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Six Things British Expats Need to Know about Paying Tax in the USA

Contributed by 1st Move International Ltd
December 18, 2018

While Australia is often cited as the most popular destination for British expats, with around 1.3 million Brits living 'Down Under', it is estimated that there are roughly the same number across North America.

Of course, there are many advantages to moving to Canada or the United States, including diverse landscapes, a familiar language, and affordable properties when compared to the current UK housing market. However, there are some areas where the process for international removals may introduce some complexities. In the United States especially, getting to grips with US tax legislation can be somewhat confusing for many.

Here are 6 things that all British expats should know about paying tax in the USA:

1. The Statutory Residence Test Doesn't Exist

In the United States, there is no Statutory Residence Test to determine whether or not you need to pay tax, as there is in the United Kingdom. However, the US does have a similar system in place, called the Substantial Presence Test. While there are many factors that will be considered, a general rule of thumb is that anyone present in the United States for more than 31 days during the current year, totalling more than 183 days through the last 3 years, will be required to pay tax in the US. This is true for everyone, including those that are not permanent legal residents in America. Keep this in mind if you're thinking of moving abroad and have been spending time in the States checking out destinations and properties.

2. You can Still Pay... Even if you Don't Qualify

If the Substantial Presence Test determines that you are not required to pay tax in the US, you can still opt to pay if you wish to do so. British expats who are not deemed to be residents can do this by filing their taxes under the 'First Year Choice' or 'First Year Election' option. While it may seem strange to voluntarily pay tax without being required to do so, there may be benefits for married couples who can file jointly and receive the relevant tax benefits. For British expats married to a US resident, it is not possible to file jointly if you are still in the country on 'Non Resident Alien' status. Therefore, taking the First Year Choice option is the only way to receive married couple benefits as a non resident in the USA.

3. Tax is Calculated on a Worldwide Basis

As with many countries, US tax takes into account income that is sourced not only within the person's country of residence, but also income that is sourced anywhere in the world. For British expats living in the United States, the most obvious source will be any income from activities in the UK, such as earning rent from a UK property, or receiving income from any UK business ventures. The result is that British expats in America will need to pay tax in both the United Kingdom and in the United States. Fortunately, there is a Double Tax Treaty agreement in place between these two countries, which means that you will be able to claim back any paid US taxes from the US government that you have also paid to HMRC.

4. There are Hefty Fines for Being Late

HMRC is relatively lax when it comes to penalties for late tax returns. In the UK, taxes can be filed up to three months late with just a £100 fine in total (rising to a little more for taxes filed later than 3 months overdue). In the United States, however, there is no fixed penalty such as this. Instead, 5% of tax due will be added to the penalty for every month that the filing is delayed, up to a maximum of 25%. In addition to this, all taxes that are filed more than 2 months late will be subject to a minimum fine of 135 USD (roughly £100) or 100% of tax due, whichever is less. British expats paying tax in the United States should try to ensure they do not file late, remembering that the final date for returns is 15th April each year.

5. Each State has its Own Rules

Federal Income Tax rules apply across the United States as a whole. However, unlike in the UK, there is additional tax legislation that varies by region. Each state has its own tax that it chooses to implement (or not, as the case may be), which is known as State Income Tax. While most states do impose State Income Tax, there are a few that do not. These are Alaska, Florida, Nevada, Tennessee, Texas, Washington, Wyoming, South Dakota, and New Hampshire, where State Income Tax is set at 0%. Maximum State Income Tax rate varies between the 2.9% due in North Dakota to the more significant 13.3% for the highest earners in California. Typically, the midwestern states tend to have the lowest state tax rates.

6. There's no HMRC to Do it For You

Finally, be ready to stand on your own two feet, taxation-wise! Dealing with HMRC can sometimes be frustrating, but on the whole the system is designed to make tax simple, calculating the tax you pay as an employee automatically and ensuring this is deducted from your wages. Sadly, British expats working in the United States will find no such assistance. In fact, it is necessary for employees to instruct their employer to deduct the correct amount of tax by using a W-4 form. This can increase the risk of errors, resulting in either underpayments or overpayments being made. Underpayments can lead to fines, although tax refunds are available for overpayments. The best way to ensure a speedy refund is to file online and ensure you specify where the refund should be made.


Tags: tax | Expats | individual income tax



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