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Tax Guide for British Expats in the U.S.

Tax Guide for British Expats in the U.S.
Ines Zemelman, EA
17 September 2021

The United States is a preferred destination for British expats for several reasons. Whether it’s the similar lifestyles, the shared language or the vast array of locations, it’s no wonder that there are millions of British expats living in the U.S.

However, although there are a lot of similarities between the two countries, there is a world of difference in the financial and tax systems that the two utilize. Moreover, British expats in America that fail to get a good, solid grasp of the nuances of these systems could suffer dire, financial repercussions.

The good thing is we’ve made this nifty guide that has been with British expats in America in mind, whether they are British green card holders that need some tax advice or someone who is thinking about moving to the U.S. and would like to be equipped with the right information. Let’s begin with the tax basics for British expats.

US Tax basics for British Expats

While the UK tax system is fairly straightforward, the U.S. isn’t as much as there are different tax rates for Federal and Municipal. Failure to pay the right amount on time can result in hefty fines, which can reach as much as 25% of the total tax amount that you are due.

If you are employed in the U.S., the onus of telling your employer how much tax they should deduct falls on you, by completing a W-4 form. But if you are earning in the U.S. for an American company, you will be taxed at source and you still must file a tax return to the IRS.

The U.S. tax return form is called form 1040, and you can file it online.

Which UK Expats are Required to File US Taxes?

One thing that British expats in the U.S. must find out is whether they are liable to file U.S. taxes. This can be done using two simple tests. The first is the Green Card test that states that anyone who possesses a Green Card, no matter where they are in the world, has to file U.S taxes. This means British expats who are living in the U.S. that have a Green Card must file.

Meanwhile, if British expats in the U.S. do not have a Green Card but pass the Substantial Presence Test, then they are also obliged to file a U.S. tax return.

Alternatively, if UK expats living in the US don’t have a green card but pass the Substantial Presence Test, then they are still required to file a US tax return. The Substantial Presence Test is similar to the Statutory Residence Test in the U.K., it is a criterion that the IRS uses to determine whether the British expat qualifies as either a resident or nonresident for tax purposes. 

The Substantial Presence test means that someone is physically present in the US for at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately beforehand, counting:

  • All the days you were present in the current year, and

  • 1/3 of the days you were present in the first year before the current year, and

  • 1/6 of the days you were present in the second year before the current year.

If a British expat living or working in the U.S. passes either one of these two tests, then they are subject to U.S. taxation on their worldwide income. The only exceptions are if they are working for the British government, or if they are in the U.S. on a teacher, training (including sport), or student visa.

British expats living in America may also have to pay state taxes. The rules differ from state to state, so it would be best to check with the state tax authorities where you live to find out what your responsibilities are. Some states, for example, Florida, do not obligate their residents to pay income tax locally. However, they will be subject to other tax rules, so it is crucial to gain assistance from a dependable local tax expert to help you with local tax rules. It is strongly not recommended to file your tax returns by yourself as the penalties of improper or late filings can be severe.

The deadline for filing your taxes in the US is the 15th of April each year. You must also take note that you have to get your taxes in order as soon as you possibly can. Waiting until the last minute to work on those is only inviting trouble as the demand for assistance increases to a level that tax consultants are no longer able to accommodate new clients.

To make your relocation go smoother, here are some other U.S. tax issues that British expats should know about.

Immigrant or Non-Immigrant 

U.S. tax obligations of the British expat in the U.S. primarily depend on the Visa type under which they were admitted to the U.S.

There are two main categories of visas for the US: immigrant and nonimmigrant (in other words: permanent and temporary). Nonimmigrant visas are granted for tourists, students, researchers, and short-term work placements. Government employees and diplomats also enter the U.S. under non-immigrant visa types. 

Non-immigrants with income from the U.S. file non-resident tax returns and pay tax only on income from U.S. sources.

Immigrant visas give permanent residence in the USA, so it’s a much-coveted thing amongst British expats in America. Immigrant visas may be employment-based or family-based. Generally, U.S. tax obligations begin from the first day where you cross the U.S. border but the devil is in the details.

Resident or Non-Resident

The second factor that determines the scope of U.S. tax obligations is the length of stay in the U.S.

Even a holder of a non-immigrant visa will become a U.S. resident for tax purposes if they meet the Substantial Presence Test. Consequently, they will have the same U.S. tax filing obligations that immigrant visa holders. 

U.S. Green Card

Citizens of Britain who were granted a U.S. Green Card or met the Substantial Presence Test are considered U.S. Resident Aliens. For resident aliens, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same as for U.S. citizens. 

The main difference between Green Card holders and those who become resident aliens by meeting the Substantial Presence - a Green Card holder has a full range of U.S. filing obligations even if they do not spend a single day in the U.S. during the tax year.

Taxpayer Identification Numbers 

All individuals filing tax returns must have a U.S. Social Security number (SSN) or an individual tax identification number (ITIN). ITIN is not just for tax filing purposes; it is your unique U.S. government identifier needed for selling residences, obtaining driver’s licenses, opening certain bank accounts and more. An ITIN must be renewed every 5 years.

Ines Zemelman, EA
Founder of TFX