Having entered into 2025, we will soon see the Republicans form a new US government with the shy and retiring Mr D Trump at the helm once more!
Is there an End to US Tax Filing for US Persons Living Abroad in Sight?
On December 18, 2024, Washington DC representative Darin LaHood introduced the residence-based taxation for American Abroad Act. This bill, if passed, would see an to end Americans living abroad having to report their worldwide income on an annual US return. Instead, it has been suggested that income from US sources for US citizens residing overseas would need to be reported only.
Whether this comes to fruition or not yet remains to be seen. This is not the first time such a suggestion has been introduced and passing this bill may face some serious resistance even from Donald’s “loyal” republican supporters.
Tax Cuts and Jobs Act (TCJA) of 2017
This was due to end at the end of 2025 but what we now know, is that this is likely to be extended following Trumps re-election. This will result, amongst other things, in the top rate of US tax remaining fixed at 37% and the gift and estate tax exemptions remaining at recent all-time highs ($13.99 million for 2025).
The Effect of the Abolition of the Non-Dom Regime for US Citizens in the UK
Last year, we saw the UK governments (both the Conservatives and Labour) look to end the concept of being “non-domiciled” in the UK and consequently, the end of filing of UK returns on a remittance basis. Please read here for more details on this.
Dual US/UK tax Filing
For most US persons living in the UK, dual income reporting is often required and for many, reporting their entire worldwide income within both jurisdictions is needed. This is likely to become even more true following the abolition of the UK non-dom regime! Fortunately, there is the US/UK double tax treaty that may help prevent paying taxes twice although tax planning is often required.
This tax treaty consists of a series of Articles, and these will dictate which country has the primary taxing rights on certain types of income. However, even where the UK may have primary taxing rights, the US invariably will still seek to tax worldwide income regardless (unless LaHoods bill get passed of course)!
For example, wages paid by a UK employer for a US person living in the UK will be taxed in the UK ahead of the US. Here, the Foreign Earnings Income Exclusion (up to $126,500 for the 2024 tax year) may be claimed to reduce such taxable wages from US taxation with any wages above this threshold, offset by foreign tax credits. However, offsetting foreign tax credits is usually only possible if the UK taxes have been withheld and/or paid during the same calendar year in which the earnings were earned and so some care is required to ensure UK taxes have been settled timely from a US tax perspective (in order to prevent any shortfall in tax credits).
Of course, for most employees in the UK, PAYE will be deducted at source so this is not typically an issue but for self-employed individuals, where UK taxes are not deducted at source, prepayment of UK taxes can help avoid any shortfall of foreign tax credits and so avoid double taxation. The same can also be true for US persons residing in the UK but who may still be employed and paid by a US company! Paying tax to one country will not necessarily negate your obligation to pay tax in another country and you should not assume that the UK will allow a credit for taxes paid to the IRS.
Also, non-earned income (including US and UK pensions, capital gains (whether US or not)) may also require the prepayment of UK taxes ahead of the usual UK tax payment deadlines so to ensure sufficient credits are available on the US return.
Timing of the realisation of gains/losses to align the different tax years and factoring in exchange rate fluctuations may also need to be planned for. For example, realising gains during April-December 2025 and losses 1 Jan –5 April 2026 will fall within the same UK tax year (2025/26 UK tax year) but will be reported on 2 different US tax years where the 2026 losses cannot be offset against the 2025 gains! Other considerations including whether there are carried forward losses in either jurisdiction will need to be factored in.
Reducing your tax exposure
There are some dual-qualified charities that US/UK taxpayers can donate to, allowing you to claim the benefit on both your US and your UK tax returns.
You may also wish to increase pension contributions to UK or US pension plans. Typically, reductions up to the corresponding limits in each country may be available although not deducting UK employee contributions and taxing employer contributions on a US return may be a way to utilise excess foreign tax credits that have accrued on your US returns (and where a tax basis within that UK pension is generated from a US tax perspective). This is often beneficial for Americans eventually returning to live in the US as the already taxed contributions can be distributed tax-free for such persons who may be subject to US taxation only on such distributions and who are no longer subject to UK taxes (in accordance with Article 17 of the US/UK tax treaty).
Initial Free Consultation
We would recommend a review of your individual circumstances with a dual US/UK tax advisor to address unintentional consequences and maximise potential opportunities. We are happy to provide a free initial 15-minute consultation to discuss how we might be able to help you with your US and UK tax filings and help identify potential tax planning opportunities.
Please complete the form at the side of the page to get in touch with us.
