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    Default US Citizen contracting in UK

    Can anyone point me in the direction of any previous threads relating to tax obligations of a US citizen contracting in the UK? I've had a quick scan and can find a whole bunch on Europe but nothing on the US.

    Failing this, a newb here is on 300 per day (new contractor, first ltd) and is a US resident. Any ideas how much tax (if any) they'll need to pay back to the US?

    Thanks.

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    Unfortunately, a US citizen is taxable on their worldwide income in the US based on their citizenship, rather than their residency status, which is why so many US citizens living abroad choose to renounce their US citizenship. It's even worse if a US citizen wants to contract through their own company abroad, because that can substantially complicate their US tax return (google Subpart F income, for example), although there are ways to reduce this complexity (e.g. by having the company income treated as personal income). The other issue is that, even with the double taxation treaty, many tax treatments are not aligned (e.g. pensions, ISAs etc.). Basically, as a US citizen looking to contract in the UK, I'd probably be looking at an umbrella. I would also be looking for professional advice, as the threads here and elsewhere may be useful, but will not be detailed or tailored.

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    As jamesbrown says, if you're a US citizen, you need to file a US personal tax return, even if you haven't lived there in yonks.

    We have a handful of clients in this situation. They've typically changed their company year ends to 31 Dec, as that makes the reporting easier for US purposes. Afraid I don't really know anything beyond that, they've each got a US accountant that does their US tax return.

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    Quote Originally Posted by Invisiblehand View Post
    Can anyone point me in the direction of any previous threads relating to tax obligations of a US citizen contracting in the UK? I've had a quick scan and can find a whole bunch on Europe but nothing on the US.

    Failing this, a newb here is on 300 per day (new contractor, first ltd) and is a US resident. Any ideas how much tax (if any) they'll need to pay back to the US?

    Thanks.
    Are you a British Citizen or UK or EU permanent resident or a T1/2/4/5 dependant?

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    I just wrote a bunch of stuff related to this a couple weeks ago. See my long comments here. I'm not going to recreate it all. Not everything in those comments relates to your question but a bunch of it does.

    You should not have to pay any US tax on your UK income. You can use the foreign tax credit. You should GET ADVICE. You should almost certainly use a 12/31 end of tax year for the ltd, as Chris Maslin noted above. You should almost certainly file the election to have it be a disregarded entity and file as self-employed. You'll still be able to use UK corp tax as well as any dividend tax towards a tax credit, which should be enough to wipe out US tax liability on UK income. If you take this approach, you will calculate your US tax based on all your income, including the self-employment income, and then wipe it out using the UK tax paid as a tax credit. Any decent advisor will tell you how. See my comments in the other thread for questions to ask an advisor to find out if he isn't an idiot.

    Alternative to using the foreign tax credit, you can use the foreign earned income exclusion to wipe out up to around $100K of UK income off your US taxable income. But this can complicate other things and if you have kids, I don't think you can use the child tax credit, which you could if you use the foreign tax credit instead. Again, any advisor who knows anything should be able to help you through this.

    There is a deadline (I don't remember what it is) for filing the election to have your company be a disregarded entity. So you should not delay on this. I have known three people who didn't know about the election or the deadline. One filed late without giving an excuse and was rejected. The other two explained that they were filing late because they didn't know about the deadline. Both were accepted. So if you are past the deadline, still get advice and file the election, with an explanation/excuse, if your advisor recommends you file it.

    If you can't find an advisor, perhaps you could ask Chris Maslin who his clients use.

    Also, if you make your wife a shareholder, and you file as a disregarded entity, for US tax purposes you are not self-employed, you are a partnership. That means you have to file a partnership return in the US every year. Your income goes on 1040 Schedule E (it is Schedule C if it is self-employment).

    As a general rule, the best move you can make is to do whatever you can to minimise UK tax liability, because UK tax credits are still going to wipe out US tax liabilities. I do not think it is possible under any normal situation to reduce your UK tax liability lower than the US tax liability on the same income. But neither do you want to spend multiple thousands for US tax specialists every year, so you want to get on top of this and get it right. Form 5471 is the worst form in the glorious US tax system, you really don't want to have to pay someone to do that for you every year.

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    Oh, one more thing. It's my understanding that the US tax experts in this country are, shall we say, aggressive in their pricing and that you might do better if, via recommendations, you can find someone in the US to handle it for you. There's no reason you can't have someone back there do it.

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    Quote Originally Posted by WordIsBond View Post
    Oh, one more thing. It's my understanding that the US tax experts in this country are, shall we say, aggressive in their pricing and that you might do better if, via recommendations, you can find someone in the US to handle it for you. There's no reason you can't have someone back there do it.
    I completely agree with what you've written above, but I will add that it's not so much the additional tax paid, if any (that's the point of the double taxation treaties), but about the hassle of filing a US tax return, depending on your status in the UK, and the consequences of getting it wrong, which is very easy. Incidentally, the FEIE may be useful (e.g. if you're operating through an umbrella), but it applies to earned income, not unearned income. The hassles really kick in when you don't do things properly on the basis of poor advice. For example, you don't nominate to be considered a disregarded entity (business income = personal income) and you then take dividends from a UK limited. 5471 for Subpart F income is most definitely one to avoid (several $k to get that one completed, potentially). In those circumstances, you'll not only experience massive hassle, but substantial additional tax too.

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    Quote Originally Posted by jamesbrown View Post
    but about the hassle of filing a US tax return, depending on your status in the UK, and the consequences of getting it wrong, which is very easy. Incidentally, the FEIE may be useful (e.g. if you're operating through an umbrella), but it applies to earned income, not unearned income.
    We're agreed -- get advice ASAP.

    I'll add one point about the FEIE (Foreign Earned Income Exclusion, in case OP doesn't know). It's my understanding that you CAN apply it to dividends from a Controlled Foreign Corporation. So if the advice is to not file the election as a disregarded entity (which in most cases would probably be suspect advice), you'll have a CFC, have to file 5471, but the dividends would probably qualify for the FEIE. And if you go with the Foreign Tax Credit, the dividends of a CFC would in most cases go under General Category income. If you have a disregarded entity, all profit would apply for either the FEIE or General Category income on Form 1116 (FTC).

    I would like to reiterate that though I may know more about this stuff than a lot of so-called US tax experts in this country, I am not an accountant, not certified to give advice on US taxes, or anything like that. I did have the good fortune to abscond with America's finest woman for my bride, so I've had to pick up some knowledge of this stuff, and that knowledge has deepened as our own tax situation has grown more complex. But there are likely many nuances which could affect OP of which I have not the least idea, so everything I write here should be taken cautiously and discussed with a professional.

    I do certainly know that decisions made now can cost you a lot later. And I also know that if anyone pointed me down the route of having to file 5471 every year, I'd be wondering if that was because they wanted a piece of that annual action. I'd certainly want to know why they advised that. If I did go that route, I'd probably only pay for it for a couple of years and consider then just doing it myself. The fee most charge for a 5471 is probably all out of proportion to what is needed for a simple contractor's business. The form is a nightmare to learn but if you know what you are doing, as any professional should, they can probably take a contractor's UK accounts and spit out a 5471 in a couple of hours, at the most. They should be paid something for the expertise that enables them to do that, but they shouldn't be paid the same fee as would be justified by a larger, more complex business.

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    Quote Originally Posted by WordIsBond View Post
    We're agreed -- get advice ASAP.

    I'll add one point about the FEIE (Foreign Earned Income Exclusion, in case OP doesn't know). It's my understanding that you CAN apply it to dividends from a Controlled Foreign Corporation. So if the advice is to not file the election as a disregarded entity (which in most cases would probably be suspect advice), you'll have a CFC, have to file 5471, but the dividends would probably qualify for the FEIE. And if you go with the Foreign Tax Credit, the dividends of a CFC would in most cases go under General Category income. If you have a disregarded entity, all profit would apply for either the FEIE or General Category income on Form 1116 (FTC).

    I would like to reiterate that though I may know more about this stuff than a lot of so-called US tax experts in this country, I am not an accountant, not certified to give advice on US taxes, or anything like that. I did have the good fortune to abscond with America's finest woman for my bride, so I've had to pick up some knowledge of this stuff, and that knowledge has deepened as our own tax situation has grown more complex. But there are likely many nuances which could affect OP of which I have not the least idea, so everything I write here should be taken cautiously and discussed with a professional.

    I do certainly know that decisions made now can cost you a lot later. And I also know that if anyone pointed me down the route of having to file 5471 every year, I'd be wondering if that was because they wanted a piece of that annual action. I'd certainly want to know why they advised that. If I did go that route, I'd probably only pay for it for a couple of years and consider then just doing it myself. The fee most charge for a 5471 is probably all out of proportion to what is needed for a simple contractor's business. The form is a nightmare to learn but if you know what you are doing, as any professional should, they can probably take a contractor's UK accounts and spit out a 5471 in a couple of hours, at the most. They should be paid something for the expertise that enables them to do that, but they shouldn't be paid the same fee as would be justified by a larger, more complex business.
    At the risk of distraction, that's an interesting comment on dividend income from a CFC as qualifying for the FEIE. Do you have any links about that? It was always my understanding that, outside of declaring the entity as disregarded, any dividend income from a CFC would be treated in the same way as unearned income more generally and, therefore, taxed accordingly. The other issue to bear in mind here is that the FEIE needs to be claimed explicitly and it's a relatively modest amount ($100k) for a disregarded entity operating in the professional services space. Agreed on 5471. There's a bunch of accountants looking to profit in this specialist area, and it's not uncommon for quotes that are literally in the thousands (vs. the sub $1k that it should actually cost for a simple return).

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    Quote Originally Posted by jamesbrown View Post
    At the risk of distraction, that's an interesting comment on dividend income from a CFC as qualifying for the FEIE. Do you have any links about that? It was always my understanding that, outside of declaring the entity as disregarded, any dividend income from a CFC would be treated in the same way as unearned income more generally and, therefore, taxed accordingly. The other issue to bear in mind here is that the FEIE needs to be claimed explicitly and it's a relatively modest amount ($100k) for a disregarded entity operating in the professional services space. Agreed on 5471. There's a bunch of accountants looking to profit in this specialist area, and it's not uncommon for quotes that are literally in the thousands (vs. the sub $1k that it should actually cost for a simple return).
    Thanks for the challenge. I can't back that up, so it appears I may have been fed duff information on it. Helps to reiterate that I am NOT an expert on this stuff.

    What I said about it being general category income for the Foreign Tax Credit IS pretty clear from the instructions for Form 1116. But I can't find anything about it in relation to the FEIE. If you want to use FEIE to wipe out US tax liability, you pretty much have to either go umbrella or go with a disregarded entity. In almost every case, I think the disregarded entity is best.

    As for the amount of the FEIE, OP said 300 / day. Assuming 230 days a years, that's 69K, which given current exchange rates is well within the FEIE limit. The best advice I could give, actually, is to make more money, rendering the FEIE not a good option.

    Again, depending on other factors, the Foreign Tax Credit may be far superior. It also has the advantage that you always pay more UK tax than US tax, so you get a carryforward of your excess tax credit. That can be carried forward for ten years. If you have a year in the future where your UK income is relatively low, having that carryforward could end up being quite beneficial.

    The FEIE also makes calculating the Alternative Minimum Tax more complicated. At that level of income, I don't think AMT is an issue, however.

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