As an expat tax specialist focused on the UK and US systems, Tom Griffiths often gets asked the question of whether those with dual UK/US citizenship need to file a tax return. He shares his thoughts on the US tax filing system and what duel citizens need to know here.
It’s common for those living and working abroad to have tax questions requiring greater clarity or expert advice because the tax system can become complicated very quickly, more so when there are changes in circumstance and because the US tax system is rather unique.
To benefit from any tax savings, expats must submit a tax return.
Generally speaking, US citizens (dual or otherwise) must file a tax return when their income exceeds the current standard deduction amount, currently at $12,400. Citizens who work outside the US could qualify for the Foreign Earned Income Exclusion, presently set at $108,700.
Americans with dual citizenship who live in another country and have to pay taxes can often panic because of tax obligations and the possibility of being double taxed on the same worldwide income.
Thankfully, there is a treaty between the UK and the US, meaning dual residents do not pay tax above the highest rate on foreign financial assets. Those on higher salaries can claim the foreign tax credits via the treaty, which helps avoid double taxation.
You have to pay capital gains tax on gains you make on property and land in the UK even if you’re a non resident for tax bill purposes.
The US and UK tax treaty all expats should know about.
The treaty does help create a fairer balance for expats by easing the tax burden, especially when you work with a US expat specialist to limit the liabilities.
There’s the benefit of a filing extension too. Americans with dual citizenship living abroad benefit from the two month extension until June 15th and, if required, can request to extend further until October 15th.
US Expats are also required to report non-US bank, investment and financial accounts, as well as business interests. These do depend on minimum balance and value thresholds.
As the US State Department states, Dual nationals owe allegiance to both the United States and the foreign country in which they reside and are required to abide by the tax laws of each country.
Advantages of dual citizenship.
Some countries do not recognise dual citizenship; thankfully, the UK and US are not one of them. The UK does allow those born in another country to retain their nationality and apply for residency with them.
This dual agreement comes with many advantages, including the ability to live and work freely in either country. And the benefit of owning property in either or both countries, and reasonably unlimited travel in and out of both.
Those who apply for the right to live and work within an EU country also enjoy the benefit of working and travelling in other EU member countries. Additionally, some dual passports open up further travel opportunities with visa free travel to other countries.
The other advantages are the ability to access both healthcare and social security systems, the legal right to vote in both countries and even the right to run for office.
Avoiding double taxation as a dual citizen.
US dual citizens who live and work abroad sometimes assume that the USA/UK tax treaty protects them from tax filing in both countries; however, this is not the case.
The tax treaty stipulates that Americans residing abroad must still file their taxes but, in doing so, can claim one or more provisions to avoid being double taxed both in their country of residence and country of birth.
Some tax treaties can also mitigate double taxation of alternative types of income such as investments and retirement income. These can also be claimed as part of the federal tax return when filing.
It is also possible to claim tax credits from one country to offset the taxes paid in another, although this depends on where the income was earned. Additionally, the international treaty called the Totalisation agreement helps to prevent double taxation on social security payments.
It is advisable for dual citizens living abroad to seek specialist guidance from a US expat tax expert to ensure US tax filing is as smooth an beneficial as possible.
No Need to renounce US citizenship.
Some Americans consider renouncing their citizenship because the system can seem complicated, overwhelming in some cases and does require time management if not handled by an expat tax specialist.
Rather than taking the long winded (and complicated in itself) step of renunciation, it is instead just worth considering alternative options, of which there are several.
So, the simple answer is yes, dual US/UK citizens living and working in the UK do still need to file a US tax return, and it makes sense to do so to avoid the limited disadvantages and receive the myriad of advantages dual citizenship provides.
Tom Griffiths is a tax advisor and consultant specialising in US expatriate tax matters. He works with clients to structure and streamline taxes for investment, trading entities and owned businesses.