Do US citizens living in the UK pay US taxes?
Living abroad offers numerous benefits, including the opportunity to experience different cultures and enjoy a new lifestyle. However, it also brings about a complex tax situation for those who are US citizens living in the UK. One of the most common questions among expatriates is whether they are still required to pay US taxes while residing in the UK. In this article, we will explore the tax obligations of US citizens living in the UK and provide an overview of the relevant regulations.
Understanding Tax Residency
Before diving into the tax obligations, it is essential to understand the concept of tax residency. The United States has a unique system where individuals are taxed on their worldwide income, regardless of where they live. To determine whether a US citizen is required to file a US tax return, the IRS considers several factors, including the number of days spent in the UK, the nature of their stay, and their residential ties to the US.
Substantial Presence Test
One of the primary methods used to determine tax residency is the Substantial Presence Test (SPT). According to this test, a US citizen is considered a resident for tax purposes if they meet any of the following criteria:
1. Spend at least 31 days in the UK during the current year.
2. Spend at least 183 days in the UK combined with other foreign countries during the current year.
3. Spend an average of 121 days in the UK over a three-year period, with the current year accounting for at least 31 days.
If a US citizen living in the UK meets any of these criteria, they are generally required to file a US tax return and pay taxes on their worldwide income.
Reporting Foreign Income
Even if a US citizen living in the UK is not considered a resident for tax purposes, they must still report their foreign income to the IRS. This is done through Form 8938, which is filed with the tax return. Additionally, they may need to file Form 3520, which reports foreign bank accounts and assets exceeding certain thresholds.
Double Taxation Relief
To avoid paying taxes on the same income twice, the UK and the United States have a tax treaty in place. This treaty provides relief from double taxation by allowing taxpayers to claim a credit for taxes paid to the UK on their US income. This credit can be claimed on Form 1116, Foreign Tax Credit.
Conclusion
In conclusion, US citizens living in the UK are generally required to pay US taxes on their worldwide income, depending on their tax residency status. It is crucial for expatriates to understand their tax obligations and take the necessary steps to comply with the IRS regulations. Consulting with a tax professional or accountant can help navigate the complexities of international tax laws and ensure proper compliance.
