US Taxes: Common Mistakes
Nathalie Goldstein, CEO of MyExpatTaxes, recently told the financial press that one of the most common mistakes made by US expats is assuming they no longer need to file US taxes. As the recent furore over “accidental Americans” has shown, US citizens living abroad must still file with the IRS, even if they do not believe they owe any tax. Failure to do so can lead to penalties running into thousands of dollars.
Filing issues also involve:
- misunderstanding filing deadlines for expats
- failure to submit foreign account reporting forms
- failure to claim the most beneficial exclusions and credits
- overlooking state and self-employment tax obligations whilst overseas.
If you are an American national – whether a young digital nomad or a retiree on a pension – you still need to file your tax returns if your income exceeds IRS thresholds, and it is well worth double-checking. For instance, a single filer under age 65 must file if their gross income is at least $15,750. Note that thresholds are based on gross income, and even if your income is below the Foreign Earned Income Exclusion (FEIE), you will still need to file with the IRS in order to claim the FEIE.
If you are self-employed and earning $400 or more in net self-employment income, you have to file with the IRS, even if credits eliminate your US income tax liability.
Goldstein warns:
“A lot of expats are surprised to learn that filing and paying are two separate things. Even if your US tax bill ends up at zero, the IRS may still expect a return.”
The report can be found here:
Rising Prices Keep Expats Isolated
The UK’s Daily Telegraph reported this month that rising costs are putting serious hindrances in the way of expat travel plans, with Brits resident in Australia particularly affected due to increasing jet fuel costs. This is, of course, a result of the war in the Middle East. The newspaper points out that although Australia and New Zealand are the most far-flung places for British expats, with at least a 24-hour flight, the routes to them are well worn and well established. However, the cost of those flights is accelerating and is being passed on to passengers.
Travel experts estimate that flight costs are currently rising by around 15-20%, and airlines have already cut millions of seats as they aim for increased cost efficiency. The Telegraph writes that:
“Dual-national families are being forced to reconsider Christmas plans, trips home are being reduced or consolidated and some are beginning to question whether living overseas is financially sustainable at all.”
Expats in the Antipodes and Canada reported to the Telegraph that they have already been obliged to reconsider trips home that would, until recently, have been regarded as routine, such as for Christmas or weddings. For long-distance couples, additional strain has been placed on relationships as travelling becomes more difficult, and for families, with several airline tickets to purchase, travelling home is rapidly becoming unsustainable – even for those living within Europe.
Rise in Taxes for Expats and Pensioners
Sarah Coles, head of personal finance at AJ Bell, told the financial press this month that, in the UK, “as people have received pay rises or inflation-linked pension increases, millions have been dragged into paying tax. This includes an awful lot of pensioners living on very modest personal or workplace pensions.” It also includes expats, who may have frozen pensions and may also be facing estate taxes in their countries of residence.
Chartered tax advisers point out that the key change is not the inheritance tax rate itself but the connecting factor. As Tax Adviser Magazine notes, domicile has been replaced by long-term residence as the principal test for determining whether overseas assets fall within the UK inheritance tax net. Individuals with international lifestyles are therefore being encouraged to review their estate plans and residence status in light of the reforms.
It is crucial, therefore, to remember that your UK tax liability doesn’t stop when you move abroad. British expats are not in quite such a difficult position as US expats, but they can still face some degree of tax exposure. You should be familiar with recent non-dom changes: if you have been UK tax resident for at least 10 of the previous 20 tax years, you may fall within the UK’s long-term residence regime for inheritance tax purposes, potentially bringing your worldwide estate within the scope of UK inheritance tax (there are nuances to this, such as spousal exemptions). From April 2027, unused pension funds and certain death benefits are expected to become subject to inheritance tax in more circumstances, which could affect the estimated 4.8 million Brits currently living abroad.
The “tail period” depends on how long you have lived in the UK. If you’ve had 10 to 13 years of residence, then you’ll have a three-year tail; if you’ve lived in the UK for 16 years, you’ll have a six-year tail, and so on. To clarify, if you have over 13 years of prior residence, then your tail extends by one year for each additional year before it reaches a maximum of 10 years. Someone who has been resident for 20 years (or effectively long-term resident for the maximum period) can remain within the UK IHT net for up to 10 years after departure. The precise calculation can become more complicated if residence years are not consecutive or if transitional rules apply.
CEO of DeVere Group, Nigel Green, says:
“A huge number of Britons abroad still believe leaving the UK automatically protects them from inheritance tax. For many people, this assumption is becoming dangerously outdated.” (Note that DeVere does have a commercial interest in expatriate financial planning.)
Confusion has been generated, he says, by the recent changes to the non-dom regime, which have permitted some expats to exempt their foreign incomes from being taxed in the UK. However, the tax net is continuing to tighten, with the proposed changes coming into force in April 2027 – and you also need to be aware that the statutory residence test, to decide your tax residence status, applies for the entire tax year, not just your date of departure.
Be aware also of country-specific tax regulations, such as France’s succession rules, which can create significant restrictions on testamentary freedom and may affect the distribution of assets situated in France, even where a UK will exists.