# New resident USA only income from UK this tax year



## Kph100 (Jul 23, 2018)

Gained US green card in 2019. I have no yet started working in USA and my only income during 2019 was from UK employment where I paid UK income tax on it .

Where on the 2019 tax forms do I disclose my foreign income, I assume somewhere on the 1040.

Also where on the foreign income tax form can I claim the credit for the tax paid ?
Will the USA tax due be completely equal to the UK tax already paid ?

I assume I use a current exchange rate 

Is this easy situation or should I consult tax professional, tax much more complicated here than UK !

Thank you


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## Moulard (Feb 3, 2017)

There is another option which may be simpler.

In your first year you can file a dual status return. File as a non-resident for that part of 2019 before you entered the US. File as a resident for that part of 2019 after you entered the US.

https://www.irs.gov/individuals/international-taxpayers/taxation-of-dual-status-aliens

also refer to the dual status chapter in pub 519

https://www.irs.gov/pub/irs-pdf/p519.pdf

Unless you had US sourced income while you were resident in the UK this will likely be the simplest filing option.

Yes, you have the option make an election under IRC § 6013(h) to be treated as a US person for the whole tax year but not sure it will be advantageous or simple (as you have discovered)

But If you do decide to go down that route...

Your foreign income would go on the same lines as US sourced income..

Line 1 - wages, 
Line 2 - Interest etc.

No need to attach documentation to support your foreign income.

You would need to complete Forms 1116 (Foreign Tax Credits) one for general income (Wages) a second one for passive income (Interest etc). As you would no longer be a tax resident of the UK, I don't believe that you could avail yourself of the foreign earned income exclusion. I would have to dig through treasury regulations and form 2555 to be sure.

Its quite possible, because of the way that tax credits are split into categories that you could owe tax in one category, even though you have an excess in another. This is rare, but it does occur, particularly if foreign taxes are not all lumped together. Similarly, it is quite possible you could have a US tax debt purely because of the differences in the tax years if you are (and you most likely are) a cash basis tax-payer.

Setting the FEIE question aside, you would then tally up the FTCs and add the amount to line 1 of schedule 3 and then again onto line 13b of the 1040. 

Technically you are meant to use "the exchange rate prevailing when you receive, pay, or accrue the item." so you would need to convert UK taxes, deductions, and wages etc using a spot rate. For wages a lot of people use the IRS published annual average rate, but you get the idea...


You would need to file Schedule B assuming you having closed down all of your UK accounts, pension funds etc. You may need to attach form 8938 if your foreign accounts exceed the reporting thresholds. Also FBAR (FinCen form 114) -- but that will be required so long as you are a US person holding foreign financial accounts.


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## Kph100 (Jul 23, 2018)

Thanks for reply.
To clarify I got my green card part way thru year but continued to live in UK and earn money.
My only income from US is interest that was paid monthly after transferring funds from UK to US bank accounts after the green card was gained.

I still have UK bank accounts and will need to do FBAR reporting.

So my income from UK (obviously wont have W2) still goes as income on 1040 ? Tried to use Turbo Tax but cant really work out how to enter it. I have paid UK income tax on this income right up to Dec 2019. Spent some time in UK and some in USA since getting permanent residency.
(dont qualify for the foreign residency)

questions - 
1. Do i put the UK income on form 1040 line 1 as I have no W2s as its from UK
2. How do I make sure the amount of tax credit I get on my return is equal to the tax I paid in UK as surely it should equal itself ? ie UK tax paid equals tax credit on USA return.
3. As the income was taxed monthly do I use a conversion exchange rate at end of year 31st Dec ?
4, I still have UK accounts and in 2020 will be receiving a monthly pension amount from a UK defined benefits pension, how will this be reported ? (same way ? )

Thank you


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## Moulard (Feb 3, 2017)

Have you actually been admitted to the US on your immigrant visa? 

Technically you are not a permanent resident until you are admitted into the United States on an immigrant visa. Its not until you arrive in the US that you receive your Alien Registration Number, and as such your residency only begins on the first day you arrive in the U.S. 

The way you phrase your clarifying statement leads me to suggest that you have the visa in your passport, have started to wrap up your UK affairs, but have not yet entered the US. If this is the case, then you are not a US permanent resident yet.

That you say you have US bank accounts leads me to believe that you have been in the US in the past on some other type of visa. Under "Know Your Customer" laws many banks won't open an account unless you are physically present, although some will open the account, take deposits but not allow withdrawals until you show up with proof of identity paperwork.

Depending on circumstances, You could be a US tax resident if you in the US for 31 days during 2019 and a weighted total of 183 days during the past 3 years (take a look at the instructions for 1040NR).

I am only re-iterating this, because from what you state, there is a strong chance that you are still a non-resident and as such would only have to file a tax return on your US interest - if there was enough to meet filing thresholds.

But lets set all that aside for a moment and start answering your questions as if you were filing as a US resident for the whole year.



> 1. Do i put the UK income on form 1040 line 1 as I have no W2s as its from UK


Your UK gross wages would go on line 1. If you get paid monthly, then you can use any spot rate to convert to USD. Many people just use the annual rate published by the IRS. Many of the commercial tools have a FEC (Foreign Employer Compensation) form which mimics the W2 and is used to capture wages not on a W2. Look for something like that in Turbo Tax. I don't use it, so it might be called something slightly different)



> 2. How do I make sure the amount of tax credit I get on my return is equal to the tax I paid in UK as surely it should equal itself ? ie UK tax paid equals tax credit on USA return.


The bad news is you may not be able to. The good news is that I assume UK tax rates are higher that US federal rates, so the chance of that is small, but real, given this is the first year and you will not be able to carry forward any credits.

It will take 5 or 6 goes at reading it to understand, but read the instructions for Form 1116 carefully.. in parallel with this. 

When dealing with foreign tax credits you have two methods you can use, an accrual method of accounting or a cash basis.

If you use a cash basis of accounting, then the tax liability from your actual tax bill from April 19 would be the tax you paid and could take a credit for (see my comment below on tax paid vs tax withheld) - this could leave you with a US tax liability if your calendar year income and UK tax liability did not align well (for example a significant pay rise after the 18-19 tax year.

This is by far the easiest approach, as you can simply take the tax paid numbers off of your UK equivalent of a notice of assessment / tax bill statement...

On your 2020 tax return, you would then be able to gain a tax credit for the amount assessed in April 2020 covering income between April 2019 - April 2020.

I would suggest doing a dry run of your US return to see if you end up with carryover tax credits

You can also use an accrual method of accounting, and calculate the tax paid on your Jan to April income and then again on your April - December income. If you are outside the US, you get an automatic extension which conveniently is beyond the end of the UK tax year.




> 3. As the income was taxed monthly do I use a conversion exchange rate at end of year 31st Dec ?


Was it truly paid monthly, or simply withheld monthly. I am going to suggest the later. And that the actual tax liability was not calculated until sometime after the 5 April end of the tax year. Consider ... is there is ever any chance that you would owe more than the amount withheld, or received a refund.. if no, then you can calculate tax paid each month converted using a spot rate.

Going back to Q1 above, on line 1 you are reporting your gross income (ie. inclusive of any income tax withheld, NHS contributions withheld and the like)



> 4, I still have UK accounts and in 2020 will be receiving a monthly pension amount from a UK defined benefits pension, how will this be reported ? (same way ? )


On this one you are probably going to have to refer to the US-UK tax treaty and any technical memorandum, as I believe the US-UK treaty is quite different to others around the world in relation to pensions.

There will be some on this forum that will say ignore it... but assuming you do not take that advice.. 

The income would be reported on 1040 Line 4c and the taxable amount would be reported on Line 4d. Yes, converted into USD the same way.. you have to use the same consistent method to convert to USD through the entire return. 

If the pension income is only taxable in the UK according to the treaty, then 4d would be 0

Luckily you don't need to disclose a treaty based return position for this because Treasury Regs in 26 CFR § 301.6114-1 indicate that reporting is waived (paragraph (C)(1)(iv)


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## Kph100 (Jul 23, 2018)

Hi

Yes I have activated the visa and in possession of my greencard.
Having done so I returned to UK for time and finished off my employment.

So all my income this year has been UK sourced. 

Thanks very much for your assistance, I think having tried to understand all the form explanations, that I am going to get a professional do my return this year which should make it easier for me to understand next year.

Thanks


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## Moulard (Feb 3, 2017)

Sorry, I had misunderstood your circumstances and had assumed that there was a significant chance your UK income was from when you were not yet a US person. 

Second, the discussion of tax credits led me down one path on your question of tax credit...

But there is another approach that you can also take which has similar effect to a tax credit assuming that you are eligible.. Depending on how long you were in the US before returning to the UK is likely to be the deciding factor...

The Foreign Earned Income Exclusion - Form 2555 

If your tax home is still the UK, and you meet the physical presence test (in the UK for 330 days in a consecutive 365 days that includes at least one day in 2019 ( you can exclude your UK wages up to a limit ($105,900 USD in 2019). 

I am going to assume here that you would not meet the bona fide residence test, as from what you have said that you are in the UK a definite, temporary purpose and are planning return to the United States. (that definite purpose being to finish up your affairs in the UK).

If your UK wages are above that then you would still need FTCs either instead of, or in addition to the FEIE.

With the FEIE effectively you add your UK wages on line 1, then subtract them again on line 7a (attaching Form 2555) which will reduce your taxable income - and thus avoiding US tax on your UK income.


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## Kph100 (Jul 23, 2018)

Complicated isnt it lol

Yes most of my UK income gained in 2019 was before I activated my green card. However the remaining was since.

So for 2019 I cant claim the bona fide resident test and as I travelled to USA to see familt and friends quite a few times befoe getting my greencard there is no 365 day period even ending on 1st jan 2019 that I was in UK for 330 days in that year period.


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## Moulard (Feb 3, 2017)

That being the case you are stuck with using tax credits. It isn't too complicated, but it can take some time to get your head around - if you are filing from the UK you can request an extension until October pretty easily, so plenty of time to get a handle on it...

Very simplistically.. 

1) Divide your income into a wages bucket and a passive income bucket (you will need one form 1116 for passive income and another one for general income)

For the sake of the exercise you had 90k in wages and 15k in interest ; proportionally that is 85.71 % wages and 14.29% passive.

2) Now you have to divide your foreign taxes that you have either paid or accrued accordingly. 

If you paid 32k in taxes and the tax rate was the same for all sorts of income then you would split your foreign taxes into the two categories.. $27,427 against wages and the balance against interest.

3) you then have to pro-rate the standard deduction the same way.. (I will assume you are using the standard deduction)

12200 x .8571 = $10,420 

So your taxable wages eligible for foreign tax credits = $79579 (90k - 10420)
And your eligible taxes paid for the wages category = $27,427 (32k x .8571)

4) Next you determine pro-rate share your US tax liability for that category of income

If the Foreign tax burden is higher, the tax credit will cover the US liability, if it is lower, you can end up owing US tax.

Its this split of taxes between categories which is one reason why you can end up owning US tax even if your Foreign tax bill was higher... It happens a fair bit if you have, say a foreign pension distribution which is tax free there but taxable in the US. Or, another example is if investments are taxed at a different rate and this skews the division of taxes between categories..

Lost? ... it takes a while to parse it all..

There are a number of worked examples, both simple and complex out there on the internet (my favourite one seems to be down at the moment) which are fully worked out.. and that makes it easier to follow along.


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## Kph100 (Jul 23, 2018)

Well i went to HR Block to get an advisor to do it. 

Mistake

She filed return but didnt submit 8938 forms !

and they now say cant submit amended return yet as IRS not released amnded tax forms yet/

Lesson learnt do it yourself.


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