# Tax question from US citizen working in UK



## maxmurphy

Hi,

Like many others who have posted in this forum I have just discovered that I should have been filing tax returns to the US. I work and pay taxes in the UK, I wasn't born in the US, I have never lived or worked in US but I am US citizen because my father was a citizen and I obtained a passport when I was younger. I don't have a SSN.

I was oblivious to the requirement to fill in tax forms until I started reading up on it today and I'm wondering what I should do. I'm employed and payed in the UK by a US based company and for reasons related to my employment I can't really ignore the situation. 

My first option is to apply for a SSN and then use the streamlined filing procedure to get back on track. This would be pretty straight forward in terms of income tax for previous years as for the previous 3 years my earnings were under the allowance thresholds. However I'm not so sure about next year and following years so there are a few things I'd like clarified.

I received some money from shares in a UK based company on which there were some favourable tax conditions. Can I put these in the 2555 form ? 

Also for capital gains and salary income to be declared in both the 2555 and 1040 do I declare the gross amount before tax in the UK or the net after tax and national insurance deductions in the UK. 

What about pension contributions from both me and my employer which aren't taxable in the UK, do these go into the forms ?

Depending on the answers to the above questions I may have tax liabilities in future years (but probably not). The other thing that is worrying me ins the fact that I will have to declare bank accounts which are mostly joint with my wife who is not a US citizen. I've nothing to hide but I don't like the idea of getting my wife caught up in this process.

For me US citzenship is nice to have but not something I really need and if the tax situation is going to cost me money whether this be in the next few years or on my pension or my estate when I die maybe the simplest option would be to renounce US citizenship. If I do this without a SSN should I expect to be asked to file tax returns for previous years ?

Max


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## BBCWatcher

maxmurphy said:


> I received some money from shares in a UK based company on which there were some favourable tax conditions. Can I put these in the 2555 form ?


First of all it may not be in your interest to take the Foreign Earned Income Exclusion. I would recommend using only the Foreign Tax Credit in your first tax calculation to see where you are. If it makes sense to skip the FEIE then it becomes much easier to contribute to the U.S. tax advantaged Roth IRA, for example.

OK, to answer your question directly, it depends on whether you received those shares as earned income or otherwise. The IRS defines what earned income means, so read the instructions closely. Non-cash compensation can be earned income in some circumstances.



> Also for capital gains and salary income to be declared in both the 2555 and 1040 do I declare the gross amount before tax in the UK or the net after tax and national insurance deductions in the UK.


It's almost always gross unless the instructions say otherwise.



> What about pension contributions from both me and my employer which aren't taxable in the UK, do these go into the forms ?


What do you mean by "pension" in this case?



> The other thing that is worrying me ins the fact that I will have to declare bank accounts which are mostly joint with my wife who is not a US citizen. I've nothing to hide but I don't like the idea of getting my wife caught up in this process.


She isn't. She has no filing obligation, and she cannot be held responsible for your report. Only you do, and only for your scope which includes your joint accounts and other accounts over which you have signature authority. If you had a joint account with the Pope you'd have to report that account, too -- it's yours.



> For me US citzenship is nice to have but not something I really need and if the tax situation is going to cost me money whether this be in the next few years or on my pension or my estate when I die maybe the simplest option would be to renounce US citizenship. If I do this without a SSN should I expect to be asked to file tax returns for previous years ?


Yes. It's "unlikely," though, you'd have a U.S. tax liability as a resident of the U.K. In fact you might be able to shield more savings from both U.S. and U.K. tax via the aforementioned Roth IRA.


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## maxmurphy

Thanks, very helpful, a few more questions



BBCWatcher said:


> First of all it may not be in your interest to take the Foreign Earned Income Exclusion. I would recommend using only the Foreign Tax Credit in your first tax calculation to see where you are. If it makes sense to skip the FEIE then it becomes much easier to contribute to the U.S. tax advantaged Roth IRA, for example.


Ok, so for the years that I need to do catch up FEIE will result in no tax, for subsequent years it will be a bit tighter and as a uk high income tax payer FTC May be better option



BBCWatcher said:


> OK, to answer your question directly, it depends on whether you received those shares as earned income or otherwise. The IRS defines what earned income means, so read the instructions closely. Non-cash compensation can be earned income in some circumstances.


They were capital gains taxes subject to some extra tax relief in the uk




BBCWatcher said:


> It's almost always gross unless the instructions say otherwise.
> 
> 
> What do you mean by "pension" in this case



It's a workplace pension paid into by both my and my employer.




BBCWatcher said:


> Yes. It's "unlikely," though, you'd have a U.S. tax liability as a resident of the U.K. In fact you might be able to shield more savings from both U.S. and U.K. tax via the aforementioned Roth IRA.


I don't understand, what would the US liability be on


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## BBCWatcher

maxmurphy said:


> Ok, so for the years that I need to do catch up FEIE will result in no tax, for subsequent years it will be a bit tighter and as a uk high income tax payer FTC May be better option


Sorry, let me try again. Run your tax calculations at least twice: once without the Foreign Earned Income Exclusion (but with the Foreign Tax Credit), and once with the FEIE. If both result in zero U.S. tax liability, choose path #1. It's a bit less paperwork and more tax favorable. (And when you run the calculation for tax year 2010 see if you can qualify for the Making Work Pay Tax Credit.)

The FEIE is a great thing, but it isn't for everybody.



> They were capital gains taxes subject to some extra tax relief in the uk


Yes, understood. You received some shares at some point and disposed of them resulting in some U.K. tax-favored capital gains.

Your question was whether these shares and/or gains can be excluded on Form 2555 which is the Foreign Earned Income Exclusion (if you take it). And the answer is maybe, but one key question is whether these shares were earned income. To generalize, if your employer paid you in stock as compensation for your services, yes, those shares probably could be considered earned income. Check the instructions of course.



> It's a workplace pension paid into by both my and my employer.


OK, that sounds roughly like a U.S. 401(k) plan but not one that's U.S. tax qualified. Yes, in general, your employer's contributions into such a plan would be considered income (and probably earned income).

Relatedly, if your employer pays for life insurance that would provide a death benefit greater than US$50,000 then the portion of the premium the employer pays (at their group rate) for the benefit above US$50,000 is considered U.S. taxable income.

Isn't this fun? 

For what it's worth, I steer well clear of anything the U.S. would consider as a trigger for Passive Foreign Investment Company (PFIC) rules. If you feel the same way, be very careful what you invest in. Otherwise you could run into some more significant paperwork issues at the very least.



> I don't understand, what would the US liability be on


As I said, since the U.K. is a comparatively high tax jurisdiction you are "unlikely" as a resident of the U.K. to have a U.S. tax liability regardless of form or amount of income. "Unlikely" doesn't mean "never," of course.

HOWEVER, you can do a bit better than that perhaps. One way is through U.S. refundable tax credits if you qualify. Yes, U.S. citizens living overseas can occasionally get free money from the IRS. The aforementioned Making Work Pay Tax Credit which was last available for tax year 2010 was a great example (and is still collectible if you qualify and if you file by April 15, 2014). The Additional Child Tax Credit is another notable example. A third way is to shield retirement savings from taxes using the U.S. Roth Individual Retirement Account (IRA). Roth IRAs seem to be tax treaty respected, so presumably they would also be exempt from U.K. taxes.

None of these options are available -- or at least they're considerably more difficult -- if you take the Foreign Earned Income Exclusion. So this is why it's a good idea to run the calculation a couple different ways. You can do that using the free online TaxAct.com as one example.

For some reason a lot of people -- including a lot of professionals -- think you must take the Foreign Earned Income Exclusion. No, it's not a requirement. If your effective foreign tax rate is higher than the U.S. rate then it's hard to imagine taking the FEIE would be a good idea. The better tax professionals will run the calculations both ways if there's any question. Since I live in a comparatively lower tax jurisdiction (Singapore) there is no question, the FEIE is best. But if you live in most European countries (for example) it'd be a good idea to run the numbers both ways to see what works best for you.


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## Bevdeforges

As usual, just a small caveat about going the tax credit route in order to be able to invest in a Roth IRA. For someone with minimal ties to the US, opening an IRA of any sort will tie you to the US tax system and exchange rates for the very long term.

For those with other US interests, they may well be practical and even useful, but for those of us living outside the US, there is the exchange rate situation to contend with in retirement (which is precisely when you don't want to have to deal with such things).
Cheers,
Bev


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## BBCWatcher

No, I disagree, completely.

A Roth IRA can contain practically any U.S. purchasable investment. Only the custodian has to be U.S.-based. The holdings within a Roth are very, very flexible. If you want to stuff your Roth IRA chock full of British pound-denominated investments (such as shares in publicly traded British companies), no problem! You can completely eliminate all exchange rate risk if that's what you want to do, and it's still tax free (assuming qualified withdrawals).

As examples, here are exchange-traded funds (ETFs) available for purchase in the U.S. that invest solely in U.K. equities (trading symbols, in no particular order): DXPS, EWU, FKU, and EWUS. All except FKU have expense ratios under 0.6%. It's also possible to buy any of several different individual U.K. equities, often via extremely inexpensive ADRs. Most U.S. brokers let you buy any British equities straight from the London Stock Exchange as well -- that's no problem whatsoever.

This is also true for any other major currency and the vast majority of minor ones. You have many choices available in all of them.

Even so, you may want to use a Roth IRA to diversify in currency terms. Just because you can keep 100% of your Roth IRA invested in a particular currency doesn't mean you necessarily should. But yes, you can, easily.


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## BBCWatcher

Bevdeforges said:


> For someone with minimal ties to the US, opening an IRA of any sort will tie you to the US tax system and exchange rates for the very long term.


I addressed the exchange rates issue in the previous post (easy answer: "no, that's not correct"), now let me turn to the "tie you to the U.S. tax system" part.

U.S. citizens are _already_ tied to the U.S. tax system! A Roth IRA is the most popular and easiest way to _disengage_ from some U.S. taxes. That's because qualified Roth IRA withdrawals are 100% free of U.S. tax (and almost always non-U.S. taxes as well via the tax treaties the U.S. negotiates and signs). Unquestionably Roth IRAs are great if you're able to save something for retirement (which can start as soon as age 59 1/2) and if you haven't shielded all your earned income using the Foreign Earned Income Exclusion.

I would also add -- and this is based partly on experience here in Singapore and in a couple other countries -- that I simply cannot beat the U.S. investment firms for variety and cost efficiency. Where a typical mutual fund in Singapore (called a "unit trust") might have an expense ratio of 2% per year, in the U.S. better funds can be found with 90% lower expenses (0.2% per year). And this is pretty typical around the world: the U.S. has fantastic investment products in a well-regulated environment with practically infinite variety at low cost. And, if that's not enough, you're very unlikely to run afoul of PFIC complications when saving in the U.S. Whereas it's very easy to run afoul of those complications if saving outside the U.S.

So I'll disagree with you on this one, Bev, and strongly. Most people don't save nearly enough for retirement, and if they can save in a Roth IRA that's a fantastic way to do it.


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## Bevdeforges

I'll agree that people don't save enough for retirement - but if you're located outside the US, you want to take a look at what is available in the country in which you live. Particularly if you have minimal ties to the US and may one day want to consider renouncing your US citizenship.

Also, you should check on how your country of residence treats withdrawals from any US "tax deferred" type of account.

Oh, and Roth IRAs aren't the only kind of IRA either. There is also the traditional IRA where you deduct the contributions when you make them, and then pay US taxes on the withdrawals. Depending on your situation, this may actually work out better than the "tax free" Roth IRA. It used to be the case that if you file married filing separately, you couldn't open a Roth IRA. Don't know if they've changed that by now, but it's something else to take into consideration.
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> I'll agree that people don't save enough for retirement - but if you're located outside the US, you want to take a look at what is available in the country in which you live. Particularly if you have minimal ties to the US and may one day want to consider renouncing your US citizenship.


What is outside the U.S. will always have higher investment fees. (Well, I've never found anything less costly, and I've looked pretty hard.) Unless treaty protected it will also always be U.S. taxable and perhaps very harshly so (PFICs, badly timed "forced withdrawals" that could cause Social Security tax consequences for example, etc.)

If an individual renounces U.S. citizenship that doesn't materially alter the tax advantages of U.S. individual retirement accounts. They require withholding for foreigners, but withholding is (mostly) recoverable.

You'd have to thread a mighty fine needle to end up with a U.S. tax advantaged IRA that wouldn't make sense if you can save for retirement. In the vast, vast majority of cases it totally makes sense.



> Also, you should check on how your country of residence treats withdrawals from any US "tax deferred" type of account.


Of course. However, if that country has a tax treaty with the U.S. then U.S. IRAs will in all likelihood be respected. Also note that U.S. Roth IRAs have no required minimum distributions so you can keep those savings firmly parked if you wish/need.



> Oh, and Roth IRAs aren't the only kind of IRA either. There is also the traditional IRA where you deduct the contributions when you make them, and then pay US taxes on the withdrawals. Depending on your situation, this may actually work out better than the "tax free" Roth IRA.


Yes, but "not usually." However, the choices and flexibility available with U.S. tax-advantaged retirement accounts are another reason they're so nice.

Note that one reason you might want to avoid a pre-tax Traditional IRA is because it makes the so-called "backdoor (Roth) IRA" more difficult to pull off. The backdoor IRA is available to individuals who earn "too much" to make IRA contributions. (See below.)



> It used to be the case that if you file married filing separately, you couldn't open a Roth IRA. Don't know if they've changed that by now, but it's something else to take into consideration.


That has changed, and also there's the aforementioned backdoor IRA. Briefly, if you earn above the maximum to qualify for making a direct IRA contribution then it is possible to make an after-tax contribution to a Traditional IRA then quickly convert that IRA to a Roth IRA. Congress has kept that particular maneuver legal. However, it doesn't work too well if you have a Traditional IRA already given the way the partial conversions work.

Note that a spouse can generally make an IRA contribution for his/her partner as long as the household has enough total earned income to make the contributions -- even if one spouse isn't working. Also, Roth IRAs in particular can have estate tax advantages in certain cases (and if that's a concern), and tax treaties tend to protect that tax treatment, too.

I would add that it's prudent for everyone to have reasonable diversification. It's very possible for your country of residence to have a financial crisis and wipe out all or part of your savings. That just happened in Cyprus, for example. The U.S. is not only a very low cost place for investors it's also a comparatively safe one. In fact it'd be most odd purely from a risk point of view for a U.S. citizen living anywhere who has at least some savings not to keep some portion in the U.S. There are many wonderful countries, but I wouldn't bet on any single country for my retirement even if (or perhaps especially if) I lived there.

Anyway, I've run the numbers pretty carefully in my own circumstances, and basically I'm an utter fool if I don't contribute to a U.S. Roth IRA if/as I'm allowed (and assuming I save, which of course I should). It's nowhere near a close call for me. Your mileage may vary, but "probably not." It's really tough to beat a U.S. tax free retirement savings account if one is available to you.


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## Bevdeforges

> Also note that U.S. Roth IRAs have no required minimum distributions so you can keep those savings firmly parked if you wish/need.


Just a small example, but "keeping those savings firmly parked" doesn't help you if you need the money to live on for retirement. If you are using the Roth as a wealth accumulation vehicle to pass to your kids, then fine - but retirement savings is one of those things you need to have access to at retirement. (Or at least some of us need to.)

The other caveat on the US style retirement savings/investment plan is that, if you're in the wrong kind of investments in a downturn (like a few years ago), the value of your funds can tank just as you need to start drawing on it. Some other types of investments at least offer protection for the principle - or, once you start to draw on it, the monthly payout is assured. Some people need that sort of protection.

But as you say, it depends on your own circumstances.
Cheers,
Bev


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## BBCWatcher

Bev, neither of those points are arguments against U.S. Roth IRAs. If you need the money in retirement, fine! But Roth IRAs (unlike many other tax advantaged retirement savings programs, U.S. and non-U.S.) don't require minimum distributions at any particular age. That's 100% good!

Also, yes, your savings could go down or up...and how is that unique to Roth IRAs? If you want to put all your Roth IRA funds into a variety of AAA rated government bonds, you can. That probably wouldn't be a _smart_ thing to do, but you can.

The fact that many investments have volatility is a strong reason to save more not less, a strong reason to save for the long term not (only) short term, and a strong reason to save as cost efficiently as possible including tax cost efficiency -- all strong reasons arguing for maximizing your Roth IRA if available to you and if you can.


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## Bevdeforges

OK, I'm done with this discussion. Not sure what your "thing" is for Roth IRAs, but they aren't the one and only "best thing" for everyone. It depends (like everything) on the facts and circumstances of your particular situation.

Some people actually should stay away from investment altogether - that's what bank savings and certificates of deposit are for. (Or assurance vie or annuities or any number of other types of savings plans.) Some people simply don't have the time, the knowledge or the ability to monitor self-directed investments the way they need to be monitored to be safe and effective. And some folks really can't tolerate the potential for loss when it comes to their retirement savings instruments. US citizen or not, you have to determine you own needs and limitations.
Cheers,
Bev


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## BBCWatcher

Bev, this is just bad advice, sorry.

The only question is whether tax free is better than taxable. Yes! If you want your Roth IRA to be 100% invested only in AAA rated government bonds, insured certificate of deposits, etc., etc. no problem! You can open a Roth IRA at most banks and credit unions in the U.S. and put everything in a U.S. federally insured certificate of deposit if that's what you want. *But all the gains are tax free* if you hold the funds until at least age 59 1/2 and if any dollar (or yen or euro) you withdraw was put in at least 5 years ago. Which, you know, sounds an awful lot like how CDs work, too.

I hardly think this is even debatable. Tax free is better than taxable, period. If you can save for retirement, and if you can make a contribution to a U.S. tax free account, why on earth would you not? (Yes, that's a rhetorical question.)

Roth IRAs are not exotic. They're the near-universal great middle class retirement savings tax break, quite simply, and every bit as ordinary and common as child tax credits. And Roth IRAs are also available to all U.S. citizens (and U.S. permanent residents) who have earned income that is not fully excluded via the Foreign Earned Income Exclusion (FEIE).

"Take the deal," I say. It's very, very hard to beat.


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## Bevdeforges

It is entirely possible that taxable could be preferable to (US) tax free under some circumstances. But that notwithstanding, it's never a good idea to go into something solely for the "tax advantages." There are other aspects of investments that may outweigh the tax-free status. Each person has to evaluate that for themselves.
Cheers,
Bev


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## maxmurphy

Thanks for the input. I'm hoping that my tax liability will be 0 or close to that. For the years that I need to catch up on it will be under either the FEIE but I don't fully understand how to best use FTC and the US UK double taxation treat. I've read the treaty and it seems that pretty much all my income should be exempt. Does anyone know which forms I need to use for the tax treaty and whether s/w such as TaxAct will help with tax treaties like this.


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## Bevdeforges

If you want to use the FTC, the form you need is 1116. There is a special form you need to find if you intend to invoke some other aspect of the current US-UK tax treaty - form 8833.

The IRS has a series of pages related to Tax Treaty issues. You may want to start here:
Claiming Tax Treaty Benefits
Cheers,
Bev


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## whistlerexpat

I am new to this so hope doing correctly. 
Regarding the form 8833 do you have to complete if using the form 1116? I am a dual US Canadian citizen


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## Bevdeforges

If you're simply making use of the standard forms 2555 or 1116, there shouldn't be any need to complete a form 8833. That one is for taking a stance that relies primarily on some part of the tax treaty rather than the "standard" tax forms.
Cheers,
Bev


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## maxmurphy

Bevdeforges said:


> If you want to use the FTC, the form you need is 1116. There is a special form you need to find if you intend to invoke some other aspect of the current US-UK tax treaty - form 8833.
> 
> The IRS has a series of pages related to Tax Treaty issues. You may want to start here:
> Claiming Tax Treaty Benefits
> Cheers,
> Bev


Thanks Bev, I looked at the link provided but it seems to me more relevant to a UK citizen earning US income and using the treaty. I couldn't see what section applies to a us citizen earning uk income and using the treaty.


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## whistlerexpat

Thanks Bev for clarifying. I tried finding this information on the IRS site but was confusing.


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## Bevdeforges

maxmurphy said:


> Thanks Bev, I looked at the link provided but it seems to me more relevant to a UK citizen earning US income and using the treaty. I couldn't see what section applies to a us citizen earning uk income and using the treaty.


It sounds like what you need is Publication 54, which explains the overall process for overseas tax filers. There is a section at the end of the publication that talks about treaty issues that may require filing that extra form.
Cheers,
Bev


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