US / UK Dual Citizenship Tax Information
Many countries all over the world allow people to hold dual citizenship i.e. they are official citizens of not one but two countries.
Dual citizenship is acquired when you file for dual citizenship or you automatically get it through a parent. In some cases you become a dual citizen by birth.
No matter how you earn dual citizenship, you need to figure out your taxation obligations.
This article is specifically devoted to US/UK dual citizens and their taxation queries.
If you are a dual citizen of these two countries, you do owe taxes to both these countries. This is because the United States has a citizenship-based taxation system which mentions that the taxation rules for American citizens are the same no matter where they reside.
Technically, you might face double taxation but practically you do not have to pay twice since the IRS offers multiple programs and strategies to reduce the tax liability of dual citizens.
Foreign tax credit(FTC), Foreign earned income exclusion(FEIE), are some provisions to avoid double taxation.
The UK and US also have a totalization agreement that helps dual citizens to determine which country they should contribute to in terms of social security taxes. This treaty also clarifies what income is taxable and what is not.
If you feel lost in the series of processes, our expert team of tax advisers at Xerxes Associates LLP is there to help you. Trust our experienced tax accountants to guide you in every step with responsive and personalised service. From tax compliance to return preparations and submissions, we cover it all for you.
Foreign tax credit(FTC)
For income tax imposed, one can use FTC to collect tax credits on a dollar-to-dollar basis. Since UK tax rates are higher than US ones, this program is extremely fruitful for dual citizens.
How this program works:
Total Taxes to be payed (US) = $ 500
Taxes already paid (UK) = $ 300
Credits received = $ 300
End Tax owed (US) = $200
Foreign earned income exclusion(FEIE)
To qualify for this program, you have to reside outside the US and pass either the Physical Presence Test or the Bona Fide Residence Test. If you do qualify, you can exclude your foreign earned income till a certain amount ( which changes each year based on inflation; the 2022 amount: $112,000)
In some rare instances, people don’t realise that they have dual citizenship and they owe taxes to the United States. This happens when you become an American by accident. For example, you and your parents are citizens of the UK and you have resided in the UK itself , but your birth took place in the US while your parents were working there.
Such situations become a bit tricky since you didn’t deliberately omit paying your taxes and shouldn’t be penalised for the same. IRS is pretty understanding in such cases and has Offshore streamlined compliance procedures in place, constructed to assist you to catch up on your US taxes.
If you can prove that this tax omission was an honest misunderstanding, you have resided in a foreign country for at least 330 days of a year, (within the past 3 years), and do not have any US land, you can correct your errors with the Offshore streamlined compliance procedures.
The UK and US tax years and tax bands both vary. In the UK, the tax year is from April 6 to April 5 whereas in the US it starts from January 1 and ends December 31. These variations affect your tax deadlines and the way you file taxes. Thus knowing which tax bracket you fall in and what are the prominent dates of filing taxes in both countries is extremely important.
A cautionary note: People with more than $10,000 in their foreign account need to file a
Report of Foreign Bank and Financial Accounts (FBAR) and Foreign Account Tax Compliance Act (FATCA) form . Penalties apply if they don’t.
Taxation processes can be confusing, but Xerxes Associates are here to assist. Contact us for any further queries.