US FAQ's

I've left the US. Do I still need to file a US tax return?

Yes, if you are a US citizen or green card holder or if you receive certain types of US source income. US citizens and resident aliens are subject to US tax on their worldwide income regardless of whether they are physically present in the US or not.

Can I claim a deduction on my US tax return for my UK mortgage interest payments?

Yes, a deduction can be claimed on Schedule A for mortgage interest paid in respect of your main or second homes. In general the deduction is limited to the interest payable on the first $1,000,000 of mortgage, plus $100,000 of home equity loan. If the property is a rental property, mortgage interest that you pay on this property can be claimed as a rental expense.

What is AMT?

AMT (Alternative Minimum Tax) is a parallel tax system, which starts with your regular taxable income but adds back certain so called "exclusion and preference" items, examples of which include accelerated depreciation, tax exempt interest etc, before applying a flat rate of tax. You may therefore find that you end up paying AMT as well as your regular US tax. It's not all doom and gloom, as it is possible to claim a credit in a subsequent year for AMT that you have paid in the past on deferral items.

What is the foreign earned income exclusion?

Taxpayers who are employed/self-employed and live outside of the US may qualify for certain tax benefits. Individuals who qualify for the foreign earned income exclusion are eligible to exclude from US tax up to $80,000 of their foreign earned income. The $80,000 maximum exclusion is increased annually for inflation. This must be earned income and must relate to services performed in the current year.

My UK earnings are completely covered by the foreign earned income exclusion so I don't have any taxable income. Do I still have to file a US tax return?

Yes, you have to file a return each year to claim the exclusion.

I don't have any earnings but the foreign earned income exclusion will cover all of my investment income. Does that mean I won't owe any US taxes?

No, the foreign earned income exclusion can only be claimed against non-US source earnings so you may have US tax to pay on your investment income.

Can I claim a deduction for my non-US housing expenses?

In addition to the foreign earned income exclusion, employed and self-employed individuals may be allowed to claim a deduction for certain non-US housing expenses they incur. In general, the maximum amount of foreign housing expenses that can be claimed in any year is limited to 30% of the foreign earned income exclusion less the base housing amount (16% of the foreign earned income exclusion). Certain towns and cities where the cost of living is high such as London have an increased maximum limit. Expenses that are claimed must be considered reasonable and include rent, insurance, utilities, service charge etc. Please note that mortgage interest that you pay is not a deductible expense; instead this is claimed as an itemised deduction on Schedule A of the return.

I'm paying UK tax on all of my income but still have to file a US tax return. Am I paying double tax?

Providing you are aware of the rules and claiming the correct foreign tax credits, in theory you should not suffer double tax. Some planning is often needed to ensure that the credits match up properly between the US and the foreign jurisdiction. In general where income is subject to tax in both jurisdictions you end of paying the higher of the two taxes.

If I pay UK tax on all of my income, why do I still have a US tax liability? Why don't the UK credits offset the tax?

The US allows you to claim credits for foreign taxes under either the "paid" or "accrued" basis. Under the "paid" basis you pick up credits for the taxes that are physically paid during the relevant calendar year. This can cause issues due to timing differences between the US and foreign jurisdiction whereby income is being taxed in one year but the corresponding foreign tax credit is paid in a later year. Planning is fundamental here to avoid cash flow issues.

I'm on the "paid" basis for foreign tax credits but I've paid my UK tax too late to claim it as a credit on my US tax return. Is there anything I can do about this?

Unfortunately, in most cases you would in the first instance have to pay the US tax. However, all is not necessarily lost because in most cases you can claim the credit in the year that you actually paid the tax. If you then have excess credits in that year, it may be possible to carry back the credits one year if there is a shortfall of foreign tax credits in that earlier year, which will then generate a refund of tax by filing an amended return. If the credits cannot be carried back one year, they can be carried forward for 10 years before they are lost.

I've got excess foreign tax credits and I'm relocating back to the US. Is there anything I can do to utilise these?

Yes, if you have excess foreign tax credits in the general limitation basket you can offset these against foreign source earnings i.e. earnings relating to workdays outside of the US. Excess foreign tax credits can be carried forward for 10 years before they are lost.

I live outside the US? Do I have to still file my tax return by April 15?

No, in general most individuals who live abroad qualify for an automatic extension of time to file their Federal return through to 15 June following the end of the tax year. This is an extension of time to file the return only and not to pay any tax liability that may be due, so interest would accrue on any tax liability from 15 April following the end of the tax year.

I haven't filed a US tax return for several years now. What should I do?

You should look to bring your US filing obligations up-to-date as soon as possible. Providing you voluntarily approach the IRS before they find you, we have experienced leniency from the IRS in relation to late payment and late filing penalties. The specifics of your case would need to be looked at in detail to decide the best practical approach to bring your affairs up-to-date.

I own an interest in a non-US company? Are there any particular issues I need to be aware of?

There are various issues that need to be considered here. As this is a very complex area of international tax, you should seek professional advice to discuss the specifics of your situation.

My spouse is not an American. Are there any issues I need to be aware of?

Yes, there are gift tax and estate tax issues to be aware of. You should seek tax advice to examine the areas of concern and to consider potential tax planning exercises to overcome these.

I'm a US citizen and I've just received a distribution from a non-US trust settled by my late British grandfather? Do I have to pay US tax on receipt of this distribution?

Trust law is a highly complex area and you should therefore seek professional advice on this matter as soon as possible. It's likely that there will be US tax to pay on this distribution as well as an additional penalty charge. There are significant penalties for failing to properly report this information to the IRS.

I've just sold my main home here in the UK. I hear that the sale of your principal private residence is exempt from UK capital gains tax. Is the same true from a US tax perspective?

No, providing certain rules are met there is an exclusion available of up to $250,000 ($500,000 for a jointly filed US return) against the capital gain, however any gain in excess of this is taxable in the US. If the property has been held for longer than a year, the gain is taxed at a 15% rate. Exchange rates can play a part in increasing or decreasing the gain. A loss generated on the sale of your main home cannot be claimed.

I'm thinking about investing in a unit trust because the rate of return is good. Are there any US tax issues to be aware of?

Unit trusts and other similar non-US tax favoured investments often fall within the Passive Foreign Investment Company (PFIC) rules. These have disadvantageous tax consequences from a US tax perspective because unless certain elections are made, any gains realized on these investments are taxed at the highest rate of US tax as well as a penalty charge. Ideally you should avoid making these types of investments unless they are designed to be specifically "US friendly".