# US Taxes from UK - ISA & NOL questions



## sid351 (Aug 13, 2013)

Hi there,

I'm a US citizen living permanently in the UK (since I was a kid), filing my first return ever.

I qualify for the foreign earned income exclusion (FEIE) and don't earn enough to surpass it, which has TaxACT telling me I qualify for a NOL (net operating loss) year.

My questions are two-fold:

Firstly, if I'm in a NOL, and probably will be for the foreseeable future, does that mean that if I go over the FEIE one year (within 20 from now) I can carry-forward some of my NOL's as deductions of tax for that time in the future? OR, as I suspect, is TaxACT calculating it a little off, or my understanding NOL's is not quite right?

Secondly, as I'm under the FEIE limit (and potentially NOL'd by a fair amount) how would I stand with opening one of the Tax-Free ISA savings accounts in the UK? 

Currently I don't have one to avoid headaches, I have a decent (taxed) interest rate on my current account; the rate (even after tax) is only slightly better on the ISA's. If it's a headache I'll stick with my taxed current account. Could I "use" some of the gap between what I earn and the FEIE to cover what I gain tax-free in interest? Or am I starting to get in to the territory where it'd be worth (considering) the $300 to pay someone that does US ex-pat tax for a living?

Bonus question (for food-for-thought): How complicated would becoming self-employed (still in the UK and paying UK taxed) make all of this?


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## Bevdeforges (Nov 16, 2007)

I was about to say that, if TaxAct tells you you qualify for an NOL, then you must be self-employed already. But you might want to look at IRS Pub. 536 Publication 536 (2013), Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 
to make sure you're not including anything in the deductions that is disallowed. 

The issue of tax-free savings accounts is a tricky one for those of us living overseas. Generally speaking, tax-free savings accounts are only tax-free in their own jurisdiction. The IRS expects you to declare the income like any other savings account, and if your personal exemption and standard deduction don't cover your "unearned income" (i.e. the part that you can't include on the FEIE exclusion) then you pay tax on it.

But no, you can't "use" some of the gap between what I earn and the FEIE to cover what I gain tax-free in interest. The FEIE only applies to "earned" income - i.e. salary and salary-like compensation. Interest, dividends and capital gains can't be included when taking the FEIE.

But how exactly did you get to an NOL if you're an employee?
Cheers,
Bev


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## sid351 (Aug 13, 2013)

Bevdeforges said:


> But how exactly did you get to an NOL if you're an employee?
> Cheers,
> Bev


Obviously I did something wrong. I think I might start the submission from scratch on TaxACT.

Thanks Bev.


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## jbr439 (Nov 17, 2013)

I imagine there is the possibility an ISA would be considered a "foreign trust" (as is the case with Canadian tax free accounts). In that case you'd have annual 3520 and 3520A forms to file.


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## BBCWatcher (Dec 28, 2012)

The U.K. and the U.S. have a tax treaty, so there's a decent chance the treaty will have something to say about that particular U.K. account, though maybe with a savings clause modifier.

But yes, I agree with Bev that, _as a general principle_, there is no such thing as a globally tax-advantaged account. If you hold an account in, say, Botswana that the government there doesn't tax (or taxes less) due to Botswana's tax code, U.K. tax authorities aren't going to care much at all about that.

Fortunately the U.S. tax code has a personal exemption and (usually) standard deduction, so even a foreign tax-free account that has no treaty protection has to kick off some non-trivial income before it gets into taxable territory. Also, _most_ countries don't tax capital gains until they are realized, so if you have an account that's light in interest/dividends but potentially heavy in capital gains, as long as you aren't actively trading within the account you won't have gains to report.

Then there are the PFIC issues in the U.S. tax code, so watch out for those. Ordinary bank accounts, direct holding of individual government and corporate bonds (gilts), and direct holding of publicly traded shares (equities) in banks and insurance companies are among the types of holdings that aren't treated as PFICs. Other things might be, such as foreign mutual funds (a.k.a. unit trusts).


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## Brank2015 (Mar 4, 2015)

Bev, quick question....does rental income on property be included within FEIE?
Thanks
Les


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## Bevdeforges (Nov 16, 2007)

Brank2015 said:


> Bev, quick question....does rental income on property be included within FEIE?
> Thanks
> Les


Only if you are employed in a property business (i.e. it's your main source of income). If it's just an "investment" then it doesn't count as "earned" income and goes with the other investment income. (Pub 54 has more information on this.)
Cheers,
Bev


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