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US/UK Dual Citizenship Taxes

This article identifies the potential US tax obligations that US/UK dual citizens will have with the IRS, it is intended as a guide only and must not be used in isolation to make any decisions. You must always seek professional advice from someone qualified to assist with your tax affairs, especially when it relates to US/UK dual citizenship.

Written on 11 July 2022

US dual citizenship taxes can be very complex 

If you are a citizen of two countries at the same time, you are considered a “dual citizen”. Whilst being born in a country might automatically give you citizenship of that country, citizenship is not normally gained simply by moving and living there, but through a combination of additional factors and legal applications.

Although some countries do not permit dual citizenship, it is possible to be a dual citizen of the US and another country, including the UK.

For the purpose of this article, we will look at the tax obligations for a US/UK dual citizen.

Being a dual citizen can have significant tax implications, which could expose your financial assets and income to US tax, including:

  • Investments that you hold (including UK tax friendly investments, such as ISAs)
  • Inheritance that you receive from a US citizen (such as pensions)
  • The sale of a property (situated anywhere in the world) as well as the re-mortgage of a property
  • Foreign earned income over $112,000 (in 2022) or $108,700 (2021).

The unfortunate aspect of this potential tax minefield is that many US dual citizens are unaware that they have this responsibility – and sometimes only realise when a tax bill is owed to the IRS.

This article identifies the potential US tax obligations that US/UK dual citizens will have with the IRS, it is intended as a guide only and must not be used in isolation to make any decisions. You must always seek professional advice from someone qualified to assist with your tax affairs, especially when it relates to US/UK dual citizenship.

If you would like to speak to an expert in assisting US dual citizens, please request an introduction using our service and we will review your situation and connect you with somebody who will be able to assist you.

Who is considered a US (dual) citizen?

Due to the tax requirements of the IRS around US dual citizens, it is essential to understand when you might be considered a US dual citizen as soon as possible to ensure you minimise any tax exposures/bills/obligations. Pleading ignorance once you are aware of your obligations will not be accepted as an excuse to avoid any tax responsibilities and you should seek expert advice as soon as you can.

The first step is understanding if you are a US citizen.

Generally, if you are born in the United States you will be considered a US citizen.

Also, if you are born outside the US to parents who are US citizens you might also be considered a US citizen. This may be slightly more complex depending on the rules of the country you were born in. However, if you were born in the UK to US citizen parent(s), you would ordinarily be considered a US/UK dual citizen.

Do US Dual Citizens have to file US taxes?

The US is one of the few countries in the world to tax their citizens not on their US residency status but on their citizenship. This means that US citizens (and Green Card holders) living outside of the US are still required to file an annual US tax return with the IRS.

That being said, although you have to file your taxes in the US, this doesn’t necessarily mean you will have US taxes to pay.  Thankfully, there may be a tax treaty in place (between the US and the country where you may reside) whereby double taxation can be minimised or avoided altogether.

For example, if you are a US/UK dual citizen, you live in the UK, and work in the UK, you are unlikely to have to pay tax in the US on your UK employment income due to the double tax treaty in place between the two countries.  The tax treaty states that your employment income should be taxed in the country where the income was derived.  Whilst the income is still reportable to the US, the UK taxes paid on such employment income can generally be offset against the US tax arising on the same income.  There are also other methods of reducing the US tax (see next paragraph).

Please note, treaties between the US and other countries may differ or not exist at all and so you may need to check with a tax specialist familiar with both US tax and the country in which you reside so as to ensure that you are aware of the particular rules between the two countries.

The Foreign Earned Income Exclusion (FEIE) for US/UK dual citizens

If you live outside the US, and you either qualify as a “Bona Fide” Resident (BFR) of that other country or meet the “Physical Presence Test” (PPT) you should be able to exclude an amount of your foreign earnings (including self-employment earnings).

The amount you can deduct is up to $112,000 (base on 2022 figures). This would be the amount of non-US earnings you can deduct based on a full year and a smaller amount (pro-rated) would be deducted if you only qualified for the exclusion for part of the year (typically for someone moving from or back to the US during the year).

To qualify for BFR, you would need to have lived outside of the US for a complete calendar year. To meet PPT, you would need to be out of the US for 330 days during any 365 day period.

Accidental Americans, US tax and Streamlined Foreign Offshore Procedures

There are many individuals residing outside of the US that have been unaware of their US filing requirements. Some may even be considered to be “Accidental Americans” where they acquired US citizenship at birth but have spent very little time or no time actually living in the US (for example an individual born to a US parent but has lived their entire life outside of the US or a person born in the US but left at a very early age).

This section of the article discusses the Streamlined Filing program that the IRS introduced during 2011. This was designed to help “non-wilful” US persons to get back in to the US tax filing system and thereby become US tax compliant.

There are of course, certain rules and requirements you must meet in order to submit your tax filings under this route and negate any penalties.

Once you recognise that you may have tax obligations in the US, your opportunity to prove a genuine misunderstanding significantly diminishes and the chances of paying a penalty increases substantially if you take no action.

So, how does one come up to date under the streamlined filing procedure?
  • Submit late tax returns for the last three years including any related information returns and pay the tax due, if any.
    • Submit late Reports of Foreign Bank accounts for the last six years
    • Complete form 14653  (A Certification whereby you declare under perjuries of penalties, that you were non-wilful in your failure to file and that you must provide a statement as to where your income and assets are situated)

Continued filing of US returns and foreign bank reports will be required unless the individual decides to renounce their US citizenship

FATCA and FBAR

In addition to filing US taxes, US dual citizens are also subject to both FATCA and FBAR rules which require US citizens living abroad to share information about any non-US financial accounts and assets (e.g. a UK bank account) with the IRS through Form 8938 (FATCA) and also submitting your FBAR with FinCEN.

The purpose of this is to ensure that your financial affairs are transparent with the US government and minimise the chance that you are evading tax.

Whilst these forms are purely for reporting purposes, the failure to file these forms do carry substantial penalties.

What is apparent is that UK banks are handing over the names of their US clients to the US Authorities, you may have even been asked to confirm your citizenship and residency?! Should the US Authorities contact you before you have submitted your US tax filings, there is no guarantee you will be able to abate any penalties they impose.

Getting your US tax affairs up to date

As discussed in this article, as a US dual citizen, your worldwide income, inheritances, capital gains, investment income, savings and more are all subject to US tax rules.

The first step to getting your US tax affairs up to date is overcoming the initial fear of approaching the IRS. It can be daunting, and the fear of potential penalties can lead to inaction.

However, this is not an acceptable approach and may end up costing more.

While it is possible to get your tax affairs up to date yourself, it can be incredibly complex and it is easy to make mistakes which may end up with significant financial penalties. It is therefore vital to begin by speaking to a US tax specialist who is skilled and experienced assisting US dual citizens get their US tax filing in order.

They will be able to evaluate your circumstances and help you begin the Streamlined Foreign Offshore Procedure as soon as possible.

If you are reading this article, you probably need to consider whether you can genuinely consider yourself non-wilful going forward. Our recommendation is to request a free introduction to one of our partners to ensure you are aware what your tax obligations are in the US.

What are the longer-term tax implications for US dual citizens?

Once you have brought your tax filings up to date, you will still be subject to the same tax rules as other US citizens living abroad – which includes reporting worldwide income, claiming the appropriate income tax exemptions as well as requirements to detail foreign accounts and assets.

We have created a guide which covers the main tax obligations you are likely to be subject to as a US citizen living abroad.

However, if you are ever in any doubt about what tax you are subject to, you should always seek professional advice from someone who understands the intricacies of the US/UK tax systems for people living abroad.

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