Having elected to live and work across the pond in the UK is, undoubtedly, a carefully thought-out decision. And when researching the different aspects of the move, one of the most critical factors to explore is how the taxation regulations in the US and the UK affect your particular situation. Get in touch with an experienced expat tax consultant who can guide you on filing returns in both countries. Yes, you read that right! Here’s some detailed information on the most common mistakes US expats make when figuring out how to calculate and declare their income.
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Not Filing Returns in Both Countries
Do keep in mind that as long as you retain US citizenship or Green Card status, you must file annual returns regardless of the location where you reside and whether or not your income is within the taxable bracket. You’ll also declare the income you earn from worldwide sources. This rule applies to both US and British citizens. That means you’ll list all the income you’ve made during the fiscal year from American and British sources, including passive and earned income. Let’s try this example. If you own rent-generating properties in the USA, you must declare that income in two separate returns filed with the IRS and Her Majesty’s Revenue & Customs (HMRC), the UK taxation agency.
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Duplicating a Previous Year’s Return
Many US ex-pats mistakenly use a previous year’s return as a template for filing in the current year. However, going back to your tax consultant is always advisable. That’s because IRS regulations and tax bracket thresholds change each year to account for inflation and various other allowances. For instance, the exclusion limit under the Foreign Earned Income Exclusion (FEIE) for 2019 was fixed at $105,900, but this limit has been raised to $108,700 for 2021. Not taking advantage of this benefit is a common filing mistake that can cost you higher taxes. Working with a professional will keep you informed about the latest updates to the regulations, so you avoid making errors like these.
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Choosing the Wrong Exclusions
While the IRS has several provisions to help you avoid double taxation, choosing the ones that apply to your status and income is critical. For instance, the Foreign Earned Income Exclusion and Foreign Tax Credit (FTC) cannot be claimed together on a single return. Chances are that claiming the FTC could be more beneficial and help you save higher taxes. Other factors include figuring out which income source can be claimed under the FEIE and identifying residency status in the UK. Incorrectly calculating the number of days you lived in the UK to fulfill the Bona Fide Residence Test could result in related errors in the tax return.
Considering that misrepresenting your income and not paying taxes can incur you penalties, rely on the services of a CPA trained in the US and the UK taxation laws. They’ll help you navigate the system’s complexities, so you stay on top of your obligations.