Tax Residency Status

Worried_Mum

My daughter was born in USA and has USA citizenship.  Lived in UK since age 1 and has British Citizenship (certificate).  Now has the tax residency letter to complete from her bank.  Will she have to pay US tax on her UK earnings even though she is not US resident and has never lived or worked in the US?
Thank you :-)

oldbikebloke

as  a US citizen she is liable for US tax on her worldwide income even if not living in the US
https://www.irs.gov/individuals/international-taxpayers/taxpayers-living-abroad

either she values her US citizenship and is happy to bear the cost in admin time of doing a US tax return, and working out what tax relief she can claim, so that she may not actually have any tax to pay. 
Or she decides it is not worth the effort and she renounces her US citizenship 
https://www.usa.gov/renounce-lose-citizenship
it is (allegedly) one of the reasons why Boris Johnson gave up his dual nationality
https://money.cnn.com/2017/02/09/news/boris-johnson-us-citizenship/index.html

Worried_Mum

Thank you.  Although it seems totally unfair that they can claim taxes on someone who has never worked in that country.  Interestingly, HMRC stated she would not be taxed as she had no income from the US.

EdSwippet

Worried_Mum said:

Thank you.  Although it seems totally unfair that they can claim taxes on someone who has never worked in that country.  Interestingly, HMRC stated she would not be taxed as she had no income from the US.

If HMRC said this, they were wrong. This wikipedia page will give you a lot more background on your daughter's situation, and outline some of her options:

https://en.wikipedia.org/wiki/Accidental_American

A particular frustration for US citizens living in the UK -- including dual US/UK citizens -- is the inability to efficiently use things like ISAs. The US does not recognise these as tax-free, and so will simply tax what the UK does not. To add insult to injury, the US punitively taxes any holdings in non-US domiciled funds such as OEICs and UCITS ETFs, which are of course what many investors will hold in stocks and shares ISAs. US tax rates on these can reach 100%, if left long enough.

Worried_Mum

Thank you.  This is becoming a nightmare.

xylophone

This is becoming a nightmare.

Renounce her US citizenship?

oldbikebloke

Worried_Mum said:

Thank you.  This is becoming a nightmare.

America taxes its citizens on all their income, no matter where they earned it, or no matter where they are living when doing so.
That is a fact, it is not a question of fairness, it is a question of why you should be proud to be American and owe allegiance to the US in the form of financially supporting it.
The fact only one other other country has the same rule is neither here nor there.

You don't imply how old she is, and therefore how long she has remained under the radar, she may get a very nasty shock if she ever tries to enter the US and the IRS notice her.

her solution is to end her "American-ness" once and for all

Worried_Mum

Think that could be complicated too.  However someone has said that if she earns less than the Foreign Earned Income Exclusion of $105k then she wouldn't need to file a US tax return?

Worried_Mum

She's 33

EdSwippet

Worried_Mum said:

Think that could be complicated too.  However someone has said that if she earns less than the Foreign Earned Income Exclusion of $105k then she wouldn't need to file a US tax return?

Someone is wrong, I'm afraid. There are different annual income thresholds for whether or not the US demands a tax return. You can find them in IRS publication 54 -- and I suspect you'll also find some very uneasy bedtime reading elsewhere in that. For most people, the annual income threshold is around $13k-$25k or so, but for 'Married filing separately' it is just $5 (yes, really!). If your daughter is married, and her spouse is not a US citizen, she would want to use 'Married filing separately' to avoid dragging her spouse into the same US tax nightmare that she is now uncovering for herself.

The $105k is indeed the annual Foreign Earned Income Exclusion, so that earnings below this face no US tax, but note carefully the word 'earned'. This exclusion does not apply to any unearned income, so interest, dividends, rental income, capital gains, and so on all fall outside it. For these, she might be able to use a Foreign Tax Credit to offset any UK tax, but of course only if she owed UK tax on this income in the first place (so for example not ISA stuff, then).

Finally, it's worth noting that if your daughter has no real substantive connections with the US -- no accounts or money held there, for example -- then ignoring the whole thing is actually a possibility. The US has no power to reach into UK financial institutions and levy liens or fines against UK citizens. They might bluster, but that's about it. Of course, if she regularly travels to the US or has any financial ties to the US, this is risky. Under US law, although it's often done, strictly speaking it's illegal for US citizens to enter the US on a non-US passport.