Tax Preparation for Living & Working in the UK as a U.S. Citizen
To avoid double taxation, it is important to understand tax law as it applies to U.S. citizens working in the United Kingdom. You should understand enough about UK tax law to avoid pitfalls and enough about U.S. tax law to take advantage of generous tax exclusions the Internal Revenue Service (IRS) offers.
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UK Residence and Domicile
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If you are working in the UK, you may be classified as a UK resident, though you are not considered domiciled in the UK. You will be classified as a domiciliary of the UK if the government believes you have made the UK your long-term home. This determination is made based on objective indicators of your intentions, such as how long you have lived there. It is beneficial not to have this classification because the UK taxes the worldwide income of its domiciliaries. However, as a resident, you will not be taxed on income you earn outside the UK unless you bring it into the country.
U.S. Federal Tax Benefits
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The IRS offers several tax benefits to U.S. citizens working in the UK. Since the U.S.-UK tax treaty allows U.S. citizens who paid tax to the UK government to credit this amount against their U.S. federal tax liability, you should calculate this tax credit and subtract it from your U.S. tax liability. If you still owe taxes to the IRS, you can make an alternative calculation. First, calculate what proportion of the tax year you were physically present in the UK according to the number of days you were physically present there and multiply this number by the full exclusion amount. In 2008, this was $87,600. Next, add to this product the cost of any employer-provided housing you received while living in the UK. Subtract the total from your U.S. federal tax liability, compare the remainder with the remainder that you obtained by applying the U.S.-UK tax treaty, and choose the result most favorable to you.
State Taxation Issues
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States assert tax jurisdiction over people considered legally domiciled in the state. Although state laws differ, you are more likely to be considered domiciled in a state if you maintain a residence there, hold a state driver's license or vote there. Even if you are domiciled in a particular state, you may or may not be taxed on income you earn in the UK, because many states do not tax their domiciliaries on income earned overseas. If your state does expect you to pay taxes on income you earned in the UK, check to see if it will allow you to credit taxes paid to the UK government against your state taxes.
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