# US Estimated Taxes While Abroad



## Meepmeepy

Hi guys,

Just looking for quick clarification on something. My spouse currently pays estimated taxes in the US due to being self employed. They have currently probably paid a little too much estimated tax than they need to because their income is now going to be earned in the UK from next month onwards.

When they move to the UK, am I correct in assuming because the rest of their income for the year will be covered by the US/UK tax treaty they can now stop paying estimated taxes in the US? And fling estimated taxes every 3 months? (their income will be within the threshold permitted by the US/UK treaty).


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## Bevdeforges

It depends on the nature of their income, but if it's covered by the FEIE, it's likely they'll be able to stop with the estimated taxes every quarter. The key thing is that you have to cover either 90% of your tax due or 100% of what you actually owed the previous year by the April 15th filing deadline. If your estimated payments fall short, you'll owe interest and penalties.

If you have overpaid, though, you'll get a refund when they file their 2015 taxes next year.
Cheers,
Bev


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## Meepmeepy

Thank you!

Obviously I'm aware when my partner gets to the UK they need to fill out some forms/let the IRS know about their circumstances. The income would be self employed money in the UK for a few months and then PAYE fully employed income which as far as I can tell is covered by the FEIE. 

SO as long as my spouse has paid 90-100% of what they owe for the 2014-15 year on their US taxable income it should not be an issue, correct?


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## Bevdeforges

Actually, no, there are no forms to fill out to "let the IRS know about their circumstances." As a US citizen, your spouse must continue to file US tax returns on pretty much the same basis as they did back in the US. The FEIE doesn't exempt anyone from filing - you have to file a return in order to claim the FEIE each year.

And the first year that someone is living overseas can get a bit tricky because you can't file a return claiming the FEIE until you have qualified for the FEIE - either 12 consecutive months outside the US, or one full calendar year outside the US. (See IRS Publication 54 for details.) So normally one has to file for the appropriate extensions of the time to file until one meets the requirement.

Also, be careful. The US individual tax year is the calendar year. Your spouse should have already filed for 2014. If s/he is moving to the UK during 2015, it's the 2015 calendar year for their next filing. (Although the UK tax year runs April to April, the US tax year is the calendar year and you must adjust.)
Cheers,
Bev


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## Meepmeepy

Ok so following steps.

1/ Make sure estimated taxes for period Jan 2015-Aug 2015 are paid in to 90% by Jan 2016 deadline.
2/ Make sure any additional self employment, state and federal taxes for the same period are paid by April 2016 even if we have not filed a return.
3/ Before April 2015 ask for a 6 month extension by filling out the correct form. 
4/ Once 6 month extension is granted and we pass the 330 day threshold of qualifying for FEIE (which would be around August 1st so within the 6 months) file the return which we have already paid for).


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## Bevdeforges

Basically, yup! (Though it's not the 330 day thing you have to pass - it's the 12 consecutive months outside the US as I understand it. See Pub 54 for details.)
Cheers,
Bev


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## BBCWatcher

Meepmeepy said:


> 1/ Make sure estimated taxes for period Jan 2015-Aug 2015 are paid in to 90% by Jan 2016 deadline.


Almost. There are some cases where you can get charged interest if the estimated tax payment is insuffcient within a tax year. You don't get to make three $1 estimated tax payments and then a fourth big one if your income is relatively smooth throughout the year -- that doesn't work.

So it's best to hit 100% to that date as of the September 15th estimated tax payment (the third installment). Then "top up" if necessary by April 15, 2016. The January 15, 2016, fourth estimated tax payment would only apply to other income if she's taking the FEIE, so it might be very small or zero.

Note that she is not required to take the FEIE. I recommend that U.K. residents run the numbers both ways in a simulation: with the FEIE and without (only taking the FTC).


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## Meepmeepy

BBCWatcher said:


> Almost. There are some cases where you can get charged interest if the estimated tax payment is insuffcient within a tax year. You don't get to make three $1 estimated tax payments and then a fourth big one if your income is relatively smooth throughout the year -- that doesn't work.
> 
> So it's best to hit 100% to that date as of the September 15th estimated tax payment (the third installment). Then "top up" if necessary by April 15, 2016. The January 15, 2016, fourth estimated tax payment would only apply to other income if she's taking the FEIE, so it might be very small or zero.
> 
> Note that she is not required to take the FEIE. I recommend that U.K. residents run the numbers both ways in a simulation: with the FEIE and without (only taking the FTC).



What does the FTC involve. Sorry I have no idea what it is heh. I guess my main concern is paying double tax on their US and UK income and I thought the FEIE was the only was to avoid that.


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## Bevdeforges

FTC refers to the Foreign Tax Credit, whereby you take a credit against any and all US income taxes due for foreign income taxes you paid on your income during the tax year. (Be careful because the US only considers certain taxes paid overseas to be "income taxes" even if they are paid at the same time as the income tax.)

For the first, usually partial year that you're abroad, it can be touch and go whether the taxes paid in your new country will cover your US tax obligation on your foreign income. (See Publication 54 for further explanation of how it works.)

The other complicating factor for someone moving to the UK is that the tax years are different. The US tax year is a calendar year, whereas the UK tax year runs April to April. So you do have to keep reasonable financial records of your own to report the right income for the right period to each of the two governments.
Cheers,
Bev


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## BBCWatcher

But the basic point is that if the foreign income tax is about equal or higher -- and can be reasonably expected to remain that way -- the FTC-only approach is the better deal. Just like the FEIE there's a "startup" period when you might have to pay the IRS then get a refund (via an amended tax return for example), and/or when you ought to delay U.S. filing as long as allowed.

If you don't take the FEIE then it becomes possible to qualify for the Additional Child Tax Credit (if otherwise qualified), and it at least becomes a lot easier to make qualified U.S. IRA contributions.

You can use even the free tax preparation software such as TaxAct.com and TaxSlayer.com to try both approaches as a simulation to see which works better. That's all that I recommend, and I don't even recommend doing that in clearly lower income tax places like the United Arab Emirates. But U.K. residence could go either way -- "It depends."


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## StewartPatton

All of the above seems reasonably correct with the assumption that your spouse will be an employee in the UK. If your spouse will be self-employed, they still must pay U.S. self-employment taxes--the FEIE doesn't do anything for that. However, if they qualify for the benefits of the US-UK totalization agreement (and this is a separate agreement than the US-UK tax treaty), they can get a certificate of coverage from the UK, which would exempt them from US self-employment taxes.


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## Meepmeepy

StewartPatton said:


> All of the above seems reasonably correct with the assumption that your spouse will be an employee in the UK. If your spouse will be self-employed, they still must pay U.S. self-employment taxes--the FEIE doesn't do anything for that. However, if they qualify for the benefits of the US-UK totalization agreement (and this is a separate agreement than the US-UK tax treaty), they can get a certificate of coverage from the UK, which would exempt them from US self-employment taxes.


Ugh this is all so confusing and this is the first we have heard of this =/ . Really feeling overwhelmed and worried almost all her income will be taken in tax which we just can't afford.

So this certificate. Do we get one right away? Do we have to wait till she has paid some taxes national insurance/UK taxes in the UK? It's going to take a month or so to get all the paperwork sorted to registered a self employed in the UK (got to get a NI number which has a 2 weeks wait at the moment) and then register as self employed. So do we wait till we have registered?


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## Bevdeforges

Easiest thing is to concentrate on the registration for her "self-employment" and see that through. Now, if that registration includes some sort of registration for paying into the social insurance system in the UK based on her business, then she should be eligible to get a certificate saying that she is covered in the UK system.

You do NOT need to submit this certificate with the tax returns. Just have it available should the question ever come up. (Chances are, it won't.)
Cheers,
Bev


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## StewartPatton

Bevdeforges said:


> You do NOT need to submit this certificate with the tax returns. Just have it available should the question ever come up. (Chances are, it won't.)


This is not correct. You must submit a copy of the certificate of coverage with your US tax returns.

Here's a link with more info on all this: International Programs - Totalization Agreement with the United Kingdom


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## BBCWatcher

StewartPatton said:


> This is not correct. You must submit a copy of the certificate of coverage with your US tax returns.


I think it's a good idea to provide a citation when/where possible, so let me do that here.

Bev, Stewart is evidently referring to the instructions for IRS Form 1040 Schedule SE. On page 2 of those instructions (2014 edition at least) you'll find the following guidance:



IRS Form 1040 Schedule SE Instructions said:


> If your self-employment income is exempt from SE tax, you should get a statement from the appropriate agency of the foreign country verifying that your self-employment income is subject to social security coverage in that country. *If the foreign country will not issue the statement*, contact the SSA Office of International Programs. Do not complete Schedule SE. Instead, attach a copy of the statement to Form 1040 and enter “Exempt, see attached statement” on Form 1040, line 57.


(Emphasis mine.) Stewart, I think Bev is correct. If you get the statement from the foreign social insurance program, then you keep it in your files and do nothing. The instructions for attaching a statement refer to the situation when the foreign social insurance program won't issue a certificate/statement (for bureaucratic reasons, apparently), whereupon there's a process to get a statement from the U.S. Social Security Administration.


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## BBCWatcher

OK, so if Bev and I are correct -- and I think we are!  -- then please note that you only need to satisfy two requirements here:

1. Get the foreign social insurance coverage certificate/statement into your personal files at least before the IRS could make an inquiry, preferably before you file your U.S. tax return (perhaps with a filing extension);

2. Make sure the self-employment income you are excluding from U.S. SE tax is, indeed, within the scope of the foreign social insurance program in a treaty country -- in other words that foreign social insurance contributions have been deducted (or will be paid) from that income. The income scope of coverage needs to match. It's OK from the U.S. point of view if you're _late_ paying your U.K. NI contributions, for example, as long as you're actually paying them -- perhaps with U.K. interest/penalties if you're late, and that wouldn't be a good idea.

Now, all that said, if you have followed Stewart's advice and provided the IRS with paperwork that they don't actually require (i.e. a foreign social insurance coverage certificate/statement), no problem. The IRS won't be offended.


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## iota2014

Scratching my head here. I thought StewartPatton was referring to this paragraph in the page about the Totalisation Agreement:



> Certificates of coverage issued by the United Kingdom should be retained by the employer in the United States in case of an audit by the Internal Revenue Service (IRS). No copy should be sent to the IRS unless specifically requested by IRS. However, *a self-employed person must attach a photocopy of the certificate to his or her income tax return each year as proof of the U.S. exemption.*


This stuff is unbelievably complicated.


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## Bevdeforges

Basically, there is "what is written in the regs" and there is "how things are actually done in practice." The definition of "self-employed" can also vary greatly from one situation to the next.

Face it, there is no one "right way" to fill out and file your US tax forms. You do a good faith effort, disclosing everything that needs disclosing and taking those deductions and other "breaks" you believe you are entitled to. If you do something "wrong" or the IRS has questions about what you've submitted, they'll be in touch to ask further questions.

Put it this way, you are also "supposed to" send in the IRS copy of your W-2 form to support the figure you report as salary income. But if you're overseas you don't have any W-2s. So they wind up having to take your word for it. 
Cheers,
Bev


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## iota2014

It's a total mess, IMO.


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## Bevdeforges

iota2014 said:


> It's a total mess, IMO.


Hence all the calls in the US (for many years) to overhaul and simplify the tax system. With the current climate in Congress, though, I am definitely NOT holding my breath!
Cheers,
Bev


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## iota2014

No. And trying to simplify it can be predicted to make it even less coherent than it already is. It would need starting over, which can't be done. 

I look forward to being free of it.


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## BBCWatcher

The IRS's instructions must take precedence in IRS affairs, including tax filing. If the Social Security Administration mischaracterized the IRS's requirements, then the IRS controls. If Bev and I are correct, the IRS has simpler requirements than the SSA might think.

I don't think the W-2 example is a good example of complexity. The IRS tells you to attach W-2s. The IRS doesn't tell you to attach foreign wage statements that are not W-2s -- which would be more complex, as it happens. There's no ambiguity here provided you're applying high school level English interpretation skills.


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## StewartPatton

Interesting. The guidance here is very clear--a self-employed person is supposed to send a certificate of coverage to the IRS. Somehow people take that clear guidance to mean "oh, this is so complicated, it's terrible, just terrible." What's really terrible is the confident tone in which some people are so willing to provide the wrong answer. Gotta love the internet.


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## BBCWatcher

StewartPatton said:


> The guidance here is very clear--a self-employed person is supposed to send a certificate of coverage to the IRS.


OK, so where does the *IRS* tell filers to do that? 

I agree that the IRS is, in general, quite amazing in providing clear guidance in most situations. I'm much less pessimistic than Bev is on that point. In other words, I'm very willing to agree with you, but the IRS's own guidance that I cited doesn't actually tell filers to attach a _foreign_ certificate of social security coverage. It _does_ tell them to go get one.


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## BBCWatcher

As a follow-up, I took a quick look at the IRS's instructions for Form 1040 Schedule SE going back as far as tax year 2005. I can't find any change in that instructional language I quoted. If the IRS wants a foreign social security coverage certificate filed with your tax return, that particular language is quite badly written at the very least in telling you to do that.

Then it occurred to me that most of these treaty countries would issue coverage certificates/statements in a language other than English. Japanese from Japan, for example. What the heck is the IRS even supposed to do with a bunch of gibberish (to them at least) filed with a U.S. tax return? Well, the Social Security Administration seems to think it's your job, as a self-employed individual, to translate the coverage certificate. But darned if I can find anything at the IRS that even _hints_ of such a requirement!

I don't think we can fully trust the SSA's representations here, any more than we would trust the Small Business Administration to tell taxpayers how to file with the IRS, or the National Park Service to tell people how to get their lost U.S. savings bonds replaced. Each agency has its own areas of competence. If the SSA is correct, then it should be relatively easy to find matching or supporting language at the IRS. But where is it? (This works in reverse, too. I wouldn't trust the IRS to tell me how much my future Social Security retirement benefit will be. The SSA knows how to do that.)

If anyone can find some more/better guidance from the IRS on how one is supposed to do this, please post a follow-up.


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## Meepmeepy

Sorry to bump my old thread. But these questions are still on topic.

1/ My partner is now registered as self employed has a UK equivalent of social security number. Will be paying the UK national insurance every 6 months in one chunk. Can they now apply for a Totalization Agreement with the United Kingdom certificate OR does she need evidence she has paid some national insurance first to get that?

2 / My partner works as a contractor for a number of US companies still. Do they now need to be sent a W8? Or as she is still a US national does that not apply?


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## BBCWatcher

Meepmeepy said:


> 1/ ....Will be paying the UK national insurance every 6 months in one chunk. Can they now apply for a Totalization Agreement with the United Kingdom certificate....


What matters is that your partner is contributing to U.K. National Insurance across all his eligible income. As long as contributions are being fully made across all applicable income, great. The way your partner demonstrates that underlying fact is with a coverage certificate obtained from Inland Revenue's National Insurance Contributions Office. That coverage certificate should include the effective start date when that underlying fact first became true.

The timing of contributions doesn't particularly matter. If U.K. NI wants payments a certain way, in arrears or in advance, that's fine, that's up to the U.K. system. So yes, if your partner is signed up for U.K. NI contributions, and they'll actually be made across that income, that'll do.



> 2 / My partner works as a contractor for a number of US companies still. Do they now need to be sent a W8? Or as she is still a US national does that not apply?


Form W-8BEN? No, that's for non-U.S. persons. She is a U.S. person, so Form W-9 applies. The fact she is contributing to U.K. National Insurance does not alter her U.S. personhood.


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