Why You Might Be Losing Thousands
You’re moving abroad and excited about your new life in a new country.
Moving between the United Kingdom and the United States brings different income tax rates and procedures for filing US & UK tax returns.
But what if I told you that you might pay double taxes? Yes, the US UK Income Tax Treaty is supposed to protect you. But if you don’t understand it correctly, it could cost you thousands. Americans living in the UK will pay both US income tax and UK income tax.
Imagine this. You’ve moved from London to New York for a job. You’re earning good money, but when tax season comes around, you’re hit with taxes in both countries. Not knowing how to apply the treaty means you’ve lost out. You’ve paid more than you should. And it could have been avoided.
What Is the US UK Income Double Taxation Agreement (DTA)?
The US UK Double Taxation Agreement (DTA) is an agreement between the United States and the United Kingdom. It’s designed to prevent you from paying tax on the same income in both countries. But it’s not automatic. You need to know how it works. Many expats think they are safe from double taxation but miss key details.
How does it work if you live in the US but work remotely for a UK company? What if you have assets in both countries? These questions can make your head spin. But don’t worry, we’re going to break it down.
What Could Go Wrong?
Many people don’t take the time to understand the US UK Income Tax Treaty. And it can lead to serious mistakes by US or UK citizens living abroad. For example, if you don’t know that certain types of income are treated differently, you could pay tax twice on your salary, dividends, or investments. This can be disastrous. Let’s look at two examples.
Example 1: Moving from London to New York
Sarah moved from London to New York to get a higher-paying job. She thinks she’s covered under the US UK Income Tax Treaty. She forgets that the US taxes its citizens and residents on worldwide income. She also keeps a rental property in the UK, which earns her extra money, but Sarah doesn’t know she’s supposed to report this to the US tax authorities. She pays tax on the same income in both countries, losing thousands.
Example 2: Moving from California to London
Mike is an American citizen moving from California to London to work in a tech role. He assumes the US UK DTA covers him entirely. He keeps his investments in a US brokerage account. The UK taxes him on this income as well. He ended up paying taxes in both countries on his investment earnings because he didn’t know how to apply the treaty.
Americans have a lot to consider as they must continue to file 1040 returns to the Internal Revenue Service (IRS), no matter where they live. There are two ways of treating foreign earnings when living in the UK. The first is the Foreign Earned Income Exclusion (FEIE). The second is claiming the Foreign Tax Credit (FTC) on tax charged in the UK by HMRC.
How to Avoid Double Taxation
The treaty is there to protect you. But you must know how to use it. Some rules allow you to claim tax credits paid in another country. For example, if you pay tax in the UK, you can offset this against your US tax liability, and vice versa. But it’s not automatic. You need to file the correct forms and provide proof of taxes paid.
If you don’t file the correct forms on time, the tax authorities in both countries might demand you pay taxes. That’s the nightmare scenario. You can avoid this by understanding how to apply the treaty properly.
What You Should Do Next
First, make sure you understand your tax obligations in both countries. This includes knowing which forms to file and when. Always declare your foreign income to both tax authorities, even if you think it’s not taxable in one country. Use the US UK Income Tax Treaty to reduce or eliminate double taxation. You’ll also need to keep records of any taxes you’ve paid abroad to claim credits later.
If this sounds complicated, it’s because it can be. But don’t panic. Some experts can help you navigate the system and avoid costly mistakes.
If you are British and have moved to the United States while earning rental income from your buy-to-let properties, you will still need to file self-assessment tax returns to HMRC as a non-resident landlord.
Key Questions People Ask
Does the treaty mean I only pay tax in one country?
No. The treaty doesn’t automatically prevent you from paying taxes in both countries. It allows you to offset taxes paid in one country against the other. You need to file the proper paperwork to avoid paying twice.
What income does the DTA cover?
It covers most types of income, including salary, dividends, and pensions. However, each type of income may have different rules. It’s essential to check how each type of income is treated under the treaty.
How do I claim tax relief under the US UK Income Tax Treaty?
You’ll need to file specific forms, such as the Foreign Tax Credit form with the IRS, and report any foreign income on your UK tax return. Keeping detailed records of taxes paid in both countries is crucial.
Can I stop paying US taxes if I move from the US to the UK?
No. The US taxes its citizens and residents on their worldwide income, regardless of where they live. The DTA can help reduce your tax bill, but you must still file US tax returns.
Can I get double taxed on pensions?
No, generally, pensions are taxed only in the country of residence. However, you need to report pensions in both countries to ensure they are taxed correctly under the treaty.