# US expat in UK taxes on bonus



## Brandon_B (Jun 26, 2021)

Hey there,

My wife and are US citizens currently living in the UK. My wife, who works for a US company that just got acquired, is going to get paid out for her shares. The agreement made by the purchasing company is paying out shareholders (who are all employees) as a cash bonus on the next pay cycle. This is bad for us from my understanding because though bonus in the US are taxed at a flat 22%, the UK taxes it as income at whatever bracket it falls under for the year. Which would put the full amount at 47%, like I said, bad. 

My questions are, is there a way to Lowe's this tax responsibility in the UK? If there isn't, and we decided to leave the UK immediately back to the US, would we then be able to have split year treatment on the income for the year? How does split treatment work. Is it based on the entire year's income and the portion of tax year spent in the UK? 

Any advice would be helpful. This is a large payout and a difference between 22% and 47% is a difference in many tens of thousands in taxes.

Cheers,
Brandon


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## 255 (Sep 8, 2018)

Brandon_B -- OK, I think you have a few misperceptions here. First bonuses are considered "earned income," in the U.S., subject to FICA and whatever marginal income tax rate you fall in. The flat 22% is the withholding rate for bonuses, not the tax rate. As a quick example, say you earned $12,000 in salary and received a $6,000 bonus. The withholding for your salary, will be based on the number of "exemptions" you claim on your IRS form W-4; while withholding on your bonus will be a flat 22%. In this case, if the $18,000 is your total income, your U.S. tax would be zero, as you'd be under the standard deduction of $20,800 for a couple filing jointly (2020 numbers.) Living in the U.S, at the time the bonus is issued, should reduce your rate from a 47% UK rate. I know a guy that works in Europe, but spends Christmas, in the U.S. every year, where he receives a "Christmas Bonus," subject to U.S. tax but exempt in the country he lives in, in Europe. He owns his own companies, both in the U.S., and Europe and can control when/where he gets paid. He does this primarily to have U.S. "earned income," so he can continue contributing to his U.S. pension plans.

Also, if you are earning the bonus overseas and your U.S. tax is based on your worldwide income, the U.S. will get a bite of anything over the FEIE, if that's the way you file. Alternately, you can file the FTC -- so you shouldn't get "double-taxed."

Your first sentence also makes me question if this is really a cash bonus or actually a redemption of shares, which should be capital gains. Let's say your wife has "founder's" shares or she has shares from exercising stock options and her basis in these shares is $10 per share. If the acquiring company is "buying" her shares, for lets say $70 per share. She now has a gain of $60, with favorable, reduced, capital gains rates (long term capital gains rates are 0%,15% or 20%,) in the U.S., based on your overall income.

I really don't know much about UK taxes, but in general, you owe taxes to the country where you are working (physically present) regardless of where the company is based. If you are living and working in the U.S., when the "bonus" is paid, you should only owe taxes to the U.S. Lets say you decamp the UK, for the U.S., later this year -- you should only owe taxes to the UK, on income earned while living in the UK. Of course the U.S. taxes it's citizens on all their income, but you can still take the FEIE or FTC for wages earned , while living in the UK (assuming you met the qualifications.)

The only other option, that I can think of, to minimize taxes would be to "assign" your wife's shares to an entity, before the "deal" closes -- the "bonus," or whatever it is, would the be paid to the entity. Let's say you open this entity in the UAE (0% tax rate,) this company would assume your wife's basis and if you elect to have it taxed as a disregarded entity, the gain would then flow to her personally, for U.S. tax purposes. I have no idea how the UK taxes offshore entities, assuming, you remained in the UK, while receiving the "bonus." Good luck. Cheers, 255


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