UK expats moving to the US – Taxation Guide
If you are a UK Expat and are moving to the USA there are tax implication you may need to contemplate.
Whatever the country you are wondering moving to, you will always need to pay taxes, and every nation has its own system and some are considerably more complex than those in the UK.
The USA is an attractive place for British expats with currently over 1 million choosing the US as their new residence. Particularly as there is no new language to learn, the cultures are similar and there is a strong bond between UK and US businesses. The American taxation system, however, is far more complex. There are many different methods that can be used for filing returns and some will cost more than others; different states, cities and municipalities have their own income tax rates alongside national rates; and there are large fines for getting it wrong or filing it late.
The basics
With a move to any new country, it’s worth seeking the advice of an international tax expert to seek advice of the tax system of the new country. This is particularly pertinent in the USA as there are so many different considerations that getting it wrong can be expensive. A tax accountant used each year to file returns could be considered a good investment, as they will ensure tax efficiency.
All British expats need to file a tax return if they are in the USA for more than 31 days in the current tax year, or 183 days during a three-year period including the current tax year. This is called the Substantial Presence Test, which determines who is considered a US resident for tax purposes. Broadly, all worldwide income is subject to US income tax, in the same way as a US citizen. As a so called ‘resident alien’, British Expats use the same filing statuses available for US citizens and can claim the same deductions.
Further considerations are the importance of paying on schedule. The penalty for filing late is up to 25% of the overall tax due, which could high, depending on your earnings. Also, an employee is responsible for telling their employer how much tax to deduct by filling in a W-4 form. Doing this incorrectly can result in an underpayment penalty and a large tax bill.
Filing methods choices
There are options to get the best conclusion from a tax return, but that means understanding the intricacies of the taxation system. Consider this, a resident alien working in the USA with a non-resident alien spouse could choose to treat their partner as a resident alien for tax purposes, and file as a married couple. Each year, a return needs to be filed as Married Filing Jointly, Married Filing Separately or Head of Household and picking the right one can profoundly impact the amount of tax due. You can also be a dual-status alien: both a non-resident alien and a resident alien in the same tax year, which has certain rates that are applied when filing a tax return and complicates the process.
This is why an tax expert is worth the expense. When filing a return, it’s necessary to run the calculations for a number of different methods and scenarios to see which is the most tax efficient, and thereby save money in the long term.