# Moved from US to UK in 2013 - Am I Getting Screwed?



## ilovepie (Jun 11, 2013)

I'm trying to file my US taxes. My wife and I moved from the US to the UK mid-October in 2013.

Even though I only made income for 2.5 months in the UK for 2013, I'm getting royally screwed currently. I'm using Turbotax to calculate my taxes.

Issue A: I can't claim the Foreign Earned Income Exclusion because we haven't been here for anywhere near a year.

Issue B: When converting my income to US dollars, calculating what that averages out over 2.5 months compares to my old income over 9.5 months, I think I'm making on average per month 37% more than I was making per month in the US (which is ridiculous since I'm not really making anywhere near 37% more and I'm keeping a lot less per month than in the US with the cost of living here). Again this average increase is only for 2.5 months.

Issue C: Because in the UK, your taxes aren't taken out evenly every paycheck when you first start working, I didn't get hardly any taxes taken out in the 2.5 months. The first few paychecks were tax free, then the next ones increased a little. They'll increase more as the year goes on as I enter new tax brackets and I'll get taxed **** loads in the UK soon to make up for what I didn't get taxed on earlier (but IRS doesn't care about this for 2013).

Issue D: My other option is to use my Foreign Taxes paid as a Foreign Tax Credit. I can't use my UK Social Security or NHS, but only just plain Taxes. Because of Issue C, I only paid 6% in taxes on my UK earnings for 2.5 months compared to 10% in Federal Only taxes on my US earnings. This means my foreign Tax Credit isn't going to cover my difference on UK/US tax percentages (in fact, it makes up for almost nothing because I still have to pay standard US taxes on 94% of my UK income).

Issue E: When looking at the differential of my tax return with or with out including my foreign income, it's about 31% of my GROSS UK income! (Nevermind the money taken out on NHS and Taxes).

Issue F: Oh my State taxes increased with the foreign income added, but nothing has gone down in that regards when using the Tax Credit....


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## BBCWatcher (Dec 28, 2012)

OK, let's take these issues one at a time.



ilovepie said:


> Issue A: I can't claim the Foreign Earned Income Exclusion because we haven't been here for anywhere near a year.


True, but if that's what you want to do (take the FEIE) then all you need to do is file for an automatic extension which pushes your filing due date out to October 15, 2014. Fill out and send in your tax return in early October, and you will by that time have met the FEIE test(s).

Of course you may not want to take the FEIE/FHE -- "it depends" -- but this is an option. Also note that you'll still have to pay any remaining tax due by June 15, 2014. Please make sure you attach the overseas residence statement to your final tax return.



> Issue B: When converting my income to US dollars, calculating what that averages out over 2.5 months compares to my old income over 9.5 months, I think I'm making on average per month 37% more than I was making per month in the US (which is ridiculous since I'm not really making anywhere near 37% more and I'm keeping a lot less per month than in the US with the cost of living here). Again this average increase is only for 2.5 months.


Double check the exchange rate. You can use a Web site like oanda.com for example. If you have the numerator and denominator reversed, that's a problem -- fix that.

However, the cost of living in the U.K. is generally higher. Sorry about that, but maybe you actually are earning more in U.S. dollar terms while your purchasing power may be lower. The same thing happens if you move from Arkansas to New York.

But you also get a couple tax breaks when that happens. In particular, if you're eligible for the Foreign Housing Exclusion (and want to take it), higher housing costs are subsidized. Same with things like medical deductions if you qualify. And, of course, foreign income taxes.

Though you didn't mention medical. Isn't that much less expensive in the U.K. for most people? (Yes.)



> Issue C: Because in the UK, your taxes aren't taken out evenly every paycheck when you first start working, I didn't get hardly any taxes taken out in the 2.5 months. The first few paychecks were tax free, then the next ones increased a little. They'll increase more as the year goes on as I enter new tax brackets and I'll get taxed **** loads in the UK soon to make up for what I didn't get taxed on earlier (but IRS doesn't care about this for 2013).


Correct. You may have some cash flow oddities. The basic solution to that is to set aside some of that new income every month, pay the U.S. tax bill, then enjoy U.S. tax refunds and/or foreign tax credits later. If that's a genuine hardship, talk to the IRS. Also see above regarding extending your filing date.



> Issue D: My other option is to use my Foreign Taxes paid as a Foreign Tax Credit. I can't use my UK Social Security or NHS, but only just plain Taxes. Because of Issue C, I only paid 6% in taxes on my UK earnings for 2.5 months compared to 10% in Federal Only taxes on my US earnings. This means my foreign Tax Credit isn't going to cover my difference on UK/US tax percentages (in fact, it makes up for almost nothing because I still have to pay standard US taxes on 94% of my UK income).


Correct. So you may be better off with the FEIE/FHE path available via an extended filing due date.



> Issue E: When looking at the differential of my tax return with or with out including my foreign income, it's about 31% of my GROSS UK income! (Nevermind the money taken out on NHS and Taxes).


Not sure I understand this.



> Issue F: Oh my State taxes increased with the foreign income added, but nothing has gone down in that regards when using the Tax Credit....


Well they would if you're still a tax resident of that state. You had full year income, and some of that is from the U.K. But are you a tax resident of that state? You may be eligible to file a tax return in that state as a part year resident.


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## Bevdeforges (Nov 16, 2007)

The main complications you're facing at the moment are the different tax years and the first year filing issues.

Basically, you can exclude your UK earned income for those last couple of months of 2013, but to do so you have to wait until you have been outside the US for a full year to file (using the physical presence test). There is an automatic extension of the filing deadline to June 15th just because you're living abroad, but you should make sure to pay up what you owe (using the quarterly estimated tax forms) by April 15th.

Publication 54 explains how to file your extensions until you've met the 12 consecutive months overseas requirement. And actually, Publication 54 has much of the information you'll need to handle your 2013 taxes.

As for exchange rates, you can use the figures the IRS publishes or roll your own based on any reliable list of exchange rates.

On the state tax issue, check your state's website for its tax department. In many states, the year you move out of state (whether to another state or overseas), you wind up filing an NR form (NR = non-resident) where you split your liability between the time when you were living in state and the time after you left. Admittedly, some of the states stack the deck so as to get as much tax out of you this one last time as possible, but this should be the last time you have to file with them.
Cheers,
Bev


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## ilovepie (Jun 11, 2013)

BBCWatcher said:


> True, but if that's what you want to do (take the FEIE) then all you need to do is file for an automatic extension which pushes your filing due date out to October 15, 2014. Fill out and send in your tax return in early October, and you will by that time have met the FEIE test(s).
> 
> Of course you may not want to take the FEIE/FHE -- "it depends" -- but this is an option. Also note that you'll still have to pay any remaining tax due by June 15, 2014. Please make sure you attach the overseas residence statement to your final tax return.


Ok, how does this work exactly? I've never filed for an extension. First the June 15 deadline, is that just automatic? Just because I put that my new residence is overseas, I don't have to file till June?

As for the extension and filing in October 15. You state I have to pay remaining tax due by June 15. How does this work? If I owe $4k instead of getting $500 back, does that mean I pay the IRS $4k and they refund me $4.5k after October? Or can I omit my UK income, have a refund (which I presume they don't pay me) and file in October and all the UK income I add then won't be taxed and my refund/owe amount will stay the same way?

If I owe anything when I file the extension, does programs like TurboTax help me figure out paying what I owe?



> However, the cost of living in the U.K. is generally higher. Sorry about that, but maybe you actually are earning more in U.S. dollar terms while your purchasing power may be lower. The same thing happens if you move from Arkansas to New York.
> 
> But you also get a couple tax breaks when that happens. In particular, if you're eligible for the Foreign Housing Exclusion (and want to take it), higher housing costs are subsidized.


Tax breaks for higher housing costs? How does that work? I rented in DC and rent in London. My rent about doubled dollar for dollar when I moved to London. But there's no exclusion for this in TurboTax that I've found.



> Same with things like medical deductions if you qualify. And, of course, foreign income taxes.
> Though you didn't mention medical. Isn't that much less expensive in the U.K. for most people? (Yes.)


Well I guess medical costs are cheaper here. Monthly payments may be a bit higher, but you don't pay anything for even a regular visit. Anything specific to recommend to that?



> Correct. So you may be better off with the FEIE/FHE path available via an extended filing due date.


The only issue is that my student loans are based on Income Based Repayment. The need to be renewed now, and they use the latest tax return you've filed. Last year I renewed before my 2012 tax return so it used my 2011. I filed married-jointly for 2012, and I don't want to use that tax return for this years renewal as they'll count my wife's income against me. This year I plan to file separately so they only use my income. As such I need a 2013 tax return filed ASAP. Don't know how filing an extension hurts this scenario. Or if I can just file an amendment?



> Well they would if you're still a tax resident of that state. You had full year income, and some of that is from the U.K. But are you a tax resident of that state? You may be eligible to file a tax return in that state as a part year resident.


Looks like when doing DC taxes I can exclude the portion of income made out of the country and they don't tax me. Pretty simple.


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## BBCWatcher (Dec 28, 2012)

ilovepie said:


> Ok, how does this work exactly? I've never filed for an extension. First the June 15 deadline, is that just automatic? Just because I put that my new residence is overseas, I don't have to file till June?


You would file IRS Form 4868 to get an extension to October 15.

If you don't file Form 4868, your due date both to file and to pay is June 15 as long as you are residing overseas and as long as you attach a statement per the instructions in IRS Publication 54.



> As for the extension and filing in October 15. You state I have to pay remaining tax due by June 15. How does this work? If I owe $4k instead of getting $500 back, does that mean I pay the IRS $4k and they refund me $4.5k after October?


No. If you don't owe any net tax for tax year 2013 then you don't have to pay anything. If there's still an outstanding tax amount you owe (even after the Foreign Earned Income Exclusion, for example) then you pay that amount by April 15 (or June 15 if you're living overseas and follow the instructions). If you don't pay the tax owed (per your final tax filing for tax year 2013) by the due date then the IRS will charge you interest and/or penalties. Which are not too high, actually, but it's better not to pay the IRS more than you have to.

If you're not sure what your final tax owed will be exactly, make an estimate and pay that.



> If I owe anything when I file the extension, does programs like TurboTax help me figure out paying what I owe?


Maybe. It just depends on the tax software. What you'd typically do is run your taxes as if you were filing in October (i.e. with the FEIE if that's what you want to take), find out what tax is owed (if any) when you come to the end of the calculation, and pay that. If that's zero, or if you're entitled to refund, don't pay anything for that tax year.



> Tax breaks for higher housing costs? How does that work?


That's called the Foreign Housing Exclusion. Look at the instructions for the Foreign Earned Income Exclusion since the FHE is kind of wrapped up in that. If you qualify for the FHE, great.



> The only issue is that my student loans are based on Income Based Repayment. The need to be renewed now, and they use the latest tax return you've filed.


No idea how that works. Did you contact your student loan servicer?


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## ilovepie (Jun 11, 2013)

Thanks for the help everyone. I've done some research and consulted a tax expert and I will be filling for an extension till October 15th when I will then qualify for physical resident qualification. The tax expert said to lie to the software (for now) on my date I entered the UK so I can get it to calculate my total with a FEIE. Then when I submit my return in October it will be accurate to what I'm doing now.

However I'm still owing quite a bit and there's a few questions left on what to do.

First things. I worked in the US for 10.5 months and UK for 2.5 months. But over the last 20% of the year I made 25% of my income (due to exchange rate, etc). And since I found out that the FIE excludes the bottom total of my income, that 75% that I made in the US gets taxed at a higher rate. So with out the UK income I owe $250. With the UK income and the Foreign Income Exclusion applied, I owe $1,850. Better than a $5,000 difference, but $1,600 difference still seems high.

There are a couple deductions I can make to ease this number, but also a couple FEIE questions that are somewhat duplicate.

First: Moving Expenses Deduction
- I can deduct these for my overall income as most people can. The move was job related and I paid for everything out of my own pocket. Lowers my taxes owed.
- However there's a question about FEIE regarding Deductions Related to Your Foreign Earned Income. One example is moving expenses you paid to move outside the US. When I enter this amount (which is the same as the note above) my taxes owed INCREASE! WTF? Can someone explain these two contradictory entries and why one helps and the other hurts (and why the second hurts).

Second: Housing Expenses
- In the FEIE portion it asks about Housing Expenses. It talks about rent I paid myself which I certainly did for the 2.5 months. However no matter what I enter, nothing changes what I owe, positively or negatively. What's up with that?

Third: Foreign Taxes Paid Credit
- When I found out that I could qualify for the FEIE credit by filling for an extension and got the software to notify it, I noticed that the portion of my software where I claimed the UK tax I paid as a credit was still valid. It doesn't seem to me like I can get the FEIE exclusion but also claim my foreign taxes paid as a credit.


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## Bevdeforges (Nov 16, 2007)

Actually, the answer to all three of your questions is somewhat the same. In general, the tax rules try to group your deductions with the income you made that is directly related. So, in the first case, because the moving expenses are related to your UK income (i.e. moving to the UK to that new job), the expense is associated with your UK income (which is being excluded thanks to the FEIE).

Just be careful that the tax program isn't assuming somehow that your moving expenses were paid by your UK employer and thus adding them back into income before deducting them in the same amount.

For the housing expenses, the same thing applies - you paid rent out of the income that you're excluding, so no net benefit.

On the third item, I think you may be running afoul of the work-around you've come up with. If you've fiddled the date of entry to the UK, it may be making some wrong assumptions about the source of your income during the year. If you put in the correct date of entry, does the software allow you to generate any sort of return with the FEIE? 
Cheers,
Bev


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## ilovepie (Jun 11, 2013)

Bevdeforges said:


> Actually, the answer to all three of your questions is somewhat the same. In general, the tax rules try to group your deductions with the income you made that is directly related. So, in the first case, because the moving expenses are related to your UK income (i.e. moving to the UK to that new job), the expense is associated with your UK income (which is being excluded thanks to the FEIE).
> 
> Just be careful that the tax program isn't assuming somehow that your moving expenses were paid by your UK employer and thus adding them back into income before deducting them in the same amount.


There's a portion where it asks for Value of Employer Provide Goods And Expenses. I entered in none. Then there are deductions to FEI including moving expenses I paid to move outside the US. I was claiming a credit of $2,300 for our moving expenses in the standard deduction category, which decreased my taxes by $200. When I apply it to the FEI deduction also, it increases my taxes by $400. In fact, if I just leave out moving expenses from both the FEIE portion and the standard deduction portion, I owe less!

Why would money I paid out of my own pocket using money made in the US cause me more taxes? Essentially that $2,300 I made in the US in 2013, bought my plain tickets, and now they're claiming it at Foreign Income which boosts the rest of my US income higher up on the tax bracket. 

How does this make sense? I'm not gonna lose hundreds on the thousands it took me to move here. Do I just not claim any moving expenses in the FEIE nor the standard deduction. Can you please walk me through this slowly?



> For the housing expenses, the same thing applies - you paid rent out of the income that you're excluding, so no net benefit.


I'm sorry but I'm still not understanding this part. Entering anything here doesn't hurt of help my taxes owed.



> On the third item, I think you may be running afoul of the work-around you've come up with. If you've fiddled the date of entry to the UK, it may be making some wrong assumptions about the source of your income during the year. If you put in the correct date of entry, does the software allow you to generate any sort of return with the FEIE?


I don't know if its the work around. It's just TurboTax Deluxe. When I claimed the FEIE and I had my Foreign Tax Credit still applied it didn't find an error. In fact when looking back on the Foreign tax credit, it states that taxes paid that aren't included in the FEIE can apply. Since I suddenly qualify for the FEIE I shouldn't claim these, but I don't think Turbotax can make the connection of what I'm entering is from income that's excluded. It's my job not to enter it, so no issue here now.


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## Bevdeforges (Nov 16, 2007)

OK - this is the danger of relying too completely on "the software" to do your taxes for you. Despite all the best marketing of TurboTax, TaxAct or H&R Block, you still need to understand a little bit about how taxes work in order to make your forms come out "right."

Usually, the software includes copies of all the form instructions and some of the more important IRS publications, but you can also download these from the IRS website. You really want to take a look at Publication 54 to understand how the FEIE is supposed to work and what items are and aren't covered (either as income or as deductions). 

And especially in the case of those of us living overseas, you will have to "tweak" the software a bit to get it to handle your returns appropriately. 
Cheers,
Bev


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## ilovepie (Jun 11, 2013)

Bevdeforges said:


> OK - this is the danger of relying too completely on "the software" to do your taxes for you. Despite all the best marketing of TurboTax, TaxAct or H&R Block, you still need to understand a little bit about how taxes work in order to make your forms come out "right."
> 
> Usually, the software includes copies of all the form instructions and some of the more important IRS publications, but you can also download these from the IRS website. You really want to take a look at Publication 54 to understand how the FEIE is supposed to work and what items are and aren't covered (either as income or as deductions).
> 
> ...


Sorry, I did more research and it still doesn't make sense.

I can take the standard Moving Expenses Deduction for work. Lowers my tax liability. Great. But do I have to enter that same money in the Moving Expenses Deduction in the FEIE portion (even if I paid for it myself using income made from the US that's being taxed on) because doing so RAISES my tax liability. In this case I'd just ignore Moving Expenses all together from both sections and save myself money.

Still don't understand the Housing Expenses Exclusion. Again deductions in the FEIE seem to generally HURT me, so I don't understand this whole section.

And a new one. I'm getting the software to recognize that I'm qualifying for the FEIE and getting and extension till October 15th. But I need to estimate if I'm owing money to State or Federal. For state, I'm a part time DC resident. There's a section for "Deductions From Federal Income, Part-Year". If I enter in my foreign income, I get a TON back from the state. Doesn't seem right. Is the number I'm entering subtracting from my US and Foreign income, or is it subtracting only from the US income as I qualified for the FEIE. It doesn't state any exceptions, so not sure if I should enter my Foreign Income as a subtraction.


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## Bevdeforges (Nov 16, 2007)

Just had a quick look at the 2555 form. You don't include moving expenses (or other deductions) anywhere on the form. Anything you enter on line 22 is supposed to be money you were paid (or reimbursed) for moving or other expenses, or where your employer paid your expenses for you (because that counts as income).

Moving expenses you incurred go on form 3903.
Cheers,
Bev


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