As a UK expat living in the US, understanding the American taxation law is essential for fulfilling your tax obligations and avoiding costly mistakes. This guide will help you understand American tax requirements, whether you’re already in the US or preparing to relocate soon.
We’ll also explain how getting professional tax advice for UK expats in the USA can help you plan your finances more efficiently and stress-free.
What You Will Learn
- What taxes do you have to pay to the US as a UK expat?
- How does the American tax system work?
- How can UK expats reduce their tax liability?
- How can financial advisors help UK expats with tax planning?
Tax Residency in the US—Eligibility Criteria
The US tax governing agency is the Internal Revenue Service (IRS). The IRS is responsible for administering and enforcing federal tax laws, including collecting taxes, processing tax returns, and overseeing the issuance of refunds.
To be considered a US resident for tax purposes, you must pass one of two tests:
- The Green Card Test.
- The Substantial Presence Test.
The Green Card Test
You will pass the Green Card Test if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. Once you have this status, you are considered a lawful permanent resident (LPR) and a US resident for federal tax purposes.
There are several Green Card eligibility categories depending on:
| The Main Factor | Description |
|---|---|
| Family ties | Individuals who are closely related to US citizens or lawful permanent residents |
| Employment | Investors, individuals who are highly skilled in sciences, arts, education, business, or athletics, professionals with advanced degrees, and similar |
| Country of origin | Individuals who arrived from countries with low US immigration rates |
| Refugee and asylee status | Those who were granted asylum or refugee status at least one year before the Green Card application |
| Humanitarian programme assistance | Victims of human trafficking and crime who can assist the US authorities |
| Long-term residency | Those who have been US residents continuously since before 1 January 1972 |
| Unique circumstances | Religious workers, juveniles who need protection, Afghan or Iraqi nationals who worked for the US government, and certain international organisation employees |
| Other categories | Cuban nationals, Liberian nationals who have been in the US since 20 November 2014, Lautenberg parolees, American Indians born in Canada, foreign diplomats unable to return home, and more |
If you are eligible, the process of obtaining the Green Card depends on the criteria you match. For example, if you are applying through employment, as a special immigrant, or through family ties, you may need someone to file a petition for you.
If a visa is available for you, you will have to go through the Adjustment of Status to become a lawful permanent resident. If you’re not in the US at the time, you will have to undergo consular processing to receive your visa.
The Substantial Presence Test
Under America’s Substantial Presence Test, you are considered an American resident for tax purposes if you’ve spent more than 31 days in the US during the current tax year and a total of 183 days in the US over a three-year period. This includes the current year and the two previous years. These are counted as:
- All the days you were present in the current year.
- 1/3 of the days you were present in the first year before the current one.
- 1/6 of the days you were present in the second year before the current one.
If you qualify as a US resident, you’re taxed on worldwide income (including UK earnings). However, if you’re a British expat but not a US resident (you have a temporary visa or don’t meet the Substantial Presence or Green Card test), you will pay tax only on your US-sourced income.
If you meet the Green Card Test at any time during the calendar year but do not meet the Substantial Presence Test for that year, the starting date of your residency is the day on which you are present in the US while holding a Green Card.
US Taxes That UK Expats Must Pay
If you are a UK expat in the US, some of the main tax obligations you need to be aware of include:
| Tax Type | Explanation |
|---|---|
| Income Tax | All US residents and citizens must pay tax on US-based and worldwide income. Non-resident aliens are taxed only on their US-based income. Some states may charge additional municipal income tax, which is usually levied at the local level. |
| Capital Gains Tax | If you relocate to the US and then decide to sell your UK property, you need to be aware of potential tax liabilities. As of 2024, the tax rates for net capital gains range from 0% to 20%, depending on your taxable income. |
| Social Security/Medicare Tax | If you’re a resident or a non-resident alien employed within the US, you’ll be subject to the Social Security/Medicare taxes under the same rules as American citizens. Note that this applies to US-sourced income only—employees of international organisations are exempt. These taxes are automatically deducted by employers from your paycheck, so no additional filing is necessary. |
| Additional Medicare Tax | The Additional Medicare tax is a 0.9% tax on high-earning taxpayers who make: – Over $200,000 as individuals. – Over $250,000 as married couples filing together. – Over $125,000 as married individuals filing separately. |
| Net Investment Income Tax | This is an additional 3.8% tax on net investment income that must be paid by individuals, estates, and trusts whose modified adjusted gross income (MAGI) exceeds certain thresholds ($200,000 for single individuals and $250,000 for married partners filing jointly). Net investment income typically includes interest, capital gains, dividends, rental and royalty income, and non-qualified annuities. |
| Self-Employment Tax | If you are self-employed in the US, you must pay 15.3% of your net earnings for Social Security and Medicare. |
Additional taxes may apply depending on your individual circumstances. To ensure you are fully compliant with US tax laws, consider seeking professional advice from expat tax consultants. They can help you better understand your responsibilities and deadlines.
What Tax Reliefs Are Available to UK Expats?
There are several tax relief options available to UK expats to help them manage their tax obligations more effectively.
- The US-UK Double Taxation Agreement (DTA): DTA is a treaty between the US and the UK that prevents expats from paying taxes twice on the same type of income. To claim benefits under the DTA, you’ll need to file Form 8833 with your US tax return.
- Foreign Tax Credit (FTC): You can claim a foreign tax credit on your US taxes for the amount of tax you’ve paid to the UK to avoid double taxation on the same income. For instance, if you’ve paid 15% of tax in the UK, and the US tax rate for the same type of income is 20%, you only need to pay 5% more. If you want to claim a Foreign Tax Credit, you should file Form 1116.
- Exemptions on income: Some types of income, like UK government pensions, may only be taxed in the UK.
- Totalisation Agreement: If you work for both US and UK employers, you need to pay social security taxes only in your country of residence.
What Are the Benefits of Working With a Tax Adviser?
Being a UK expat in the US requires familiarity with multiple tax types, eligibility criteria, exemptions, relief options, and due dates. Failing to comply with all the complex tax requirements can lead to fees and penalties, which can affect your financial planning and overall comfort.
To reduce the chances of becoming overwhelmed with various tax laws and regulations, it’s advisable to consult a professional tax adviser. There are several major benefits of receiving professional tax advice as an expat, including:
- Ensuring legal compliance: A professional tax adviser can help you avoid legal implications by ensuring you stay aligned with both US and UK tax laws. They can personalise their advice based on your residency status, sources of income, and duration of stay in the US.
- Maximising tax efficiency: Understanding your tax obligations allows you to take full advantage of available relief options and avoid overpaying taxes. However, expat tax planning can include nuances that a professional tax adviser can simplify and clarify.
- Managing your wealth: If you have substantial wealth that you want to preserve and increase, professional tax advice is invaluable. It allows you to gain a better understanding of your investment opportunities, inheritance laws, and strategies for tax minimisation.
- Staying up to date: As the economy changes, so do tax laws. Keeping up with these changes can be extremely difficult for an individual without a legal background. Changes in your personal circumstances, like choosing to repatriate, can also affect your tax responsibilities. Consulting an expat tax adviser ensures that you are notified of any relevant changes on time so you can adjust your financial plans accordingly.
What To Consider When Choosing Your Tax Adviser
To successfully navigate the complexities of US and UK taxes, it’s important to find a tax consultant who is qualified and has experience with expat tax issues. They must be familiar with any treaties between your home country and the country of residence, and they should be able to contact other professionals and seek assistance if needed.
You should also consider their approach. They must have good communication skills and be able to clarify complex tax matters. Proper communication includes being transparent about their fees and what their service entails.
Finally, if your financial needs include wealth solutions, you want a professional who offers more strategic advice and makes you feel comfortable about your choices.
Key Takeaway
In this guide, we’ve explained the eligibility criteria for US residency, and how it affects your tax liability. We’ve summarised some of the main US taxes you need to pay, and we’ve discussed the available tax relief opportunities.
We’ve also covered the main benefits of receiving professional tax advice for UK expats in USA from an experienced tax consultant. Titan Wealth International can assist you with all the intricacies of the US tax system, from understanding tax treaties to managing your foreign income. Our team of professionals can provide tailored support that aligns with your financial expectations and ensures that you are always up-to-date on your tax-related responsibilities.
