The US is one of the few countries in the world to tax their citizens not on their US residency status but on their citizenship. This means that US citizens (and Green Card holders) living outside of the US are still required to file an annual US tax return with the IRS.
There are many individuals residing outside of the US that have been unaware of this. Some may even be considered to be “Accidental Americans” where they acquired US citizenship at birth but have spent very little time or no time actually living in the US (for example an individual born to a US parent but has lived their entire life outside of the US or a person born in the US but left at a very early age).
This article discusses the Streamlined Filing program that the IRS introduced during 2012. This was designed to help “non-wilful” US persons to get back in to the US tax filing system and thereby become US tax compliant.
The annual filing obligation is required even if the US citizen has little or no US source income since they are required to report their worldwide income on a calendar year basis. Due to the potential offset of foreign tax credits in respect of taxes settled in the foreign country in which they reside, there may be little or no US tax payable with the US filing although this does not remove the need to submit annual US tax returns. It can, however, be more of an administrative requirement that comes with being a US citizen or from holding a Green Card.
However, if an individual had income that was taxed at a low or zero rate in the non-US country (for example, in the UK no UK tax will arise from ISA income or typically from the sale of an individual’s private principle residence) then US tax liabilities may arise – Boris Johnson being a high profile individual who was subject to US tax on the disposal of his home due to him having US citizenship at the time of sale.
As well as the US tax return filing obligation, there could also be additional filing requirements for US citizens or Green card holders. Whilst some reporting’s may be informational returns with no US taxes to pay, the penalties for non-US tax compliance in respect of these forms can be severe.
Common Examples of Informational forms are:
In addition to the above tax return forms, US persons may be required to file foreign bank reports. These forms are required annually if an individual holds more than $10,000, in aggregate, within non-US bank accounts at any point during each calendar year. If required to complete these, and under the streamlined filing program, late forms for the last 6 years are required. We would recommend that these forms are completed as soon as possible since penalties for non-filing can be substantial ($10,000 per non-US account not disclosed per year).
A link to these reports and form instructions are below.
http://bsaefiling.fincen.treas.gov/main.html
http://www.fincen.gov/forms/files/FBAR%20Line%20Item%20Filing%20Instructions.pdf
• Submit late tax returns for the last three years including any related information returns and pay the tax due, if any.
• Submit late Reports of Foreign Bank accounts for the last six years
• Complete form 14653 (We can also help compete this form and review the explanation statement required)
Continued filing of US returns and foreign bank reports will be required unless the individual decides to renounce their US citizenship (briefly discussed below).
Some US persons, who (for example) have no intention of ever living in the US, may consider expatriating, i.e. renouncing their US citizenship. This means that they would no longer be considered to be a US person from the date that of expatriation. In the year of expatriation, they would be required to report their worldwide income on a US tax return up to the date that they expatriated and only income from US sources thereafter. Once expatriated, they would not be required to file future US tax returns (unless of course they were in receipt of certain US sourced income).
Anyone considering expatriating should also seek US immigration advice. In addition, they would have needed to have had filed at least 5 years of US tax returns before the tax year in which the expatriation occurs. Therefore for someone looking to expatriate during 2020 will need to have filed prior year US tax returns from 2015 through to 2019.
Where an individual’s net worth exceeds $2 million, an exit tax might apply. The expatriating individual whose net worth exceeds $2 million is deemed to have disposed of their worldwide assets on the day before expatriation and if the gain exceeds a certain limit (revised annually) then actual US tax could be payable upon the deemed disposal (except where certain exceptions apply). As such, this will require careful consideration.
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Please contact us to speak to an adviser about UK and US tax assistance.