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As a U.S. expat living and earning income in the United Kingdom, it is important that you know how IRS guidelines work. The main factor to remember is that paying little mind to where you reside, you’ll record expense forms every year as long as you hold US citizenship or a Green Card. The United States is one of the only two countries that taxes its citizens no matter where they live.
There are certain exclusions that can help you lower the amount payable each year but make sure you file the right forms each year otherwise you are at risk to pay hefty penalties. The legal exclusions you can claim are listed below:
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion or FEIE allows expats to deduct a specific amount from their overall yearly income and pay income tax solely on the balance. Currently the limit is $108,700 for 2021 but it is important to understand that filing for your taxes is still necessary even if your income is below this amount. You need to file to benefit from FEIE!
Foreign Housing Exclusion
The FHE or the Foreign Housing Exclusion is another exclusion. Because of it, expats may claim living expense deductions such as rent in case you rent or property taxes in case you own a property in the United Kingdom, utilities, parking space rental etc.
If you request Foreign Housing Exclusion, you can’t request Foreign Earned Income Exclusion too so make sure you contact an expat tax CPA that specializes in American expats living in the UK.
The Foreign Housing Exclusion might work better for retirees while the Foreign Earned Income Exclusion is geared towards professionals who have higher income. It is best to consult with a professional before making any decision.
Filing taxes in the United States does not mean that a person does not have to file taxes in their country of residence, in this case the United Kingdom. It is always advisable to consult a professional but make sure you never miss filing your taxes.