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Tax Preparation for Living & Working in the UK as a US Citizen

Tuesday, November 03, 2009
Related Tags: uk | tax | domiciliaries | domiciliary | income
 

Instructions

UK Residence and Domicile

  • Step 1:
    If you are working in the UK, you may be classified as a UK resident. Nevertheless, you may be a resident and still not be considered to be domiciled in the UK. You will be classified as a domiciliary of the UK if the government believes that you have made the UK your long-term home. This determination is made based on objective indicators of your intentions, such as how long you have lived in the UK. It is beneficial not to be classified as a domiciliary because the UK taxes the worldwide income of its domiciliaries. However, as a resident, you will not be taxed on income you earn outside the UK unless you bring it into the country.

US Federal Tax Benefits

  • Step 1:
    The IRS offers several tax benefits to US citizens working in the UK. Since the US-UK tax treaty allows US citizens who paid tax to the UK government to credit this amount against their US federal tax liability, you should calculate this tax credit and subtract it from your US tax liability. If you still owe taxes to the IRS, you can make an alternative calculation. First, calculate what proportion of the tax year you were physically present in the UK according to the number of days you were physically present there, and multiply this number by $87,600 (the 2008 full exclusion amount). Next, add to this product the cost of any employer-provided housing that you received while living in the UK. Subtract the total from your US federal tax liability, compare the remainder with the remainder that you obtained by applying the US-UK tax treaty, and choose the result that is most favorable to you.

State Taxation Issues

  • Step 1:
    States assert tax jurisdiction over people who are considered to be legally domiciled in the state. Although state laws differ, you are more likely to be considered domiciled in a state if you maintain a residence there, hold a state driver's license, or vote there. Even if you are domiciled in a particular state, you may or may not be taxed on income you earn in the UK, because many states do not tax their domiciliaries on income earned overseas. If your state does expect you to pay taxes on income you earned in the UK, check to see if they will allow you to credit taxes paid to the UK government against your state taxes.

Resources


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