Foreign income tax question

rainbow_carnage

I'm totally confused about this, but I can't afford an accountant. Hoping someone here can help.

I have dual American/British citizenship, so I file two self-employed tax returns each year. I live and work in London. One of my clients is based in California. She pays me in dollars. The money goes into a US bank account. Where do I pay taxes on it?

I've contacted both the IRS and Inland Revenue. Both said that they consider it to be foreign income and that I should pay income tax on that money in the other country. Neither seems to want my money, but I doubt I'll get away with paying no tax at all.

It's not a lot of money, and it'll cost me more to hire an accountant. I just don't want to be audited and fined for failure to pay tax (in either country).

The US tax rate is lower, so if I had to choose, I'd rather pay that.

Any advice as to what I should do?

Cook_County

From a UK tax perspective the income is taxable here and forms part of the profit/loss of your trade.

As a US person you are subject to US income tax and claim the foreign earned income exclusions and/or foreign tax credits on your US tax return so you end up never being taxed twice.

I assume you have a certificate of coverage so that you only pay UK National Insurance and not US Self Employment Tax.

rainbow_carnage

Many thanks for your reply.

I do not have a certificate of coverage. I'm not sure what that is. Why do I need it? I do pay UK National Insurance.

I've lived in the UK for almost 10 years. I have to file a US tax return to keep my US citizenship, but I don't pay any US tax because I make less that the foreign-earned income exclusion maximum ($80k). I list my UK income on my US tax return as foreign income, and as long as it's under $80k, I don't worry about it.

When I spoke to the foreign income specialist at HM Revenue, he insisted that I do not need to pay UK tax on US income. I explained that I live and work in London. He said that doesn't matter and that it's still foreign income. He said I have to list it on my UK tax return as foreign income but that I pay tax on it to the IRS.

When I spoke to the IRS, they said almost the same thing, except that they also view it as foreign because I work from London, and that I should pay tax to HM Revenue, not to them.

I'm going to call HM Revenue yet again.

Cook_County

The income you refer to is not foreign - it is UK under long established case law.

It is taxable here in the UK whether or not you claim the remittance basis on your UK tax returns.

In terms of NI, you may just want to read the US/UK totalization agreement.

bluejellyfish

In theory, you are liable to Taxation on this particular income in both the UK and US. Ie. The IRS want to tax this income as you are a US national, and HMRC want to tax this income as it is performed in the UK. To ensure you are only taxed twice, you would look to the US/UK double taxation treaty.

Under the terms of the US/UK double taxation treaty you would be considered treaty resident in the UK and therefore the UK has the primary taxing rights to your employment income - meaning you essentially claim a foreign tax credit on your US return and are fully taxed to the extent of UK tax law.

In short - Cook_County is right and the foreign income 'specialist' at HMRC is wrong.

sdooley

Hi

what bluejellyfish says is basically right, although I think he means that you are only taxed once under the double tax treaty.

However HMRC may be assuming that you are resident in the UK but not domiciled here (broadly, you haven't decided to live here for life). If so, then provided (1) the income per tax year is below £1,000 and (2) you do not remit the income to the UK (i.e. just use the dollar account for spending while you are in the US) and (3) the income does not come from a UK 'source' then this money will be completely free of UK tax (until such time as you bring (remit) it to the UK). If you go just over £1,000 in a year you might be advised to bring part of the income into the UK (and pay UK tax on it) as foreign income of non-UK domiciled people is all taxable over £1,000 p.a. unless they decide to pay the £30,000 special tax (which is optional, and only really relevant to the super-rich for obvious reasons).

However reading it again the US income seems to be employment income from duties performed in the UK, and I'm not sure how that ties in with the remittance basis rules.

rainbow_carnage

Thank you again for the helpful replies.

I've googled the US/UK totalization agreement. From what I understand, I can request a certificate of coverage retrospectively. Otherwise, how would I know the dates?

I'm not sure at which point I'd be considered domiciled here. We're definitely thinking of moving to the States in the next few years, but at this point it's not financially feasible. As a freelancer, I can't afford private health insurance. Is simply thinking about moving back at some point in the future enough to affect my tax status?

Anyway, the earnings in question exceed £1,000, so I guess I will have to pay UK taxes on them. I don't mind. I just don't want either country to audit me afterwards and demand that I pay more. And since I'm doing the work under an American Social Security number (rather than an NI number), I'm a little concerned that the American govt is the one more likely to kick up a stink. At this point, they're the only ones who know about it.