The seven taxing side-effects of a US passport

Boris Johnson has hit the news recently for a run in with the Inland Revenue Service (IRS) in the United States. Despite his deceptively English exterior, he holds a US passport and this means, like thousands of other US citizens living abroad, he still has to file US tax returns. Like the Hotel California you can check out - but you can never leave your filing requirements behind. 

1. Everyone must file wherever they are

US rules state that US citizens living outside the US still have virtually the same filing requirements those living within it for income and capital gains tax, gift and estate duties. 

2. The penalties are steep

If you fail to file the penalties can be significant. The IRS also notes it can seek interest, files and even imprisonment in addition to penalties. Some are even based on a percentage of the highest balance in your accounts any any point within a given year.

3. There is some relief for foreign earnings and taxes

There are some reliefs for those living abroad - in 2013 up to $97,600 (roughly £62,000) of foreign earned income can be excluded from US tax. The IRS also allows relief for overseas tax paid against the US bill. However, you can’t claim both the exclusion and relief for the overseas tax on the same income. In the UK if your income is over the exclusion as our taxes are higher you may be better opting to offset your UK tax bill against the US one, rather than taking the exclusion. 

4. The Banking Secrecy Act requires your details  

US citizens must not only report their worldwide income, wherever they are, but also any details of bank or financial accounts held outside the US if they have, in aggregate, more than $10,000. 

The $10,000 limit applies not just to your savings, but any accounts which you might not own but you are a signatory for - for example a club or society or the company you work for. Just another trap to look for and more penalites if you've not filed. 

5. Disclose voluntarily and fix those ‘delinquent’ returns 

In order to encourage people to come forward voluntarily the US has run a number of disclosure opportunities. The current 2014 opportunity caps the number of historic returns required at eight years, provides fixed penalties and should generally protect against criminal prosecution. 

The problem in the UK is we don’t require you to keep evidence that far back so individuals may not have retained the relevant information.

6. The web is huge and very adhesive

In case any US citizens were considering ignoring this and hoping for the best, the IRS has persuaded many countries to implement regulations forcing banks and financial institutions to report all their dealings with US citizens back to the IRS. The IRS can now obtain an immense amount of data on US citizens abroad. 

7. You can exit - for a price

Increasingly for many US citizens, one solution to the cost and expense of filing IRS forms has been to give up their citizenship. But handing back the passport has a price - the US has just increased the fees more than five-fold to $2,350. For some people there will also be an expatriate tax on exit, and they will still need to bring their back-taxes up to date first.

If you are concerned that you may have back-taxes to file in the US, we can put you in touch with a reputable US advisor and liaise with them to bring you up to date. 

Helen Thornley, Tax Consultant