Taxation Requirements of US Expats Living in London
Living as a US expat in London can be a thrilling experience, but it also comes with its own set of challenges, particularly when it comes to taxation requirements. The United States requires its citizens and permanent residents (i.e., green card holders) to report their worldwide income, regardless of where they reside. This means that US expats living in London, like any other country, must comply with US tax laws.
In this article, we’ll provide an overview of the taxation requirements for US expats living in London, including some key considerations and potential tax benefits.
US expats in London are required to file a US tax return annually, reporting their worldwide income. The US tax year runs from January 1 to December 31, and the tax return is due by April 15th of the following year. However, US expats are automatically granted an extension until June 15th, and they can request a further extension until October 15th.
In addition to the regular tax return, US expats may also need to file additional forms, such as the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA) reporting. FBAR must be filed by June 30th of each year to report foreign financial accounts with a total value exceeding $10,000 at any time during the calendar year. The FATCA requires foreign financial institutions to report information about their US account holders to the IRS. US expats in London must also report any foreign assets over certain thresholds by filing Form 8938 with their tax return.
Foreign Earned Income Exclusion
US expats living in London may be eligible for the Foreign Earned Income Exclusion (FEIE), which allows them to exclude a certain amount of their foreign earned income from US taxes. The FEIE for tax year 2021 is $108,700. To qualify for the exclusion, US expats must meet either the physical presence test or the bona fide residence test.
The physical presence test requires the taxpayer to be physically present in a foreign country for at least 330 full days during a 12-month period. The 12-month period doesn’t have to coincide with the calendar year, and it can start or end in the middle of a tax year.
The bona fide residence test, on the other hand, requires the taxpayer to establish a bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year. The taxpayer must also have no intention of returning to the US.
In addition to the FEIE, US expats in London may also be eligible for tax credits, which can reduce their US tax liability. The most common tax credit for US expats is the Foreign Tax Credit (FTC), which allows them to claim a credit for foreign taxes paid on their foreign-sourced income. The credit is subject to certain limitations and restrictions, and it can’t exceed the taxpayer’s US tax liability.
US expats living in London face complex tax requirements, but there are also potential tax benefits available to them. The key is to understand the rules and regulations and seek professional advice if necessary. Proper tax planning can help US expats minimise their tax liability and avoid costly penalties.
Xerxes Associates LLP work closely with US and UK expats from all different backgrounds, circumstances and occupations as well as high-net worth individuals in order to help them through the complexities of US and UK tax compliance requirements (tax imposed on expatriates). If you have a query or would like a friendly no obligation chat about your requirements then please get in touch and we shall be happy to assist you.