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us expat tax guide – united kingdom

Do I need to report UK government support on my US tax return?

Yes, if you live in the UK and receive support funds from the UK government, such as carers allowance or unemployment benefits, you need to report this income on your US tax return. 

These funds are considered taxable income for US tax purposes. However, whether you need to file a US return depends on your filing status.

For example, if you receive £6,000 from UK national insurance and are a single filer, this amount is below the US$14,600 filing threshold for 2024, so you would not need to file a US tax return. 

But if you are married to a non-American and filing separately, the threshold is only US$5, so you would need to file a US tax return. For married joint filers, the threshold is US$29,200, and for Head of Household, it is US$21,900. All worldwide income, in any currency, counts towards these thresholds.

Do I have to pay US tax on my UK income?

After determining that you need to file a US tax return, the next question is whether you will owe US tax on your UK income. Thankfully, the US-UK Tax Treaty helps you with avoiding double taxation, ensuring you do not pay social security/Medicare taxes to both countries simultaneously.

There are two primary benefits for expats or Green Card Holders in the UK:

  • Foreign Earned Income Exclusion (FEIE): Using Form 2555, you can exclude up to a certain limit of your foreign income from US taxation. For 2024, this limit is around US$126,500.
  • Foreign Tax Credit (FTC): This method is generally more beneficial for US expats in the UK. The FTC allows you to offset the taxes paid to the UK against your US tax liability. Since the UK has higher tax rates, the FTC usually results in a zero or negative US tax liability, effectively meaning you do not owe additional US taxes on your UK income.

Why is filing for the Foreign Tax Credit better than the Foreign Earned Income Exclusion?

The Foreign Tax Credit (FTC) is often better than the Foreign Earned Income Exclusion (FEIE) for several reasons:

  • Higher Earnings: If your income exceeds the FEIE limit (around US$126,500), you will still owe some US taxes. The FTC, however, can cover all your income, resulting in zero US tax liability.
  • Carry Forward Credits: FTC allows you to carry forward unused credits for up to 10 years. This is useful if you move to a low-tax jurisdiction after working in the UK, as you can use the accumulated credits to offset future US taxes.
  • Dependent Credits: Claiming the FTC allows you to take refundable child tax credits if you have dependent children and your income is not too high, which is not possible with FEIE.

How do I file for the Foreign Tax Credit?

To claim the Foreign Tax Credit, you need to file IRS Form 1116 with your US tax return. Before completing Form 1116, you will need to convert all foreign taxes paid into US dollars. 

For corporations, file Form 1118 instead. The IRS provides annual average exchange rates on their website, which can be used for this conversion.

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