Financial Mistakes to Avoid as a U.S. Expat Abroad

As a U.S. expat who has relocated permanently to the U.K., you must take the time to research how taxation rules apply to your situation. Understandably, you’ve been looking around for viable investment options to secure your future in the new location. But, before you start diverting funds to different accounts and investment products, understand how the earnings will impact the taxes you’re liable to pay. You should also research the deductions for U.S. expats that can help you lower your tax liability. Staying on top of the rules will help you avoid costly financial mistakes and penalties.

U.S. Citizens Must File Annual Returns with the IRS

If you retain U.S. citizenship or a Green Card, you’re required to file returns with the IRS back home each year. And, since the U.S. government taxes income earned from domestic and global sources, you might just run up a huge tax tab. Work with a UK tax consultant for expats who can advise you on how to take advantage of the exclusions made available by the IRS to expats and lower the taxes you’ll pay. Two of the most beneficial tools are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

Not Taking Advantage of Exclusions is a Mistake

The FEIE allows you to deduct a certain income from the limit set by the IRS each year. This slab is fixed at $108,700 for the year 2021. Accordingly, you’ll deduct your total taxable income from this amount and pay taxes only on the balance. Further, the IRS allows you a tax credit up to the amount you paid to the U.K. government. You can deduct these taxes from your IRS dues and pay only the remaining dues. Your tax advisor will also inform you that the exclusions are available for every individual, and couples filing joint returns can also take advantage of tax breaks.

Understand How the Foreign Bank Account Report (FBAR) Works

If you’ve opened a bank account in the U.K., and hold more than a total of $10,000 in these accounts at any time during the financial year, you’re required to report that account in your US IRS tax return. You’ll also include information about other bank accounts, pensions, IRA schemes, retirement accounts, and investments in the U.K. US law requires you to complete and submit Form 8938 as outlined by the Foreign Bank Account Report (FBAR) along with your tax return.

Keep in mind that failing to report this income can attract penalties like 50% of the balance or $100,000, whichever is higher. Avoid this costly financial mistake by understanding how this rule works and stay compliant with the laws. Better yet, avoid opening new accounts unless you require them. Further, consider moving your savings account to a bank that has locations in the UK before you move.

Taxation laws can be complicated and confusing for the layperson. Avoid the risk of penalties by consulting a professional who is knowledgeable about the laws in both, the USA and UK.