Filing Taxes When Moving to the US, what you need to know before moving (ideally).

What You Need to Know

Moving to a new country is exciting, but taxes when moving to the US can turn that excitement into stress if you’re not prepared. The tax system in the United States is complex, and you could face hefty penalties if you don’t know the rules. It is important to know when filing a federal tax return to the Internal Revenue Service (IRS) and a state tax return where you choose to live.

Please note that you will only become a US tax resident when you meet the IRS Substantial Presence Test.

Where do you pay the most taxes between the United Kingdom (UK) and the United States (US)? You will need to work out the income tax rate in the US and UK to see if you will end up paying more than before.

Worst Case Scenario

Imagine this: You’ve moved to New York from the UK. You’re settling in and excited about your new job. Then, months later, a letter arrived from the IRS. They want to know why you haven’t filed a US tax return. Panic sets in as you realize you’re at risk of double taxation. The UK tax office is also asking for paperwork. Suddenly, your dream move has become a tax nightmare. You live in the United States with a nightmare situation.

This scenario is real for many people. Understanding US tax filing when moving to the United States is crucial to avoid costly surprises. If you don’t plan, you might end up paying taxes in the UK and the US.

Why You Can’t Ignore US Taxes

When you move to the US, you must deal with one of the most complicated tax systems in the world. The United States taxes you based on your residency status, not just where you earn money. This means that even if you’re living in the US but earning income abroad, you may have to report it to the IRS.

For example, if you move from London to California, you may think your UK earnings are safe from the IRS as a British Expat. Unfortunately, that’s not true. The US government still expects you to report your global income. You can easily make mistakes if you’re unaware of the tax rules for expats.

From London, UK to New York, US

Let’s say you’ve accepted a job in New York and are moving from the UK. You might think that you only need to worry about US taxes. However, you’ll also need to file your final UK tax return for the part of the year you lived there. You may have to deal with double taxation if you don’t claim the right tax reliefs.

Both countries could tax you in the year you leave unless you file the proper forms. Luckily, the US and UK have a tax treaty. This allows you to claim credits or exemptions to avoid paying tax twice on the same income. The problem arises when you don’t know how to apply these credits.

From London to California

Now, imagine moving to California for a better climate and lifestyle. You rent out your home in London while you’re away. Even though you’re now a US resident, the UK tax office still expects you to declare your rental income. On top of that, the IRS wants you to declare that same income on your US tax return.

The result? You could end up paying taxes on your rental income in the UK and the US unless you know how to claim the foreign tax credits. Without understanding how both systems work together, you risk overpaying or getting hit with fines.

How to Avoid Double Taxation

The good news is that you can avoid double taxation if you know the rules. The US has tax treaties with many countries, including the UK. These treaties help reduce or eliminate the chances of being taxed twice on the same income. However, to take advantage of this, you must file the right forms, such as IRS Form 8833 for tax treaty benefits.

Another way to reduce your tax burden is through the Foreign Earned Income Exclusion (FEIE). This allows you to exclude a portion of your foreign income from US taxation up to a certain limit. However, the qualifying rules can be strict, so you must be careful when applying for this benefit.

The Importance of Filing in Both Countries

Moving to the US doesn’t mean you can forget about your home country’s tax obligations. You still need to report your worldwide income in the UK if you’re a tax resident. Similarly, the US requires residents and citizens to file taxes, regardless of where the income was earned. Failure to do so can result in penalties.

Five Key Things to Keep in Mind

Always file in both countries: Even if you don’t owe anything, you may still file tax returns in the UK and the US to stay compliant. This is especially true if you have UK rental income from your buy to let properties or sell a UK property that requires you to file a Non Resident Capital Gains Tax report to HMRC.

Know the tax residency rules: Understand how each country defines tax residency. In the US, it’s based on the number of days you spend in the country.

Claim foreign tax credits: Use the US and UK tax treaty to claim foreign tax credits and avoid double taxation.

Understand the 1040 tax filing IRS deadlines: Tax filing deadlines differ in the US and UK. Make sure you know when to file to avoid late fees.

Hire a tax expert: Navigating IRS tax filing is complicated. Hiring an expert will help you stay compliant and save money.

Filing Taxes When Moving to the US does not need to be stressful but you do need to know the basics and have experts by your side.

FAQs Filing Taxes When Moving to the US