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TaxationWeb by Mark Hooper In the first of several articles on the US tax system and how it affects Americans working overseas and non-Americans working in the US, UK & US expatriate tax specialist, Mark Hooper, gives a brief explanation of the legislation regarding these aspects.IntroductionWith the special relationship between the United Kingdom and the United States meaning a large number of expatriates crossing the Atlantic each year the need to be aware of the tax systems of both countries and how they interact is becoming ever more important.It is hoped that these articles will not only educate British nationals working or investing in the US but also Americans in the UK on assignment or here working for UK companies. As the months progress I shall endeavour to cover most aspects of US Individual Taxation that will affect expatriates on both sides of the Atlantic. I am also open to suggestions of topics to discuss in these articles and to keep readers up to date with the changing legislation from the IRS. A Few BasicsAs this is the inaugural US Individual Taxation article I thought it might be best to start with a few fundamentals about the US taxation system and why it has international relevance for all of its citizens and "green card" holders.The US tax year is in line with most other country tax systems, i.e. the calendar year. However unlike most other tax systems it believes that its citizens, including "Green card" holders should file a resident tax return each and every year irrespective of where they might be residing. Thus a child born in the UK from US parents obtaining US citizenship will start filing US tax returns once the child starts earning even though the child may never even set foot in the US. Not only do most citizens have to file an annual self-assessment style Federal tax return within 3 and a half months of the end of the tax year, i.e. April 15, most also have to file a separate State tax return and some, like New Yorkers, even file City returns. If returns are late there are stiff interest and filing penalties, which I shall expand on in later articles. It is possible to delay filing, normally to August 15, although any tax due must still be paid by April 15 in order to avoid any interest and penalty charges for late payment. Indeed the IRS has just issued a press release advising of the impending deadline (see Aug. 16 Deadline Approaches for Extension Filer). Don't forget you can always submit your US tax return to the US Embassy in London if you are near the deadline or request a further extension on Form 2688. For most married couples married filing joint returns is the most tax-efficient method of filing and paying taxes. There are also beneficial tax rates for single parents called "head of household" filing. After that there is single filing and the worst rates are "married filing separate". Tax breaks for Americans living overseasEven though all Americans and Green card holders must file a tax return each year, it does not always mean any US tax is due.For those working outside the US for at least 12 months, they receive a foreign earned income exclusion of up to $80,000 or their non-US earnings, whichever is the smaller. In addition those spending more than approximately $12,000 on foreign housing may receive the difference as an additional exclusion called a foreign housing exclusion. Although one Bill currently being debated in the House of Representatives would restrict this and the above exclusion to a ceiling of $80,000 figure mentioned above. For those individuals earning in excess of the exclusion foreign tax credits are used to reduce the US taxes due on foreign earnings still further. However if an individual is subject to Alternative Minimum Tax foreign tax credits cannot exceed 90% of this amount. This "double taxation" is due to be repealed from the beginning of 2005 if current legislation is enacted unchanged. Taxation of non AmericansFor overseas individuals going to work in the US the years of arrival and departure can be particularly penal unless careful planning is used. Normally in these years an individual files a "dual status" return, i.e. part of the year they are considered as a non-resident alien and part of the year as a resident of the US. Unfortunately dual status taxpayers are not eligible to file a joint tax return and thus married individuals have to file separate returns.In addition the unwary can also trigger US residency earlier than planned. A pre- arrival business trip of 2 weeks in January can mean a taxpayer is considered a resident of the US from January even if the assignment does not commence until October. As this area of taxation is a minefield of different rules professional help is essential. Another example is how the US considers whether a person is a resident of the United States. The "substantial presence" rules stipulate that a person is a resident of the US if the following formula exceeds 182 days:- Total number of days in US during current tax year; Plus one third of days in US during previous tax year; Plus One sixth of days in US in the second preceding year. I hope this gives a little flavour of how the US taxation system operates. In future articles, I shall look further into how US expatriates can benefit from certain tax breaks. About the authorMark J. Hooper is a US Enrolled agent with 20 years experience of preparing US Individual Tax returns for expatriates and US non resident aliens living in the UK. He worked for Big 4 Accountancy Firms before starting own practice in the West Country 2 years ago. For more information on his background and services, please visit www.expattax.org.uk
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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