U.S. TAX GUIDE IN THE UK
Should you report UK government support on your US tax return?
Yes, you must report UK government support, like carer’s allowance or unemployment benefits, on your US tax return. These funds are taxable in the US.
For example, if you receive £6,000 and are a single filer, you don’t need to file a return if this is below the US$14,600 threshold for 2024. But for married individuals filing separately, the threshold is only US$5, necessitating a tax return. Worldwide income, regardless of currency, counts towards these thresholds.
Do you have to pay US tax on your UK income?
The US-UK Tax Treaty helps avoid double taxation, ensuring you don’t pay social security or Medicare taxes to both countries. There are two main benefits for US expats in the UK:
- Foreign Earned Income Exclusion (FEIE): Using Form 2555, you can exclude up to US$126,500 of foreign income in 2024.
- Foreign Tax Credit (FTC): This offsets UK taxes against US tax liability, often resulting in zero additional US tax due to higher UK tax rates.
Why is the Foreign Tax Credit better than the Foreign Earned Income Exclusion in the UK?
The FTC is often more beneficial than the FEIE for several reasons:
- Higher Earnings: If your income exceeds the FEIE limit, you may owe US taxes. The FTC covers all your income, potentially resulting in zero US tax.
- Carry Forward Credits: FTC allows you to carry unused credits forward for up to 10 years, useful if moving to a low-tax area after the UK.
- Dependent Credits: FTC enables you to claim refundable child tax credits, unlike the FEIE.
