Tax Guide for Dual Citizens of the US and UK
Being a citizen of both the US and UK comes with quite a few perks. However, it can also complicate your taxes. To help clear up any confusion you may have, here’s what you need to know about dual citizenship in the US and UK.
Who Qualifies as a Dual Citizen?
Under US tax policy, dual citizens are subject to taxation, even if they’ve never set foot in America. This makes it essential to understand whether you qualify as a dual citizen. If the IRS contacts you about your delinquent tax obligations, you could face severe penalties—and your ignorance may not excuse you.
This brings us to the rules of US citizenship. Generally, you will automatically be considered a US citizen if either of the following applies:
- You were born within the borders of the US
- At least one of your parents was a US citizen when you were born
For example, let’s say Thomas and Amelia are UK citizens with no connection to the US. While on vacation in New York City, Amelia gives birth to a son named Noah. Because Noah was born in the US, he is automatically a US citizen regardless of his parents’ citizenship status. And because his parents are from the UK, he is also a UK citizen, making him a dual citizen at birth.
Alternatively, Jesse is a US citizen who takes a job in the UK. While there, he marries a British woman. They have a daughter, Ellie. Because Ellie’s father is a US citizen, she is automatically a US citizen regardless of where she was born. Even if she never travels to the US, she will still be considered a US citizen. And because her mother is a UK citizen, she will be a dual citizen of both countries.
Do US-UK Dual Citizens Have to File US Taxes?
Yes. The US is one of only two countries in the world that imposes citizenship-based taxation rather than residence-based taxation. (The other is Eritrea.) This means that all US citizens are required to file an annual tax return no matter where they live in the world.
When filing their annual return, US citizens must report their worldwide income, not just US-source.
Do US-UK Dual Citizens Have to File UK Taxes?
If you live in the UK, yes. Unlike the US, the UK imposes residence-based taxation. This means that you will generally be taxed if either of the following applies:
- You are a resident of the UK
- You receive income from a UK-source
However, most employees’ taxes are withheld by their employer through the UK’s Pay As You Earn (PAYE) system. In most cases, you will only need to file a UK tax return if:
- You have employment income exceeding GBP 100,000 (including both salary and benefits)
- You have self-employment income exceeding GBP 1,000
- You have investment income exceeding GBP 10,000
- You are the director of a company (unless the company is a non-profit and you receive no salary or benefits)
- You or your partner have income exceeding GBP 50,000 and you claimed the Child Credit
- You have income from a non-UK source
To double-check your tax filing obligations, you can use this tool from the UK tax authority.
Note: Even if you aren’t required to file a UK tax return, you may still want to if you can claim deductions or receive a refund. Common deductions include:
- Donations to charity
- Private pension contributions
- Work expenses over £2,500
Are US-UK Dual Citizens Taxed Twice on Their Income?
Because dual citizens of the US and UK may be required to file tax returns with both countries, this leaves them at risk for double taxation. Double taxation means being taxed twice on the same income.
For example, let’s say you’re a dual citizen working in the UK for a British employer. Because your income comes from a British source, you will owe taxes to the UK government. And as a US citizen, your worldwide income will also be taxed by the US government—including the UK-source income that the British government has already taxed.
Fortunately, there are several policies in place to help Americans living in the UK avoid double taxation. Here are a few of the most common examples.
US-UK Tax Treaty
The US and the UK have agreed to a tax treaty. Because of this, most US citizens living in the UK are already exempt from double taxation.
The US-UK Tax Treaty defines which country has jurisdiction to tax a given source of income. (Typically, you will pay taxes to whichever country you reside in for the majority of the tax year.)
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is a tax exclusion available for certain US citizens living abroad. Taxpayers who qualify for the FEIE can exclude a certain amount of foreign-source income from US taxation. The exact amount changes from year to year. In 2022, you can exclude up to $112,000 in foreign-source income.
For example, if you live and work in the UK and earn a salary equal to $80,000 for tax year 2022, you would be able to exclude your entire income from US taxation. If you instead earned a salary equal to $120,000, you would be able to exclude the full $112,000. This would leave only $8,000 of your UK-source income subject to US taxation.
To qualify for the FEIE, you must meet the standards of either the bona fide residence test or the physical presence test.
Foreign Tax Credit
If you qualify for the Foreign Tax Credit, you will receive a tax credit equal to at least part of the taxes you paid to a foreign government. In many cases, you can claim the full amount you paid in foreign taxes. If that amount is greater than the taxes you owe Uncle Sam, you can use this credit to erase your US tax bill entirely.
As you can see, there are plenty of options for US citizens living abroad to avoid double taxation.
Does the UK Tax Foreign Income?
Whether the UK taxes your foreign income will depend on your residency status. If you qualify as a resident of the UK, you will be taxed on your worldwide income. If you are a non-resident, you will only be taxed on your UK-source income.
Note: There are some exceptions to this rule. Consult a qualified tax professional to learn more about your UK tax obligations.
What Other Tax Obligations Do US-UK Dual Citizens Have?
In addition to filing income tax returns, dual citizens of the US and UK may be required to file certain other tax documents. The two most common examples are the FATCA report and the FBAR.
FATCA
If a US citizen owns non-US financial assets valued above certain thresholds, they must file IRS Form 8938: Statement of Specified Foreign Financial Assets, better known as a FATCA report. The specific threshold for your finances will depend on your filing status and whether you qualify as a bona fide resident of the UK.
If you do have to file a FATCA report, just fill it out, attach it to your Form 1040, and file them at the same time.
FBAR
If a US citizen has at least $10,000 deposited in one or more non-US bank accounts, they must report it by filing FinCEN Form 114: Report of Foreign Bank and Financial Accounts, also known as the FBAR.
The FBAR is technically due on April 15, but if you miss that deadline, it automatically extends to October 15.
Note: The FBAR cannot be filed by mail. You must file it electronically using the FinCEN BSA E-Filing System.
What If I’m Behind on My US Taxes?
While every US citizen is required to file an annual tax return, many Americans living abroad are unaware of this requirement. In fact, some US citizens may not even be aware that they are citizens at all. These are known as “accidental Americans.”
Regardless, if you are behind on filing or paying your US taxes, don’t panic. The IRS provides an amnesty program to help Americans living overseas come into compliance without facing any penalties. It’s known as the Streamlined Filing Compliance Procedures.
To use this program, all you have to do is:
- Self-certify that your failure to file was not willful
- File the last three delinquent income tax returns and pay any delinquent taxes you owed during that time (with interest)
- File Foreign Bank Account Reports (FBARs) for the last six years
This will bring you into compliance with IRS regulations.
Get Reliable Help with Your Expat Tax Return
We hope this guide has helped you understand the tax implications for persons who have dual citizenship in the US and UK. However, this topic is anything but simple. If you still have questions, we have answers.
For more information, read our UK Country guide.
At Greenback Expat Tax Services, we specialize in helping expats manage their US tax obligations. Contact us, and we can give you all the information you need. In fact, we can even prepare and file your expat taxes on your behalf.
