived overseas for one calendar year and have no intention of moving back to the US to qualify under the Bona Fide Residency Test.

Those on temporary assignments and temporary overseas contractors won’t qualify.

Moving to the US from the UK tax advice

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How can I use the Foreign Tax Credit allowance?

If you live in a high-taxation country or your income exceeds the FEIE, the Foreign Tax Credit allowance may help to offset or mitigate your US tax liability.

The Foreign Tax Credit is a dollar-for-dollar credit on the taxes paid in a foreign country.

You must file Form 1116 to elect it.

Some taxpayers are eligible to utilise both the Foreign Tax Credit and FEIE.

If you

– claim the child tax credit, choosing the Foreign Tax Credit over the FEIE will often yield better tax savings.

– exclude some of your income using the FEIE you cannot use the Foreign Tax Credit on that excluded income.

– exclude $107,600 of your income and have $30,800 left you can only offset the taxes paid on that remaining income.

– are not able to claim the full amount of foreign income taxes paid or accrued, these can be carried over for the next 10 years.

Can I use a British tax treaty to prevent double taxation in the US?

Income tax treaties help to prevent double taxation for Americans living in foreign countries by reducing or mitigating US taxes on certain types of income.

The US currently has tax treaties in place with 68 countries.

Tax breaks vary greatly country-to-country.

Ex-pats need to review the treaty with their host country to find out more about how they will be taxed.

Tax treaties can be complex legal documents to understand.

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Must British ex-pats declare rental income on a US tax return?

British ex-pats must report all rental income (both foreign and domestic) to the IRS.

The good news is that many expenses related to the property can offset ex-pat tax liability.

Repairs carried out on an investment property are tax-deductible, but property improvements are more complex.

Repairs are classified as restoring the property to its original state, whilst improvements are deemed to increase the value of the property.

For tax purposes, we recommend that you keep records of both repairs and improvements to your rental property in the US.

Repairs can be included as tax deductions.

Property improvements will have an impact on how you calculate capital gains or losses on your ex-pat taxes after the property is sold.

When am I considered a US resident for tax purposes?

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.

Does living abroad mitigate US taxes?

If you qualify as an American citizen living abroad there are two methods by which you can reduce your US tax by a significant amount. These are the FEIE and Foreign Tax Credit already discussed n this Article.

You will need to demonstrate to the IRS that you have lived for at least one year abroad.

Neither the FEIE nor Foreign Tax Credit means you cannot file if your income is above the filing threshold.

Whether or not an ex-pat needs to file a state tax return largely depends on whether they intend to return.

Every US state has different rules regarding domicile and permanent place of residency.

These rules need to be factored into whether you will be considered a resident and need to therefore file.

If your income was taxed by a foreign country you can subtract that tax from your US tax to substantially reduce your US tax bill by using IRS Form 1116 and applying for Foreign Tax Credit.

However, you can only claim a Foreign Tax Credit for foreign taxes on the same income that the US is taxing.

Have a question about property investments, tax or being an expat?

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How can I avoid paying Expat Tax?

Most American ex-pats don’t owe US taxes, because as highlighted in this Article the IRS has put in place important deductions, exclusions and credits in place to ensure double taxation on the same income doesn’t occur.

Most ex-pats can offset all of their foreign earned income with the FEIE and Foreign Tax Credit.

Some frustrated ex-pats may consider renouncing their citizenship to avoid the burden of filing US taxes.

Be aware that before doing this, the IRS will require you to prove compliance on all US taxes for the five years before the date of renunciation.

Depending on your income and net worth, you might also be liable to an exit tax from the IRS.

You may be interested in services where we help Americans move to the UK with tax in mind. There are a number of legal matters and tax issues that you need to consider. We have also written a useful article about people moving from the US to the UK and getting a VISA.

The frequently asked questions about being a US tax filer

As expat tax accountants, we are regularly asked US tax filer. We will look to answer the below questions in this Article.

“Are you paying too much tax?”

“What are the basics of US tax filing?”

“Should Americans abroad file a US tax return?”

“Do I have to pay US taxes if I live abroad?”

“Are there tax extensions for ex-pats?”

“What information is needed to file my US ex-pat tax return?”

“What is IRS Free File?”

“Do I need a US tax specialist to file my US tax return?”

“How does this affect our UK readers?”

Moving to the US from the UK tax advice

You may be interested in services where we help British people move to the United States. There are a number of legal matters and tax issues that you need to consider. See how we can help you

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The frequently asked questions about British investors buying an investment property in the USA

As UK/US ex-pat tax experts, we know that buying an investment property in the USA can be a daunting prospect. This certainly applies to many of our clients looking to buy one or more properties as investments.

The first and foremost question that many of our clients ask is ‘Can foreigners buy investment property in the USA?’ This article seeks to address that question and related topics.

It’s important to understand everything you need to know about property investment in the USA before committing time, energy and money into any real estate.

The USA property investment market bounced back in 2020 much faster than other sectors of the economy. It has sustained growth into 2021 despite the impact of Covid-19.

The pandemic has affected every sector but real estate has remained resilient. Low interest rates have helped the USA housing market to stay buoyant.

The USA’s property market experienced a record-breaking year in 2020, with the average home selling for 8.4% more than in the previous year.

A total of 5.64 million homes were sold in 2020, representing a 5.6% rise from 2019 and the most since before the Great Recession.

The US housing market has been struggling to keep up with demand for the last 10 years, with a boom in demand in the middle of the Covid-19 pandemic.

Property sales during 2021 in the USA have seen house prices going up by double-digits, with houses selling rapidly in competitive market conditions. There is a tight supply of property on the market.

Housing supply will ramp up during 2021 and house rental prices are also expected to rise this year.

With housing shortages and fewer people buying property in the USA, we would expect to see the demand for rented property to grow.

What are the basics of US tax filing?

To discuss the basics of US tax filing, it is important to quickly review the taxation system in place.

The US has different federal, state and local governments with taxes imposed at each level.

Taxes are levied on income, property, sales, capital gains, dividends, imports and gifts.

In 2010, taxes collected by federal, state and municipal governments amounted to 24% of the US’s total GDP.

Taxes are imposed on the income of individuals and corporations by the federal, most state, and some local governments in the US.

Citizens and US residents are taxed on worldwide income and allowed a credit for foreign taxes.

Income subject to taxation is determined under tax accounting rules and includes almost all income from any source.

Most business expenses reduce taxable income in the US, although state rules for determining taxable income often vary from federal rules.

Federal marginal tax rates vary from 10-37% of taxable income, while state and local tax rates vary widely by jurisdiction and many are graduated.

The US taxes its non-resident citizens on worldwide income in the same manner and at the same rates as residents.

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US Tax - Who should you file a tax return?

You can see how to file a tax return using the decision tree

There are different ways that you can file a US tax return and it very much depends on the tax status of the individual according to the IRS

– Single (not married, legally separated/divorced, widowed at the start of the
tax year)

– Married filing jointly

– Married filing separately

Head of household

– Qualifying widower (widowed in the tax year or entitled to file married file jointly, have dependent children, paid more than 50% of the household costs)

If a widower remarries before the end of the tax year they cannot their previous spouse must have a tax return as Married Single.

Per the Sec. 6013(a)(1) a joint return is not allowed if one spouse was a nonresident alien (NRA) at any time during the tax year, unless the U.S. citizen and the Non-Resident Alien spouse so elect and agree to be taxed on their worldwide income.

Generally, if one spouse files separately, so must the other. An exception to this is if the other spouse qualifies for head of household while married. Then one spouse may file separately and the other may file as head of household.

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Two individuals are treated as legally married for the entire tax year if, on the last day of the tax year, they are:

– Legally married and cohabiting as spouses

– Legally married and living apart but not separated pursuant to a valid divorce decree or separate maintenance agreement

– Separated under a valid divorce decree that is not yet final

There are many tax considerations to be taken into account for each especially if you are married or have dependents / are a dependent. Choosing the incorrect filing method could result in more US tax being paid to the IRS.

It would be beneficial to review the “Determination of filing status – Decision tree” to see how you should file your US tax return.

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US - Taxes are higher for married filing separately

Special rules apply to Married Filing Separately taxpayers, which generally result in a higher tax. For example, when filing separately:

– The tax rate is generally higher than on a joint return.

– Taxpayers cannot take the child and dependent care credit, earned income credit, education credits, and certain other benefits and credits.

– Some credits and deductions, such as the child tax credit and the retirement savings contributions credit, are reduced at income levels that are half those for a joint return.

– If a taxpayer is Married Filing Separately and the spouse itemizes deductions on their return, the taxpayer must itemize and cannot take the standard deduction.

Married taxpayers sometimes choose to file separate returns when one spouse does not want to be responsible for the other spouse’s tax obligations, or because filing separately may result in a lower total tax.

For example, if one spouse has high medical or miscellaneous expenses, or large casualty losses, separate returns may result in lower total taxes because a lower adjusted gross income allows more expenses or losses to be deducted.

Another common reason taxpayers file as Married Filing Separately is to avoid an offset of their refund against their spouse’s outstanding debts.

Moving to the US from the UK tax advice

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US - Head of household

A qualifying person for Head of Household is defined as:

– A qualifying child who is single (whether or not the child can be claimed as a dependent)

– A married child who can be claimed as a dependent

– A dependent parent

– A qualifying relative who lived with the taxpayer more than half the year, and is one of the relatives listed

The Head of Household filing status provides a higher standard deduction and, generally, a lower tax rate than Single or Married Filing Separately

Are there 1040 tax filing extensions for ex-pats?

US tax information is reported on a calendar year basis even if you are an American living in a country that taxes on a fiscal year, such as the UK and Australia.

If you are an American citizen or a US person abroad, you can get an extension to file your 1040 US tax return.

An automatic two-month extension is available by default to us citizens or resident aliens who live outside the US.

The tax return must be filed during this additional period, but the federal income tax must be paid on the regular date of your return.

Another six-month automatic extension allows you to have more time to file your 1040 US tax return from abroad if you cannot complete it by the regular due date.

This does not apply to the time to pay your taxes.

To get this extension, file Form 4868 and illustrate your estimated tax liability based on the information available.

To gain this six-month extension, you must meet the following requirements:

– You are a US citizen or resident alien

– You expect to meet either the bona fide residence test or the physical presence test, but not until after your tax return is due

– Your tax home is a foreign country/countries throughout your period of bona fide residence or physical presence

You must also file Form 2350.

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What information is needed to file my US ex-pat 1040 tax return?

Gathering information is as important as filing a US ex-pat 1040 tax return.

Some of the documents you will need for your tax return include:

– Even if you are filing US taxes from abroad, you must provide all wage reporting forms. If you are a self-employed US person abroad, give your tax specialist precise records of your earnings before deductions and expenses.

– Interest and dividend income: if you deposited money into a foreign bank or financial institution and they pay you interest, this is classified as interest income. Dividend income is from any distribution of a company’s earnings to shareholders from stocks or mutual funds you own.

– Securities and stocks: if you own investments in any country including the US, you need to report this on your tax return in the form of capital gains and losses during the year. You will need accurate information on each transaction including purchase and sale prices, transaction fees and purchase and sale dates.

– Real estate: any real estate bought and sold is relevant to your US tax return. If you own a rental property, you will need to provide income and expenses during the year.

– Distributions including pensions, annuities, and profit-sharing plans: If you have payments coming from foreign social security and/or pension and do not have an end-of-year statement, you will need to keep track of payments and report them as income if filing US taxes from abroad.

– Other types of income: this can include reporting any partnership, trust or business interest that you hold, as well as any other types of income not mentioned.

You may be interested in our main Article on UK Tax status if you are looking to move to the UK or from the UK. You may also be interested to know how more about our property tax services if you are looking to invest in UK buy to let properties.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

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Should you report your UK State Pension in the US?

If you’ve built up a state pension in the UK, it is important to inform the relevant authorities, and you should be able to claim a UK pension if you’ve paid enough UK National insurance contributions.

In the US, pensions have multiple components: the pension paid by the state and the private pension called 401K.

Both of these are non-tax-deductible.

The age to receive a pension in the US is 67. To receive these funds early, you have to be 62 years old and willing to lose 20-30% of your monthly pensions payments.

The frequently asked questions about Tax Deductions V Tax Credits

As tax accountants, we are regularly asked Tax Deductions V Tax Credits. We will look to answer the below questions in this Article.

“Are you paying too much tax?”

“What are the basics of Tax Deductions & Tax Credits?

“Is a Tax Deduction better than a Tax Credit?”

“What are the two types of Tax Deduction strategies?”

“How do I claim for Tax Deductions & Tax Credits?”

“What are the benefits of Tax Deductions?”

“What are the benefits of Tax Credits?”

“Is there a maximum that I can claim?”

“Which forms are needed to claim Tax Deductions & Tax Credits?”

“How does this affect our UK readers?”

Are you paying too much tax?

As US/UK ex-pat tax experts, we know that many of our clients come to us looking for ways in which to protect more of their investments as well as utilising strategies for mitigating tax.

There are many reasons why British people living in the United States pay far more tax than they need to.

This is because:

-They do not know what they do not know.

-They have not spoken to a tax specialist that knows all the UK and US tax laws.

-Their accountants in the UK are not knowledgeable when it comes to the US tax laws under the IRS.

-Their CPAs are not knowledgeable when it comes to the UK tax laws under HMRC.

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What are the basics of Tax Deductions & Tax Credits?

As UK/US tax specialists, we appreciate that it can be time-consuming and difficult to understand the basics of Tax Deductions and Tax Credits.

There are different reasons to apply for Tax Deductions compared to Tax Credits, and it is important to get the right tax advice before proceeding with either tax-reducing strategy.

A tax Deduction can only lower your taxable income and the tax rate that is used to calculate your tax.

This can result in a larger refund of your withholding.

A Tax Deduction reduced the amount of income you pay taxes on, so you pay less in taxes.

You subtract Tax Deductions from your income before calculating how much tax you owe. How much a deduction saves you depends on your actual tax bracket.

To calculate how much a deduction could reduce your tax bill, multiply the amount of the deduction by your tax rate.

For example, if a deduction is worth $5,000 and you are in the 10% tax bracket the deduction would reduce your taxes by $500.

If you pay a higher tax rate you can gain more benefit from a Tax Deduction.

If you take a $5,000 deduction but are in the 35% tax bracket, that would equate to a £1,750 tax saving.

Tax Deductions lower a person’s tax liability by reducing their taxable income.

Because a deduction lowers your taxable income it lowers the amount of tax you owe by decreasing your taxable income not by directly lowering your tax.

Tax Credits are considered by some to be better than Tax Deductions because they directly reduce the amount of tax owed.

The effect of a Tax Deduction on your tax liability depends on your tax rate.

A Tax Credit reduces your tax giving a larger refund of your withholding. Certain Tax Credits can give a refund even if you have no withholding.

A Tax Credit is a dollar-for-dollar reduction in the amount of income tax you owe.

If you qualify for a $1,000 Tax Credit and owe $5,000 in taxes, that credit will reduce your tax bill to £4,000.

A Tax Credit can be non-refundable or refundable.

The IRS has also provided clear guidance on Tax Deductions & Tax Credits that is worth reviewing.

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What are the two types of Tax Deduction strategies? 

The two main types of Tax Deduction strategies are Standard Deduction and Itemizing.

Standard Deduction is a one-size-fits-all reduction in the amount of your income that is subject to tax.

You don’t have to do anything to qualify for it or provide any specific documentation to the IRS.

You can claim Standard Deduction by completing Form 1040. The amount varies on your filing status.

Read our article to find out everything you need to know about being a US Tax Filer and speak to us today.

Itemizing allows you to take advantage of tax deductions such as home mortgage interest, medical expenses and charitable donations.

If your itemized deductions exceed the value of the Standard Deduction you itemize so you pay less tax.

To do this, complete Form 1040 and Schedule A.

You can do one or the other, but not Standard Deduction and Itemizing.

It is also important to ensure that you meet the IRS criteria to qualify for both Tax Deductions and Tax Credits.

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How do I claim for Tax Deductions & Tax Credits?

Add up all the itemized deductions you wish to claim for then compare whether taking the Standard Deduction or Itemizing route provides the largest reduction.

After applying all deductions, the figure left is your taxable income.

From this, you can apply any credits you are eligible for.

This is the simplest method to processing your tax bill to ensure that you take full advantage of all the Tax Deductions and Tax Credits you are entitled to.

What are the benefits of Tax Deductions? 

Tax Deductions are designed to offset the amount of income you’ll pay tax on by writing off expenses like tuition and healthcare, contributions to retirement and any self-employed or capital gains losses you incur.

Claiming a Tax Deduction ensures that you don’t pay tax on certain income you’ve already spent, invested or lost.

Common Tax Deductions include:

Many US taxpayers claim a Standard Deduction as outlined above as it can be simpler than itemizing all of their deductions individually. How much you can deduct using this method depends on your tax filing status and age.

If you pay interest on a qualified student loan, you may be eligible to deduct up to $2,500 on student loan interest.

Qualified medical and dental costs are tax-deductible as long as they exceed a set percentage of gross income.

You may be allowed to deduct state, local and foreign income taxes.

If you pay taxes for property that may be deductible.

If you pay mortgage insurance premiums or interest on a mortgage, they may also be tax-deductible.

Contributions to a traditional 401 (k) or an IRA are often eligible for deductions.

If you have a high-deductible health plan and contribute to an HSA in conjunction with that plan, your HSA contributions are usually tax-deductible.

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What are the benefits of Tax Credits?

In addition to reducing the amount you pay in tax or increasing a refund amount, some Tax Credits can be claimed even if you have no tax liability.

Common Tax Credits include:

Earned Income Tax Credit (EITC) – this is a refundable Tax Credit for those who are working and earn a low to moderate income. Be aware that claiming this credit could delay ant tax refund you are owed because federal law requires the IRS to hold the refunds of anyone who claims this credit until mid-February.

Lifetime learning credit – depending on your gross income, you may be able to get a credit of up to $2,000 for qualified tuition and education-related expenses for yourself, a spouse or dependant.

Saver’s tax credit – this credit helps individuals who meet adjusted gross income requirements to save for retirement.

Residential energy-efficient property credit – as a homeowner, if you are investing in making your home more energy-efficient, you may be able to deduct those investments.

Is there a maximum that I can claim?

Between the tax years 2018-2025 there is no limit on Itemized deductions.

Individual limitations are in place on certain Tax Deductions such as medical and dental expenses.

When claiming an EITC you are capped at certain maximums.

For credits like the foreign tax credit, the amount you are eligible for is a fraction comprising the tax paid to non-us tax entities divided by the total amount owed to the IRS and entities abroad.

If you are married but filing separate tax returns and want to itemize deductions, your spouse will also have to itemize. Likewise if one of you choose the Standard Deduction route, the other must also do this.

When it comes to Itemizing, you will need well-documented records to claim certain deductions.

This is generally more work than simply claiming the Standard Deduction.

For example, if you’re claiming business use of your car, you often need proof in the form of a mileage log highlighting business and personal use.

To get the most from Tax Deductions & Tax Credits, speak to an experienced tax adviser today.

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Which IRS forms are needed to claim Tax Deductions & Tax Credits? 

For Tax Deductions, you can claim the Standard Deduction on Form 1040.

But if you are looking to Itemize your Tax Deductions, you will need to fill out Form 1040 and Schedule A.

For claiming Tax Credits, you must fill out Form 1040.

The most frequently asked questions we get asked about from investors looking to buy property for investment in the USA include:

“Why you may be paying too much tax when investing in USA Real Estate Property.”

“Understanding the basics of buying foreign property for investment in the USA.”

“Can foreigners buy investment property in the USA?”

“Is the USA property sector a stable market to invest in?”

“What are the key differences foreign property investors need to be aware of?”

“What do I need to know about the Foreign Investment in Real Property Tax Act (FIRPTA)?”

“Can foreign investors avoid FIRPTA tax?”

“What is Withholding Tax and how much does a foreign investor have to pay?”

“What are the tax implications for foreign ownership of property in the USA?”

“When does a foreign property investor need to file a US income tax return?”

“Can I use a 1031 exchange to avoid FIRPTA and Capital Gains Tax?”

“How does this affect our UK readers?”

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Understanding the basics of buying foreign property for investment in the US

As US/UK ex-pat tax experts, we know that buying property for investment in the US needs to be handled thoroughly and professionally for foreigners.

To understand the basics of buying property in the USA for British ex-pat clients, it is important to first gain an understanding of the overall USA housing market before investing in any properties there.

The real estate market in the USA has been exceptionally active throughout the Covid-19 pandemic.

Although millions were laid off or furloughed, it didn’t prevent house hunters from buying homes across the USA. As a result, the housing market saw the highest sales growth since the unprecedented housing boom in 2005.

The current housing boom has been driven by high demand and record-low mortgage rates in the USA.

Both of these factors have been because of the pandemic. The housing market has seen record-breaking growth since June 2020 with prices continuing to grow despite an ongoing economic recession.

The USA rental market has seen a surge in demand during 2021.  This is a positive sign for foreigners looking for property investment opportunities. This is despite Covid-19 lockdowns and job losses.

The IRS has produced a helpful guide for non-resident aliens and real estate investment which is worth reviewing.

Can British people buy investment property in the USA?

There are no restrictions on British investors buying real estate property in the USA.

The United States is very welcoming to British investors and buying property in the USA. British people buying real estate property in the USA has certain advantages such as a stable market, flexible financing options and tax benefits. 

There is no citizenship requirement for property sales in the US. Foreigners can also qualify for a mortgage if they meet certain criteria, which mean that non-US citizens can actively seek to invest in property.

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Is the USA property sector a stable market to invest in?

The USA is considered to be one of the most stable markets for property estate investment, with property experts predicting that house prices will increase by 8% in 2021.

What are the key differences foreign investors need to be aware of?

When it comes to buying property for investment in the USA, there are some key factors to be aware of.

As a non-US citizen buying property the IRS Publication 515 sets out basic rules for non-resident aliens.

One of the main pieces of relevant legislation in this area, the Foreign Investment in Real Property Tax Act 1980 (FIRPTA), was enacted by Congress to impose taxation on foreigners when they sell or receive income from a USA-based property interest.

Income generated by USA-based property owned by a foreign investor is taxed at 30% if not connected with a US trade or business concern.

Different USA states have different tax treaties in place, which might provide a reduced tax rate.

When a foreigner sells a US-based property, any capital gain is taxed as if a US citizen or resident had sold the property. This means the gain might qualify for lower capital gains tax treatment, as long as the property has been held for over 12 months by the foreign investor.

Non-resident aliens are subject to a 15% withholding tax on the gross sale proceeds of the property. This is unless the foreigner has specific exemptions, which there are many to mitigate the FIRPTA tax.

To be certain of understanding all the relevant US tax legislation, speak to an expert before investing.

The history behind Federal Investment in Real Property Tax Act or FIRPTA.

The United States real estate industry is a booming market that’s worth over $163 billion. If you’re a British citizen investing in the U.S. market, you’re probably on your way to making a good return.

However, investing in American real estate isn’t as simple as most of us would like it to be. There’s plenty of taxes, regulations, and requirements that must be met so you can receive your profit legally.

Much of that comes in the way of the Federal Investment in Real Property Tax Act or FIRPTA.

So what is FIRPTA? What do you need to know before you begin your U.S. real estate investment ventures?

In this article, we outline what FIRPTA is, the importance of an ITIN, and more to help you maximize your investments in U.S. real estate.

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

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) allows the U.S. government to tax a foreign person who is also a non-resident alien selling real property interests in America. This also includes sales of parcel interests.

What Defines a Non-Resident Alien?

A non-resident alien is neither a U.S. citizen nor a resident or resident alien of the United States as per the Internal Revenue Code. You can become a resident if you obtain a green card.

Staying in the country for a substantial amount of time also allows you to be a resident. A British citizen living in the U.S. most likely counts as a non-resident alien unless they’re looking to live there permanently.

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Withholding Rules Under FIRPTA

If you’re a non-citizen or a non-resident of the United States and you own or want to sell property, there are some complicated tax regulations that you need to consider.

It’s important to know these rules before investing in U.S real estate. While people might not tell you about these laws, there are penalties for noncompliance.

The first thing to note is if you’re a foreign person who is not a tax resident of the U.S. that sells real estate in the country. You’ll need to remit 15% of the sales price to the Internal Revenue Service (IRS) under FIRPA withholding rules.

The IRS administers and enforces internal revenue laws. They make sure all taxpayers are complying with U.S. tax laws.

Similarly, the IRS makes sure you pay your fair share of the taxes owed after buying real estate property in the U.S.

U.S. Income Tax Rate vs. Withholding Rate

When you compare the withholding tax to the actual state income tax, the former is usually higher than the latter.

This means when you file a U.S. tax return to report the real estate purchase, you’ll get a sizeable tax refund. You can calculate your taxable gain by subtracting the amount you paid for the property from the selling price.

If you own a property for more than a year, the highest U.S. tax rate in the long term is a capital gain rate of 20%. A large portion of the gain, however, has a tax rate of 15%.

Tax Example

Let’s look at an example. If you sell U.S. real estate for $500,000 but the basis for the property is $300,000, the gain would be $200,000. Under FIRPTA, the withholding that’s required would equal to 15% of that $500,000, or $75,000.

When you eventually file your tax return, you’d report a gain of $300,000. If the 15% tax applies to that gain, you’d only owe $45,000 in taxes. That means you get about $30,000 in tax returns.

It’s important to note that you can’t file these returns until about January or February. Any tax returns you’re owed probably won’t cash in until around June.

You’ll need to submit a Form 1040NR to claim back the FIRPTA tax. Additionally, you’ll need an Individual Tax Identification Number to do this, which we’ll cover later.

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Exceptions to Withholding under FIRPTA

There are some withholding exceptions under FIRPTA. One of these exceptions is when the sales price for your property is $300,000 or less. The buyer also has to sign an affidavit saying they’ll use the real estate for personal use about 50% of the time over the next two years.

Another exemption is when the property is between $300,000 and $1,000,000 and the buyer fulfills personal use requirements. In this case, the FIRPTA withholding rate can reduce to 10% instead of the regular 15 or 20.

If we think back to the previous example, this means the withholding would be about $50,000 instead of $75,000. Your expected refund then would be about $5,000 instead of $30,000.

Reduced Withholding

You can also apply for a Reduced Withholding Certificate. An application calculates your estimated gain and tax, and you request that your withholding be equal to the tax calculated.

You have to submit this application on or before the day of the closing with all the right calculations. The regular rate of FIRPTA withholding remains in an escrow account while the application is processed.

It takes about three months for the IRS to process the application. The withholding will then be paid to the escrow account, which you’ll then receive.

To apply for this, you’re going to need a taxpayer identification number or an employer identification number. Without these, the IRS won’t process your request.

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1031 Exchange that saves British people tax when selling US property

Another important factor for selling real estate in the U.S. is the 1031 exchange. This is essentially a swap of one investment property for another that defers capital gains.

If you meet the requirements for a 1031 exchange, you’ll pay little to no tax at the time of the exchange.

Capital Gains When Selling U.S. Real Estate Property

A capital gain is an increase in a capital asset’s value that’s realized once you sell an asset, such as property. Capital gains might occur in the short or long term. You need to claim them on income taxes as well.

Capital Gains Tax Requirements

Capitals gains kick in when you enter a contract to sell your property. You don’t need to pay any capital gains until a few things occur.

You won’t pay any capital gains until you’ve received the money for the sale. You’ll also be exempt until April 15th, when you file your 1040 tax return to the U.S. If you requested a filing extension using Form 4848, you have until October 15th to prepare your 1040.

Capital gains depend on a few different factors. The proceeds of your sales and the adjusted basis cost of the asset are key. The capital gains tax will also differ based on the tax rates of different states.

Capital Gains Tax Example

Let’s take a look at an example of capital gains taxes for a property sale.

Say your income is about $80,000 a year. You sell a property for $300,000 with a $200,000 adjusted basis cost.

You gain about $100,000, and your capital gains tax is about $15,000 if it’s at 15%. There’s also a 25% depreciation recapture rate. If the property depreciates by $50,000, then you’ll pay about $12,500 in depreciation recapture.

If you add those up, you’ll pay about $27,500 in capital gains tax to the HMRC in the UK.

When does Capital Gains Tax kick in?

Capital gains are made once you enter into a contract to sell the property in question. You do not need to pay  Capital Gains Tax until

– You have received the money (if you are taxed at the 15% FIRPTA tax rate, more on this later)

– 15th April When you file your 1040 tax return to the US and pay your liabilities

– 15th October if you have requested a filing extension using the Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, which gives you six more months to prepare 1040 your tax return.

 

Mitigating Capital Gains Tax and FIRPA Using 1031 Exchange

You can actually use a 1031 exchange to mitigate both capital gains tax and FIRPTA. This is done by exchanging U.S. real property for other U.S. real property.

There is a misconception that a 1031 exchange can help you avoid FIRPTA withholding altogether. In the past, sellers in a 1031 exchange only needed to notify their intent to the buyer to relieve them of withholding requirements.

Current 1031 Exchange Requirements

The current IRS regulations require you to do a few things.

You have to close the relinquished property at the same time you purchase the replacement property. Boot, or non-like-kind property, is not allowed in the exchange.

As the seller, you also have to tell your buyer that you’re not required to recognize any gains or losses. The buyer also has to show the IRS that they met all the requirements within 20 days.

You can also file a Form 8288-B as a non-recognition notice to the IRS if you plan on completing a 1031 exchange. This can relieve you of FIRPTA withholding, but Form 8288 does take a while to process.

FIRPTA and CGT

It is possible that you have paid $90,000 for the 15%  FIPTA but have a $50,000 Capital Gains tax liability. You would then reclaim the overpaid tax on your 1040 tax return.

It may be advisable to put in your tax return soon after 1st January so that you can claim the overpaid taxes sooner rather than later.

I very much doubt, but it is possible that you have paid $90,000 FIRPTA but have a tax liability on the capital gains of $100,000. In these instances, you would need to pay the IRS the $10,000 difference when submitting your 1040 tax return to the IRS.

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A step by step guide of how to use a 1031 Exchange

1 – Start the sales process of selling a real estate property

2 – Work out if there are ways of mitigating FIRPTA without the need for a 1031 exchange if this is a risk

3 – Use a 1031 exchange through a Qualified Intermediary

4 – Reinvest the money in a new investment property to mitigate both FIRPTA and CGT

5 – Consider the UK Capital Gains Tax implications of selling a US-based real estate if UK resident

1031 exchange mitigate the need to pay FIRPTA and Capital Gains Tax on the sale of real estate property

Like for like exchanges to avoid FIRPTA and Capital Gains Tax

It is possible to sell a real estate property investment and use the proceeds to reinvest in a new real estate property investment. This is what is known as like for life provided:

– The sold property is a property investment

– The purchased property is a property investment

– The amount of money reinvested into the new property is the same or more (cannot be less, even by $1)

– Neither property may be classed as stock (to be flipped)

How many days do you have to use a 1031 exchange?

You only have 45 days from the point of sale to identify a replacement asset to purchase. There must be an agreement to buy the replacement real estate property investment and documents are with a qualified intermediary.

In addition to the 45-day rule mentioned above the property in question must be completed within 180 days of the original sale date.

What can void the 1031 exchange?

The seller of the real; estate property wishing to use the 1031 exchange cannot take control or have access to the money involved in the sale. The said 1031 would become invalid of the seller of the real estate property obtains or controls the money received in the sales transaction.

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The frequently asked questions about paying capital gains tax in the United States as a British investor

As property accountants, we are regularly asked about capital gains tax. We will look to answer the below questions in this Article.

“Are you paying too much capital gains tax?”

“What is capital gains tax?”

“What is the difference between short-term and long-term capital gains tax?”

“How are capital gains calculated?”

“What are capital gains rule exceptions?”

“How is Net Income Investment Tax (NIIT) relevant to capital gains?”

“What are the 2021 capital gains tax rates?”

“Can I avoid capital gains tax by buying another house?”

“What is tax-loss harvesting?”

“Can I minimize capital gains tax?”

“How does this affect our UK readers?”

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What is capital gains tax in the United States?

Capital gains tax in the United States payable to The IRS is a tax applied to the profits made from the sale of an asset.

Capital gains tax is only payable once the asset has been sold. The level of capital gains tax paid depends on different factors, including income level, marital status, income tax bracket and cost basis of the asset.

It is a tax on the increase in value of investments realised when individuals or corporations sell those investments.

Capital gains tax does not apply to an unsold investment.

Stock shares that appreciate in value annually would not incur capital gains tax until sold.

The IRS classifies capital gains as profits from the sale of an asset.

The asset could be shares of stock, a piece of land, or a business and are classified as taxable income.

The amount of capital gains tax paid varies depending on how long the investment has been held for.

Short-term capital gains and long-term capital gains are taxed at different rates.

The amount of capital gains tax paid to the IRS depends on three main factors: the size of the gain, your income tax bracket, and how long you have held the asset.

Some industry commentators claim that capital gains taxes are paid disproportionately by high-income US households as they are more likely to possess assets that generate taxable gains.

It has also been argued that those who pay capital gains tax in the US have more ability to pay.

This also means that capital gains tax payment can more easily be deferred or avoided by these high-income investors as it only becomes due if and when the owner sells the asset.

Taxable capital gains can also be reduced for a year by the number of capital losses incurred over the same period.

A capital loss occurs when an owner sells an investment for less than it was purchased.

The total of long-term capital gains minus any capital losses is called the ‘net capital gain’, which is the amount that capital gains taxes are assessed on.

Capital gains tax only applies to capital assets, including stocks, bonds, jewellery, coin collections and real estate property.

Taxpayers can use different strategies to offset capital gains with capital losses to lower their capital gains tax liability. This article will highlight these strategies further.

The IRS has clear guidelines on capital gains tax which are worth reviewing.

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What is the difference between short-term and long-term Capital Gains Tax?

Short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less.

The short-term capital gains tax rate equals an individual’s income tax bracket.

Long-term capital gains tax is a tax on profits from the sale of an asset held for over a year.

The long-term capital gains tax rate is 0%, 15% or 20%, depending on your taxable income and are generally lower than short-term capital gains tax rates.

Your tax rate for long-term capital gains could be 0%, depending on your regular income tax bracket.

Taxpayers in the highest income tax bracket pay long-term capital gains rates that can be up to 50% lower than their income tax rates charged on their ordinary income.

How is capital gains calculated by The IRS in the United States?

Capital losses can be deducted from capital gains to reduce any taxable gains for the year.

The calculations can be complex if you’ve incurred capital gains and capital losses on both short-term and long-term investments during the same period.

Short-term gains are netted against short-term losses to produce a net short-term gain or loss.

The same is done with long-term gains and losses.

These numbers for short-term and long-term are reconciled to produce a final net capital gain or loss, filed on the tax return.

What are the exceptions?

Some types of assets get different capital gains tax treatment. These include:

– Collectables – gains on collectables such as art, antiques, jewellery, precious metals, coins, and stamp collections are taxed at 28% by the IRS regardless of your income.

– Owner-occupied real estate – real estate capital gains are taxed differently if you’re selling your main residence.

As long as the owner has lived in the property for two years, $250,000 of an individual’s capital gains on the sale of a home are excluded. This exclusion is $500,000 for those married and filing jointly.

Capital losses from the sale of personal property such as a home are not deductible from gains.

Investors who own real estate can take depreciation deductions against income to reflect the deterioration of a property as it ages. This is a great way to reduce your annual property taxes incurred on your rental income.

Any depreciation deduction essentially reduces the amount the investor is considered to have aid for that property originally.

That can increase the taxable capital gain when the property is sold.

This is because the gap between the property’s value after deductions and the sale price will be greater.

Non-resident aliens are also exempt from capital gains tax in the US.

This is an important exemption and is worth bearing in mind when investing.

Make sure you research how the IRS taxes non-resident aliens

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How is Net Income Investment Tax (NIIT) relevant to capital gains?

If your income in the United States is high, you may become subject to Net Income Investment Tax (NIIT).

This additional tax imposes an additional 3.8% on investment income, including capital gains, if your modified adjusted gross income exceeds certain levels.

At the time of writing, those levels are $250,000 if married and filing jointly, $200,000 if single or the head of a household, and $125,000 if married and filing separately.

What are the 2021 capital gains tax rates in the United States?

Capital gains tax rates depend on whether the asset was held for more or less than one year, as highlighted in this article.

If the asset is held for over a year, then the capital gain will be taxed at 0%, 15% or 20% depending on the overall income level of the investor.

Can I avoid US Capital Gains Tax by buying another house?

If you purchase a second home and start using it as a primary residence, you will still need to meet the residency rule to qualify for the exemption. Namely, you would have needed to have owned the property for two years.

There is also the two out of five-year rule, which means that you can live in a house for a year, rent it out for three years, then move back into it for 12 months.

The IRS will then concur that the home qualifies as your principal residence.

There is also the opportunity of investing the money you have obtained into another real estate investment. There is the ability to use a 1031 exchange. This process allows you to reinvest the money received from the property and reinvest it. The capital gains are then rolled over until you sell the newly purchased property.

What is tax-loss harvesting?

Tax-loss harvesting involves selling an investment that has lost value, replacing it with similar investment, then using the investment sold at a loss to offset any gains.

Tax-loss harvesting is a smart way to avoid paying capital gains tax.

The money lost on investment can offset capital gains on other investments.

Investors can write off losses when selling a depreciated asset, cancelling some or all of the capital gains made on appreciated assets.

This strategy can help to reduce the amount of capital gains tax paid, although as an investment strategy, it is focused on a short-term tax break rather than on long-term considerations.

Can I minimise capital gains tax?

The simple answer to this would be to hold assets and investments for more than a year before selling them. Did you know that you do not pay Capital Gains Tax if you refinance your real estate property? This might be a better way to pull money out of your investment rather than paying Capital Gains Tax.

The tax paid on long-term capital gains is generally lower than for short-term gains. Holding an asset or investment for 12 months or longer significant tax savings can be made on capital gains.

An investor could also utilize losses incurred on previous investments to offset their tax bill in the current year.

Excluding home sales is a good way to minimise capital gains tax.

If the main residence has been owned for at least two years in the five-year period before it is sold, then capital gains of up to $250,000 can be excluded from a home sale if single, and up to $500,000 if married and filing jointly.

Avoid property tax using tax-efficient investment structures

Investing in tax-advantaged accounts such as 401(k) plans, individual retirement accounts and 529 college savings accounts allows investments to grow tax-free or tax-deferred.

You do not have to pay capital gains tax if selling investments within these accounts.

Roth IRAs and 529s provide big tax advantages because you do not pay any tax on investment earnings.

It is also worth considering waiting until retirement to sell profitable assets.

The capital gains tax bill could be reduced if your retirement income is low enough.

It could even mean that you avoid paying any capital gains tax at all.

Bear in mind that an asset or investment must be sold after a year’s holding for the sale to qualify for treatment as a long-term capital gain.

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Are Brits subject to FATCA and taxation on non-US based investments?

In 2010, the IRS introduced the Foreign Account Tax Compliance Act (FATCA), designed to gather taxes on non-US based investments and financial assets held by US-taxpaying individuals, including British ex-pats.

FATCA requires banks and other financial institutions outside of the US to disclose financial matters of taxpaying US citizens and people subject to US tax rules, including investments, pensions, savings and large divorce settlements.

Many Brits moving to the US and paying tax there continue to hold financial assets in the UK, and the financial institutions that hold these are obliged to report them to the IRS.

Then the holder is potentially liable to pay tax in the US on them.

While the double tax treaty may reduce the tax liability, it may not eliminate it.

Depending on the type of financial vehicle, the tax levels in the US may be greater if it is deemed to be non-compliant with US rules.

Some common investments in the UK that are considered tax-efficient such as ISAs are not tax-free in the US and are subject to tax in the US.

HMRC has produced a series of helpful articles around tax for Brits living in the US worth reading.

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

Corporations have been established for over 500 years as a legitimate way to limit their owners’ personal liability and to encourage business investment.

Under US law, a C Corporation is an entity that is taxed separately from its owners.

Most companies are treated as C Corporations for US federal income tax purposes.

A C Corporation can own its own property, enter into contracts, sue or be sued in court, lend or invest money.

Once incorporated in a US state, a C Corporation is created as an entity and enjoys limited liability.

C Corporations are subject to corporate income taxation.

As with other businesses, corporations file annual reports with the owners of a C Corporation called shareholders.

Corporations are owned by shareholders and managed by directors and/or officers. A C Corporation may have 100’s or even 1,000’s of shareholders.

Forming a corporation can be a good option if you are looking to set up an IPO (Initial Public Offering).

Some business investors and venture capitalists also prefer to do business with a corporation rather than an LLC.

The board of directors of a corporation are elected by shareholders and are responsible for overseeing the corporation’s business.

Corporate officers carry out the daily management of a corporation.

Corporate bylaws contain the rules for conducting a C Corporation’s affairs.

These bylaws include things such as directors’ committees, shareholders’ meeting specifics (such as date, place and giving notice), office location, as well as the powers, duties and qualifications of a corporation’s directors and officers.

In a small corporation with a handful of shareholders, individual business owners usually carry out several different roles at once, such as being a shareholder, officer and director.

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How is a C Corporation taxed by the IRS in the United States?

For US federal income tax, a C Corporation is classified as a separate taxpayer.

A C Corporation files its own income tax return and pays its own income tax, in the same way as an individual.

Dividends paid to corporation shareholders are subject to double taxation. The company’s profit is taxed by the IRS and the owners are taxed on their 1040 tax return.

The C Corporation pays tax on its income. Shareholders must also pay taxes on C Corporation dividends.

A little-known tax element of C Corporations is that with proper tax planning, owners can avoid (or significantly reduce) double-taxation by using tax-saving strategies legally available to them.

Owners may, for example, keep earnings in the corporation for reasonable purposes, instead of distributing them as taxable dividends.

C Corporation owners could also have a lower tax liability to the IRS by combining salary and distributions with a reduced (or zero) taxable gain on the sale of qualifying stock.

The IRS code section 1202 gain reduction available to C Corporations can be relevant in this context.

It is also worth reviewing information on corporations from the IRS to see specific details.

The main US federal tax forms for C Corporations include Form 1120 or Form 1120-A for Corporate Income Tax Returns, Form 1120-W for Estimated Tax for Corporations, Form 8109-B Deposit Coupon, and Form 4625 Depreciation.

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How do I form a C Corporation?

In the US, a C Corporation is formed under the laws of a state with procedures varying widely.

Corporations are issued with a Certificate of Incorporation by most states under formation.

All US states require payment of a fee upon incorporation, with some states allowing the formation of corporations through electronic filing on the state’s website.

Most state corporate laws dictate that the governing instrument of a C Corporation is either the certificate of incorporation or formal articles of incorporation.

Most states require at least one director and two officers, all of whom can be the same person.

There are generally no residency requirements for directors or officers, although foreign aliens have to form C Corporations via registered agents in many states.

The process of forming a C Corporation involves filing Articles of Incorporation, designating a registered agent, and paying the state’s fee.

An organisational meeting is usually held as well as the adoption of corporate bylaws.

While each US state has individual rules for what it requires for in Articles of Incorporation, this usually includes:

– Corporation’s name

– Number of authorised shares

– Corporation’s registered agent and office

– Names and addresses of incorporators

Some states may ask for the corporation’s purpose and the names of initial directors.

Optional items in the Articles of Incorporation can include provisions concerning management and the powers and authority of directors and shareholders.

The Articles of Incorporation must be filed with the Secretary of State according to the laws of that state.

Stock is offered to shareholders who then become owners of the corporation.

The IRS has produced helpful information on forming a corporation which is worth reviewing.

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What are the advantages of a C Corporation?

Setting up a C Corporation offers many advantages over other US business structures such as an LLC.

Corporations can sell shares of stock to raise money to fund the growth of the business.

Shareholders only pay tax on salaries, bonuses and dividends they receive.

Profits made by a C Corporation are subject to a corporate tax rate that is usually lower than personal income tax rates.

Corporations can compensate employees with stock, as well as offering job benefits.

All C Corporations limit the personal liability of directors, shareholders, officers and employees.

The legal obligations of the business cannot become a personal debt obligation of any individual associated with a C Corporation.

Owners and managers can change and/or be replaced, but a C Corporation still exists in its own right.

All C Corporations are required to register with the Securities and Exchange Commission (SEC) upon reaching certain thresholds.

The ability to offer shares of stock allows a C Corporation to obtain large amounts of capital to fund new projects.

Corporations may also have an unlimited number of shareholders from anywhere in the world.

For example, corporations in Wyoming and Nevada can have directors and officers residing anywhere in the world, which can be attractive for foreign investors.

C Corporations have the widest range of tax deductions and expenses allowed by the IRS.

Corporations are the most widely-recognised form of business entity in the world.

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Is a C Corporation more tax-efficient than an LLC?

A Limited Liability Company (LLC) is a specific form of a private limited company in the US.

It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

Pass-through taxation allows the income or loss generated by the business to be reflected on the personal income tax return of the owners.

This special tax status eliminates any possibility of double taxation for LLCs, unlike with a C Corporation.

An LLC can have unlimited owners, as well as having non-US citizens as shareholders.

LLCs are more flexible than corporations in distributing profits, where a C Corporation can usually only have one class of stock.

An LLC can have multiple different classes of interest, and the percentage of pass-through income is not tied to ownership percentage.

LLCs have limited life spans and in a few US states, LLCs are required to list dissolution dates in their Articles of Organisation.

Certain events such as the death or withdrawal of a member can cause the automatic dissolution of an LLC.

The stock of corporations is freely transferable, while the interest and ownership of an LLC are not.

Corporations may be advantageous in terms of self-employment taxes in comparison to LLCs.

In a corporation, only the salary paid to the employee-owner is subject to self-employment taxation.

The remaining income that is paid as a distribution is not subject to employment tax under IRS rules.

There is therefore the potential to achieve significant employment tax savings in a C Corporation structure.

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How is a C Corporation structured in the United States?

A C Corporation chartered by the state in which it is headquartered is considered by law to be separate and apart from those who own it.

The owners of a C Corporation are the shareholders who elect a board of directors to oversee major policies and decisions.

Shareholders have limited liability for a corporation’s debts, and can only be held accountable for their investment in the stock of the company.

A C Corporation can raise additional funds through the sale of stock.

Corporations may deduct the cost of benefits it provides to officers and employees.

A C Corporation pays 21% tax but is increasing significantly. In 2021 President Biden proposed that Congress raise the corporate rate from 21% to 28%

Corporations are monitored by federal and state agencies, which can result in more paperwork to comply with regulations.

Incorporating a business may result in higher overall taxes.

Dividends paid to shareholders are not tax-deductible from business income, so income can be taxed twice.

Although double taxation isn’t favourable, the ability to reinvest profits in the corporation at a lower tax rate is an advantage.

A C Corporation is required to hold an annual meeting for shareholders and directors.

Minutes must be kept to display transparency in the operation of the business.

A C Corporation must also keep voting records of the company’s directors and a list of the owner’s names and ownership percentages.

Corporations must also file annual reports, financial disclosure reports and financial statements.

How can a C Corporation owner avoid double taxation by The IRS in the US?

The most commonly cited disadvantage of using a C Corporation is the double taxation issue.

Double taxation occurs when a C Corporation has profit left at the end of the year and wants to distribute it to shareholders as a dividend.

The C Corporation has already paid taxes on the profit. Once it distributes the profit to its shareholders, they will have to declare their dividends received as income on personal tax returns and pay taxes again.

There are several legal steps that can be taken to avoid double taxation of a C Corporation, such as:

– Use all of the write-offs and deductions allowed by the IRS to reduce the corporation’s net income

– Pay higher salaries than using a pass-through entity like an S Corporation

– Offer exceptional employee packages and benefits, as these are tax-deductible

The decision on whether or not to adopt a C Corporation will often hinge solely on the tax position of the business structure.

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Can I live in the UK and run a C Corporation in the US?

Short answer? Yes. There are two types of corporate entities non-US citizens can open:

– Corporation (C Corp)

– Limited Liability Company (LLC)

There is the additional option of an S Corporation which are often recommended to foreigners.

Many new businesses choose the C Corporation business structure in the US.

A C Corporation has the ability to expand by offering unlimited stock which is attractive to investors.

Foreign investors also favour a C Corporation for its ability to protect them from close IRS involvement.

That protection comes at the cost of double taxation, but that can be avoided through careful tax planning, which can be structured to cancel out most of the double taxation.

There are some distinct advantages for foreigners incorporating as an LLC.

The most obvious is limited liability, meaning that members are protected from personal liability for business decisions, and personal assets are safe if the LLC incurs debt or is sued.

LLCs are also free from the strict record-keeping necessary for C Corporations.

There are almost no restrictions on profit sharing between LLC members.

Whether you decide to establish a C Corporation or an LLC in the US and you are living in the UK, one consideration that affects both business structures is where to register the company.

The best US state to register in is the one in which you will be conducting business.

If you are an online company or intend to do business across some regions, it may well be worth considering registering in a state with lower tax burdens, such as Delaware and Nevada.

You may be interested in services where we help Americans move to the UK with tax in mind. There are a number of legal matters and tax issues that you need to consider.

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