Are You American Citizen (or Green Card Holder) Living outside the USA?

If you have answered yes to our poll, you may be required to prepare a US Federal Tax Return with the IRS. US tax law states that a US Citizen must declare worldwide income no matter where he or she lives around the world.

EDA Professional Services is a Scottish based accountancy firm that can assist US Citizens with their filing requirements.  We can also help even if you are not based in the UK.

Currently Scotland has different levels of taxation than the rest of the UK.  This means that you can end up paying more tax in Scotland (the higher rate threshold did not increase in Scotland meaning that the 40% rate comes at a smaller level).  As there is no tax treaty with the US and Scotland it may mean that you cannot claim any additional taxes you pay in Scotland as a Foreign Tax Credit on your US Return.

Depending on the level of taxes that may be due to the IRS, you may be required to prepare up to four years tax returns – even if there is no balance due.

If you are a US citizen living in the UK and would like to discuss this, please do not hesitate to contact us at info@edaprof.co.uk. We look forward to hearing from you.

Please note that though this blog specifies the UK where Americans are living, it can also refer to other countries around the world.  The United States has primary taxing rights over (more or less) every country.

Tax on Investments in the UK

The income generated from investments in the UK can be interest and dividends (and Capital Gains on the sale of these investments but will ignore this for now).

If you are investing in these through vehicles such as ISAs (Individual Savings Accounts) these are tax free in the UK.

If you are investing directly (or through portfolio) there are new tax rules that you would need to follow.

THE PERSONAL SAVINGS ALLOWANCE (PSA)

This applies to interest income and depends on what kind of taxpayer you are.

1. Basic tax taxpayers are entitled to an allowance of £1,000 tax free
2. High rate taxpayers are entitled to an allowance of £500 tax free
3. Additional rate taxpayers do not get any allowances for this.

This means that if your total income is less than around £45,000 (around £43,000 in Scotland) you will pay no tax on the first £1,000 of interest that you receive.

THE STARTING SAVINGS RATE BAND (SRB)

This is where it gets a little tricky.

A starting rate of £5,000 is available to every taxpayer (in addition to the PSA).  This means that up to £5,000 of interest only can be taxed at 0%.

The downside is that the £5,000 is reduced £1 for every £1 of income that exceeds the personal allowance.  Therefore, for the year ended 5 April 2018, the Personal allowance is £11,500 and if your income exceeds £16,500 you will have no tax free amount available .

For example:  you have employment income of £13,000 and interest of £1,000 how much of the savings rate band would you be entitled to.

1. Total income is £14,000
2. Deducted personal allowance of £11,500
3. Leaves £2,500 available for savings rate band
4. As the interest received is below £2,500 tax will be at 0% meaning no tax due on this interest.

Please note that in this example the interest is only £1,000 and this would be covered by the personal savings allowance discussed earlier.

DIVIDENDS

The first £5,000 of dividends for the year ended 5 April 2018 is tax free.  This does not matter how much income that you have and is available to additional rate taxpayers.

Dividends are taxed as follows:

1. 0% on the first £5,000 (and still covered by personal allowance)
2. 7.5% on dividends up to the basic rate (about £45K in the UK & £43K in Scotland)
3. 32.5% on income between the higher rate and the additional rate (up to £150K in income)
4. 38.1% when you are an additional higher rate taxpayer.

IMPLICATIONS FOR US CITIZENS IN THE UK

A US Citizen of Green Card Holder living in the UK (or any country in the world) must continue to file US Federal Tax Returns no matter where they are living.  They must also report worldwide income.

Normally UK taxes are much higher in the UK than the US, but with the number of allowances against dividends and interest it’s likely that there may be tax bills due to the IRS (Internal Revenue Service).  This is because there may no foreign tax credit to set off against this income.

If you have any questions regarding this, please do not hesitate to contact EDA Professional Services at info@edaprof.co.uk.

Reporting the sale of your home when non-resident of the UK

Have you been living outside the UK for a number of years and continued to own property?

 

Before 2015 if you were not living in the UK you did not need to report any disposals of property.  However, from the April 6th 2015 if you have property you report the sale of any property that you own to HMRC within 30 days of the sale.  There are very tough penalties for non-compliance which are broadly in line with Self-assessment tax return penalties.

Details of this can be found at HMRC’s website by clicking this link.

If the property was your main home at one point when you were living in the UK, you can claim up to 18 months Principal Private Residence (PRR) Relief.   This would take effect from 6 April 2015 until 6th October 2016.  Any gain after that period may be subject to Capital Gains Tax in the UK.

HMRC also state that you can instead of using the acquisition cost of the property you can elect to use the Market Value of the property as of 5th April 2015 as the base cost of your property.  The gain would be calculated based on the sale value less any costs and the April 2015 value.  There may be reliefs available such as PPR.

If you have sold a property in the UK whilst living abroad, please do not hesitate to contact us at info@edaprof.co.uk and include “Sale of property when I was non-resident” in the subject heading.  We would be happy to assist you.

Have you filed your US Tax Returns?

Are you an American living outside the USA?

Did you know that US Citizens are still required to file taxes with the Internal Revenue Service (IRS) in the USA even though they may not receive any income from sources inside the USA.  This is because the US taxes on the basis of citizenship.  The same can apply to Green Card holders who are living outside the USA.

For 2014 the filing thresholds for submitting a US Tax Return are as follows:

Single – $10,150

Married Filing Separately – $3,950

Married Filing Jointly – $20,300

These figures are based on gross income (not the amount that is taken into account after expenses).  An example of Married Filing Separately is when you are an American Citizen who is married to a non-US citizen who is not required to file a US tax return.  You will also see that the filing threshold is much lower for those who are filing married filing separately.

If you are living in the United Kingdom

Normally UK taxes are much higher than the US and you should not have a liability to the USA.  Does this mean you are not required to file a US Return?  Unfortunately it does not!  This is because even though income taxes are much higher in the UK than the US it does not stop you from filing returns.  In fact you must make the claims for Foreign Earned Income Exclusion (FEIE) on the return itself or by claiming Foreign Tax Credits.  There are certain items that are tax efficient in the UK but would be taxable in the USA.  A few examples below are:

ISAs – Tax free interest and dividends are subject to taxes in the USA

Capital Gains – the USA does not have a tax free Annual Allowance which is just over £11,000

Dividend income – taking a basic salary and dividends up to basic rate may not always work if you are a US citizen

There are just some examples there are many more.

If you are above the filing threshold you must file the returns and submit for the last 3 to 4 years with the IRS and letting them know why you had not filed before.

Are you an Accidental American?

What is an accidental American?

If you were born (for example) in the United Kingdom and at least one of your parents was an American citizen of born in the USA, you are by definition an American citizen.  You must inform the embassy in the UK that you are a citizen and informing them of where your parents were born.  It’s your duty to inform them and you should never bury your head in the sand.  Once you have informed them (this process may take a long time) you will be given a social security number which you will need to use when you prepare your US Federal Tax Returns.  If you have never filed with the IRS, you must do this as soon as possible to bring yourself up to date.

You may consider giving up your citizenship.  In order to do this, you will need to be up to date with your US taxes for at least the last 5 years before leaving the US system.

If you are a US citizen living in the UK and would like to discuss this, please do not hesitate to contact us at ustax@edaprof.co.uk. We look forward to hearing from you.

UK Tax Return Filing Deadline – It’s Getting Closer

It’s nearly the end of November meaning that it’s only just two months to go to file your Self-assessment tax return with HMRC.

If you file your return online before 30 December (and your tax balance is less than £3,000) your liability can be paid through PAYE. This does mean that the amount you get after tax and national insurance deductions will be smaller.

EDA Professional Services can assist in the preparation of your tax return, if you have yet to start. Please contact us using the form below and let us know what you require.

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