# so lost. UK/US taxes



## MJ2014 (Feb 23, 2016)

My head is going to explode. I've just spent all day trying to figure out what to do with my finances and really don't think I've made much progress. Please help me if you can!

I am a US citizen that has recently moved to the UK to be with my British husband. He has no income whatsoever in the US and so I was just going to do married filing separately and do not plan on claiming him as a dependent. We have no children. If we are living in the UK and he has no US income, he does not need an ITIN, correct?

Secondly, I have a traditional IRA with Vanguard with not a lot of money in it. I wanted to switch this to a ROTH IRA, but understand that I cannot because I am married filing separately, correct? 

I see no benefit to keeping a traditional IRA or continuing contributions to it because I will be claiming the foreign tax credit next year and therefore would not get any tax deduction/benefit from having an IRA anyway. So what do I do with the money sitting in there? 

Thirdly, I have a large sum of money sitting in a portfolio with T. Rowe Price in the USA that I plan on using far in the future (like in 10-25 years maybe?). Do I pay income and capital gains tax on this in the USA yearly AND in the UK? I understand I can claim 'remittance' on the earnings from this account for up to 7 years in the UK if I don't move the money into the UK, but then after that, do I have to pay the capital gains tax in both countries? That doesn't seem fair. But of course, why would it be? 

I am having trouble figuring out how to best save my money for retirement and possibly buying a house in the future without overpaying in taxes. So I can't do ROTH IRA because of my married filing separately status (and we reallllyyyy don't want to go through the process of my husband getting an ITIN and him having to file every year or filing jointly). The traditional IRA really serves no benefit with all my income being earned in the UK and claiming foreign tax credit. And if I invest with the mutual funds in T. Rowe Price, I get double taxed maybe? I have heard of an ISA in the UK, but read that the US will tax the earnings on that. 

So what tax sheltered retirement vehicle is there for an American married to a Brit living in the UK? I haven't started work yet, but anticipate starting in the next 2 months. I am not sure if my job will have an employer sponsored pension plan. Would this be taxable in the US too?

I appreciate any advice you can offer. I was hoping to get advice here before having to go to an expensive financial advisor which I really don't have the money for at this time.


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## Bevdeforges (Nov 16, 2007)

Not to worry, you're hardly the first person to have these questions - and I guarantee you, you won't be the last.



> so I was just going to do married filing separately and do not plan on claiming him as a dependent. We have no children. If we are living in the UK and he has no US income, he does not need an ITIN, correct?


That's the usual approach. The other option is to file jointly, but then you must not only get your husband an ITIN, but also report all his worldwide income as well as your own.



> Secondly, I have a traditional IRA with Vanguard with not a lot of money in it. I wanted to switch this to a ROTH IRA, but understand that I cannot because I am married filing separately, correct?


It used to be the case that you could not have a Roth IRA at all if you are married, filing separately. However, that seems to have changed over the last several years. If you're planning on remaining overseas, though, do look into this plan a bit more carefully. It's not clear what benefit you'd get from a Roth IRA when you're juggling off two different tax systems. (And you will pay full US tax on the changeover.)



> Thirdly, I have a large sum of money sitting in a portfolio with T. Rowe Price in the USA that I plan on using far in the future (like in 10-25 years maybe?). Do I pay income and capital gains tax on this in the USA yearly AND in the UK? I understand I can claim 'remittance' on the earnings from this account for up to 7 years in the UK if I don't move the money into the UK, but then after that, do I have to pay the capital gains tax in both countries? That doesn't seem fair. But of course, why would it be?


Basically, no - there is a tax treaty between the US and UK that is supposed to eliminate double taxation. I'm not real familiar with the UK treaty, but generally speaking, you pay your taxes in the "source country" - i.e. the country where the income comes from. So for your US account, most likely you'll pay tax to the US on the income and capital gains. There is usually a way to declare this on your local (country of residence) declarations, while indicating that this is subject to the tax treaty provisions so that it won't be taxed twice.



> So what tax sheltered retirement vehicle is there for an American married to a Brit living in the UK? I haven't started work yet, but anticipate starting in the next 2 months. I am not sure if my job will have an employer sponsored pension plan. Would this be taxable in the US too?


Ah, this is the big question for all of us expats. First of all, leave your regular IRA right where it is. That's what I did 25 years ago when I left the US - and I've found that 25 years later, I actually have a nice little nest egg. Generally speaking, although you can't add any more to the IRA from overseas (subject to all sorts of "ifs" "ands" and "buts" - but for simplicity's sake, let's just say you can't), it's really impressive how that compound interest stuff works over the long haul.

If your employer has a company pension plan, you may not even have to declare it to the US - it depends to a large extent on what kind of pension plan, exactly. For a defined benefit plan or the government pension program, no, you won't have to declare it at all. For a defined contribution plan, there's a bit more reporting, and you may have to declare gains year by year. Still, it's generally well worthwhile to have the retirement savings when you hit retirement age particularly if you're planning on staying in the UK. (Just for the record, I'm fast approaching my retirement age, and am finding it's rather nice to have a couple of different sources of funds to draw upon.) 

It all seems rather daunting at first, but things do have a tendency to work themselves out over the long haul. You hear lots of complaints about FATCA and such, but the longer you live overseas, the more you'll find ways to deal with the rules. 
Cheers,
Bev


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## MJ2014 (Feb 23, 2016)

Thank you so so much! I think that clears a lot up for me. So I guess it would be okay to continue contributing money into my mutual fund accounts with t Rowe price since I would simply be paying tax on that as I always have normally in the U.S. That seems to help keep things simpler for me, plus the company always gives me the tax reporting sheets I need every year, and that way I can still be earning compound interest in something in order to save for the future.

And am I correct that interest earned on my current traditional IRA is not taxed in the USA? From what I have read in the UK tax laws it is treated similarly in the UK. However I understand when I start withdrawing money from this during retirement, it is taxable in the U.S. or UK depending on where I'm living. 

I read that if I use the foreign tax credit, rather than the foreign earned income exclusion next year, that I could still contribute to my traditional IRA. Does that sound correct? Since the taxes in the UK are higher than the U.S. I'm anticipating not owing any U.S. Income tax ( and I expect to be earning around 32-35 k pounds/year). 

Thanks so much for putting things in perspective for me. I don't think I'll ever be earning that much to draw the scrutiny of the IRS but I'm always worried of unintentionally doing something illegal! Filing taxes is a special kind of hell!


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## Bevdeforges (Nov 16, 2007)

> owe price since I would simply be paying tax on that as I always have normally in the U.S. That seems to help keep things simpler for me, plus the company always gives me the tax reporting sheets I need every year, and that way I can still be earning compound interest in something in order to save for the future.


Basically, yes. Though it's doubtful T Rowe Price will give you much information about your reporting obligations for UK taxes. Chances are, you'll have to report your gains and losses, but there should be some way of exempting them from the double tax burden. (Check with someone in the UK who knows the tax rules there.)



> And am I correct that interest earned on my current traditional IRA is not taxed in the USA? From what I have read in the UK tax laws it is treated similarly in the UK. However I understand when I start withdrawing money from this during retirement, it is taxable in the U.S. or UK depending on where I'm living.


The interest and other earnings on your IRA go untaxed in the US. I have heard the UK also just ignores the gains and interest on the account. (As does France, the jurisdiction I'm familiar with.) 

When you start withdrawing funds from your IRA, you report the amount you withdraw as "income" and pay your US taxes on the amounts. If the UK works like France does, the withdrawals are considered to be transfers of capital - i.e. like you were simply withdrawing funds from your US bank account, with the tax already paid on it all.



> I read that if I use the foreign tax credit, rather than the foreign earned income exclusion next year, that I could still contribute to my traditional IRA. Does that sound correct? Since the taxes in the UK are higher than the U.S. I'm anticipating not owing any U.S. Income tax ( and I expect to be earning around 32-35 k pounds/year).


If you take the foreign tax credit rather than the Foreign Earned Income Exclusion, then yes, you will be able to contribute to your IRA. However, just be aware that you could jeopardize your ability to take the FEIE in the future. The wording of the instructions is pretty ambiguous.

The other thing to consider is the difference in the US vs. UK tax year. The US taxes based on a calendar year, while the UK taxes based on an April to April year. (The actual end date of the UK tax year is something like April 5th.) You have to apportion your UK taxes paid for "your share" (assuming you and your husband file together in the UK) and you may find that some of the UK deductions and exclusions are a bit more generous than the US so, despite the higher tax rates, you may wind up paying less tax. 

If you want to "study up" on how all this works, take a look at IRS Publication 54 for overseas taxpayers. https://www.irs.gov/publications/p54/
Cheers,
Bev


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## MJ2014 (Feb 23, 2016)

So if claiming foreign tax credit one year, you are not supposed to switch to FEIE in subsequent years? Or is it the other way around?

Might the best approach for me be to hold off on making any IRA contributions this year and wait to see how much in taxes is taken from my monthly pay checks once I start working? If it seems like I am paying more taxes than I would with the same dollar for dollar income in the U.S. do the FTC, and if not then just stick with FEIE? 

If I claim FEIE this upcoming tax year, and it makes sense for me to switch to just FTC the next year so I can continue IRA contributions in the U.S., is that possible?

Also, I noticed on my T. Rowe price account that it says if my address is abroad I may not make further purchases in those accounts. Can I just leave the contact address on those accounts as my family home address in the U.S. in order to make more contributions? I would still be paying tax on the dividends and capital gains in the USA (and presumably claiming I don't owe tax on it in the UK because of the tax treaty) so should it matter if the U.S. Address I use is my family's even though I don't normally reside there?

I just want to save money someplace for a house and for retirement that earns more than a bank savings account! Why is this so complicated!?
It seems like the only options are 1) using FTC so I can keep making IRA contributions, or 2) investing more in my mutual fund account, but possibly not since they don't want me doing this from abroad apparently? Or 3) leave all my us accounts alone as is and hope they appreciate with time, and hopefully just get an employer sponsored pension scheme through my UK job?


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## Bevdeforges (Nov 16, 2007)

Seriously, don't get too caught up in trying to work all the angles right away. It will take a while to get used to the "new economic system" you find yourself in. Simple example - yes, they take "social insurance" from your paycheck, but that really does cover your medical expenses without co-pays and all that stuff. So, you may find out you have more available money after all, even with the higher taxes. (Oh, and by the way, you will also be building eligibility toward a UK pension, too, so that is taken care of to some extent.)

But to answer your other questions: taking the FEIE is an election. (Actually, so is taking the FTC - if you want to pay double taxes, the IRS certainly won't stop you.) In the case of the FEIE, however, once you "revoke" your election to use it, you're supposed to wait a couple of years before you can use it again. Or, you have to get IRS permission to start using it again. https://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

One thing to be careful of - while, sure, you can make IRS contributions if you don't elect the FEIE, you may or may not be able to deduct your IRA contributions from your income for UK tax purposes like you can for the US.



> Also, I noticed on my T. Rowe price account that it says if my address is abroad I may not make further purchases in those accounts. Can I just leave the contact address on those accounts as my family home address in the U.S. in order to make more contributions?


That's a T Rowe Price internal policy matter, not a matter of law. Many brokerage firms are closing out "foreign" accounts, due to the additional paperwork involved. You can continue to use a family member's US address for your account if you like, but it's up to T Rowe Price whether or not they can/will ask you to "prove" your residence there at some future point. You may or may not have to declare your earnings from the US account to the UK tax authorities - and claim back (or not) taxes paid in the UK on the earnings. (That's where I tend to recommend that you wait a bit and see how the UK tax system works before making any changes in your accounts.) Each tax treaty has a few "different" provisions, and you probably should do a bit of research first to make sure you don't get tripped up on arrival.



> It seems like the only options are 1) using FTC so I can keep making IRA contributions, or 2) investing more in my mutual fund account, but possibly not since they don't want me doing this from abroad apparently? Or 3) leave all my us accounts alone as is and hope they appreciate with time, and hopefully just get an employer sponsored pension scheme through my UK job?


Or: some of the above, a combination of all the above, and/or some other option you'll discover once you've lived in the UK for a bit. First thing to realize is that you WILL get credits in the UK government retirement plan when you get employment - and those don't have to be reported on to the IRS.

Another option is to look into investment/savings schemes available to you in the UK. (Not sure about the UK, but many European countries have employer or government sponsored savings plans that are no more "complicated" for tax reporting purposes than a regular savings account.) Or, look into investing in the UK. It complicates your US reporting a bit, but if you keep it fairly simple, you can probably manage it yourself (or do a minimalist reporting to the IRS "in good faith" and wait until they tell you they "need" more information). 

It's early days yet of this FATCA stuff, and the real heavy duty reporting doesn't kick in until your foreign financial assets top $200,000 (which I suspect may take you a while). There's support among the US expat groups (see if there is a FAWCO group anywhere nearby), and at least for the time being, the IRS is focused on the big time potential tax evaders (with millions stashed in overseas accounts). There may be some options available you simply aren't aware of now.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> One thing to be careful of - while, sure, you can make IRS contributions if you don't elect the FEIE, you may or may not be able to deduct your IRA contributions from your income for UK tax purposes like you can for the US.


True, but there are a couple options:

1. You can make a nondeductible Traditional IRA contribution. This is available if you have unexcluded earned income no matter what your income level.

2. You can make a Roth IRA contribution. This is available if you have unexcluded earned income but with an income limit.

Both of these types of IRA contributions are after U.S. tax, not pre-tax.


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## Bevdeforges (Nov 16, 2007)

BBCWatcher said:


> True, but there are a couple options:
> 
> 1. You can make a nondeductible Traditional IRA contribution. This is available if you have unexcluded earned income no matter what your income level.
> 
> ...


Hm, you didn't used to be able to make a "non deductible" traditional IRA contribution - has the law on that changed? I assume you'd have to have earned income in excess of the FEIE limits to do as you described, because otherwise it's all or nothing as far as excluding your earned income.

Ditto the Roth IRA - it used to be no Roth if you filed married filing separately. That one has apparently changed (or at least I find no reference to the restriction these days), but opening a Roth from overseas can be a bit of a trick due to the KYC rules.

On the traditional IRA, too, there is the matter of calculating the taxable vs. non-taxable portion of any subsequent withdrawals. One advantage to maxing out any locally available tax-free bank accounts before you try something more exotic is that the balances are protected/insured by the local banking laws so that you'll never wake up one day to find your savings has dropped in value. Also with the local account, if you plan on remaining wherever you are, there is no exchange risk.

Anyhow, no one plan is "right" for everyone. 
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> Hm, you didn't used to be able to make a "non deductible" traditional IRA contribution - has the law on that changed?


Yes, there have been a few fairly significant changes in recent years. A nondeductible Traditional IRA contribution has no income limits. Warren Buffet can make a nondeductible Traditional IRA contribution.



> I assume you'd have to have earned income in excess of the FEIE limits to do as you described, because otherwise it's all or nothing as far as excluding your earned income.


Correct. You need unexcluded earned income to make any sort of IRA contribution. However, you can make an IRA contribution for your spouse, even a nonworking one, as long as you have enough unexcluded earned income.



> Ditto the Roth IRA - it used to be no Roth if you filed married filing separately. That one has apparently changed (or at least I find no reference to the restriction these days), but opening a Roth from overseas can be a bit of a trick due to the KYC rules.


If you already have a Traditional IRA custodian it's not too hard to open a Roth IRA with that same custodian. You can even open an IRA (Traditional or Roth) with most U.S. banks, so if you still have a U.S. bank account that's usually fine, too, at least to meet contribution deadlines to get the funds in place then shop around for a new custodian that can offer low cost index funds, for example.



> On the traditional IRA, too, there is the matter of calculating the taxable vs. non-taxable portion of any subsequent withdrawals.


That has changed, too. Several years ago Congress required "smarter" 1099s which provide the cost basis. I don't remember the cutoff date -- it's still possible to get a 1099 without a cost basis listed if the investment is old enough -- but I just got a 1099 for 2015 that included the cost basis on some fairly old money. You still have to do a little homework to know what the rules are, but the tax apportionment itself has gotten easier.



> One advantage to maxing out any locally available tax-free bank accounts before you try something more exotic is that the balances are protected/insured by the local banking laws so that you'll never wake up one day to find your savings has dropped in value.


Well, I don't think so. For a U.S. person those non-U.S. vehicles can be quite exotic automatically. Moreover, you can put IRA funds to work in whatever you want. If that's an ordinary FDIC insured savings account paying 0.5% APY at your bank (as mentioned above), that's fine. If that's a U.S. government bond index fund, that's fine. Whatever you prefer. That said, since the funds are U.S. tax advantaged ordinarily you should put those funds into the riskiest assets you feel comfortable holding within your total holdings, while the safer (lower yielding) stuff you hold is outside your IRAs.



> Also with the local account, if you plan on remaining wherever you are, there is no exchange risk.


That's not unique to a local account. If, for example, you want a euro (currency) oriented outcome, then just put your IRA funds into anything that is highly correlated with the euro -- a Eurozone stock index fund, for example. Not a problem. You can bet on whatever currency or currencies you want within your IRAs. You can even bet on gold, oil, real estate, or orange juice if that's your thing.


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## Bevdeforges (Nov 16, 2007)

OK, but for the non-gamblers among us, the local tax-free accounts actually can wind up being tax free all around (i.e. when the interest on the accounts falls within your personal exemption and standard deduction), and are not subject to the "rude awakening" if the stock market should tank just as you are looking to retire.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bev, that doesn't make any sense.

If you're not a "gambler," don't be a gambler. IRA funds can be placed in any vehicle(s) you wish, with whatever risk profiles you wish. You really should place whatever your riskiest (highest yielding) assets are within a tax-advantaged account, simply to reduce your tax. But if the riskiest assets you want to hold are U.S. or German government bonds (for example), that's fine, do that.

IRA funds are U.S. tax advantaged. You don't have to worry about whether they're under your personal exemption and/or standard deduction.

IRA funds are U.S. tax recognized. You don't have to worry about whether they're PFICs, foreign trusts, or reportable foreign accounts.

IRA management fees are the lowest cost in the world, assuming you exercise at least equivalent care in choosing an IRA custodian and investments.

Unless there is a compelling local reason, U.S. persons should rely on IRAs first as their preferred retirement savings vehicles (if they're eligible), _then_ add to something else. But none of the reasons you've provided make any logical sense as far as I can tell.


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## Bevdeforges (Nov 16, 2007)

If you don't have much money - don't pay any taxes - and would have to report (and possibly pay taxes) on any foreign fund earnings, these tax free bank accounts are safe and easy ways to save up money in the country and currency of your residency.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> If you don't have much money - don't pay any taxes - and would have to report (and possibly pay taxes) on any foreign fund earnings, these tax free bank accounts are safe and easy ways to save up money in the country and currency of your residency.


Well OK, but I did write "unless there is a compelling local reason," and even so such local accounts would not be instead of IRAs (if qualified) but rather in addition to.


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