That’s where we come in. Bright!Tax has helped thousands of clients in hundreds of countries worldwide file US taxes accurately, on time, and optimally. This includes finding all the ways you can be as tax-efficient as possible. One of those opportunities specific to the UK – American expats can withdraw up to 25% of their UK pension without being taxed by either country.

Taxing Pension Withdrawals in the UK vs. US

Before delving into the specifics of tax-free lump-sum pension withdrawals for American expats in the UK, let’s first examine how the UK and the US tax pension withdrawals.

How the UK Taxes Pension Distributions

Let’s dig into one of the biggest tax benefits the UK offers. The UK grants pensioners a one-time tax-free withdrawal of up to 25% on pensions, up to £1,073,100. This is known as Pension Commencement Lump Sum (PCLS). After this withdrawal, the pension administrator withholds taxes on the remaining pension at standard rates.

The UK tax authorities will then tax the remaining 75% at the standard personal income tax rate, which ranges from 20% to 45%, depending on your total annual income, upon distribution.

How the US Taxes Pension Distributions

US Taxes on Distributions From Domestic Pensions

In the US, the taxation of domestic pension (or retirement) income varies depending on its source:

• Traditional 401(k)s, traditional IRAs, pensions/annuity distributions, short-term capital gains, bond income, non-qualified dividends: Ordinary income rate (between 10% and 37%, depending on total annual income)
• Roth IRAs, Roth 401(k)s, qualified distributions: Tax-free, since contributions came from post-tax income
• Social Security: Up to 85% of the benefit is taxed at ordinary rates (between 10% and 37% depending on total annual income); the remaining 15% is tax-free
• Long-term capital gains, qualified dividends: Long-term capital gains rate (between 0% and 20%, depending on the total of gains realized)

US Taxes on Distributions From Foreign Pensions

As you likely already know, the US’s citizenship-based taxation system means that all American citizens and permanent residents are subject to federal income taxes, even if they live and work abroad — so by extension, pensions owned by US taxpayers that are based in other countries are still subject to US taxes.

The US does not consider most foreign pensions as qualified — meaning they don’t recognize the tax-deferred treatment of the pensions like the foreign country does. This means, by default:

• You pay tax on the income you contribute to pensions — so even if the foreign country doesn’t tax the income that you put into a pension account, the US will
• As your pension accumulates, you must pay taxes on any investment gains or earnings that contribute to the account’s growth.
• If you fail to report pension contributions and growth as income properly, the IRS will tax you on the distributions.

In such cases, the US taxes foreign pension distributions at ordinary income rates (between 10% and 37%, depending on annual income) unless they have a tax treaty with that country that specifies a different tax treatment.

Related: Taxes in the UK vs. US: The Full Breakdown

The Role of International Tax Treaties

So what exactly is a tax treaty, and why are they so important?

Again, Americans who live abroad may be subject to taxation by the US and the country where they reside. To eliminate or reduce the risk of double taxation, the US has signed a number of different international tax treaties.

These treaties often include several common elements, such as:

• Residency determination
• Permanent establishment criteria
• Treatment of certain types of income (e.g. wages, gifts, bonuses, capital gains, etc.)
• Withholding tax rates on dividends, interest, and royalties
• Procedures for dispute resolution/tie-breaker rules
• Savings clause

To claim the benefits of a treaty like this, you must meet particular requirements. The specifics vary from treaty to treaty, but generally, you must be a tax resident of both the US and the country in question.

Unfortunately, most of these treaties contain a savings clause. This states that the US government reserves the right to tax its tax residents as if the treaty didn’t exist. However, this doesn’t preclude you from claiming benefits under the treaty. The savings clause typically includes a list of exceptions to which it does not apply – in other words, provisions that survive and remain enforceable in a legal context.

The US-UK Tax Treaty

(Bear with us, we’re about to get technical.) 

The UK is one of the countries with which the US has a tax treaty. The treaty covers a wide variety of topics, but a few of the most noteworthy provisions include:

• Avoiding double taxation on certain types of income
• Income taxes & capital gains taxes between the two countries
• Measures designed to combat tax evasion

For the purpose of this article, however, we’re going to focus primarily on the US-UK pension tax treaty provision: Article 17. Two components of Article 17 are of particular interest to those with UK pensions:

• Article 17(1)(b) states that distributions from pensions based in one country are exempt from taxation in the other
• Article 17(2) states that lump-sum withdrawals are only taxed in the country in which the pension is based

While the US-UK tax treaty includes a savings clause that negates Article 17(2), Article 17(1)(b) is not affected. It is acknowledged that interpretations of these clauses can vary among professionals. Nonetheless, at Bright!Tax, we assert with confidence that because Article 17(1)(b) remains effective, we can rely on the reciprocity provision. This key provision mandates that any tax exemption granted by the UK government is to be mirrored by the US government.

In practical terms, this means that a lump-sum withdrawal from a UK-based pension, if it constitutes 25% or less of the total value, remains tax-free in both the UK and the US. This interpretation aligns with the savings clause’s directive for the US to honor UK’s tax-free treatments.

Our analysis of the treaty is both extensive and meticulous, grounding our position and ensuring that our clients fully leverage every exemption available to them. Further, we have actively validated this interpretation through consultations with numerous external financial and legal experts, confirming the exemption of such withdrawals from taxation in both jurisdictions.

Related: US Citizens Working in the UK: A Guide to UK Employment Tax

Practical Considerations of Lump-Sum Pension Withdrawals

Making a tax-free withdrawal of up to 25% from your UK pension can be a great way to minimize your tax liability and jump-start your retirement with a comfortable cushion of liquid assets. However, it may not necessarily be appropriate for every American expat living in the UK. Keep in mind that:

• The typical minimum age at which you can make a withdrawal is 55, but it may vary between plan administrators.
• Tax exemption applies to one-time lump sums only.
• Any withdrawal exceeding 25% of the pension’s total value will be subject to ordinary UK tax rates unless you hold certain lifetime allowance protections.
• You may not transfer funds from US-based pre-tax accounts such as traditional 401(k)s or traditional IRAs into a UK pension since that would result in you not paying taxes on that income at any point.

If you do decide to capitalize on the US-UK pension tax treaty provision — or claim other benefits of the overall US-UK tax treaty — you must file Form 8833 along with your federal tax return.

Speak With an Expat Tax Expert

Before making a big change to your tax or retirement strategy — including a lump-sum withdrawal from a UK-based pension — you should always consult with a tax professional. Bright!Tax’s team of dedicated expat tax experts can help you learn more about and claim this provision, as well as optimize your overall tax strategy.

Schedule a consultation today!

The post The US-UK Pension Tax Treaty Provision Expats Need to Know About appeared first on Bright!Tax Expat Tax Services.

Challenges of Taxation for US Expats

American business owners like John, operating internationally, encounter distinct challenges. They need to align their business structure with both their tax residency and US tax filing obligations, as the US requires its citizens to file annual tax returns, irrespective of their residence. Navigating IRS provisions for overseas taxpayers, while accessible, can be complex and costly. Misinterpretations often lead to missed opportunities for implementing effective, long-term tax-saving strategies. 

John initially approached his US tax filings with a cost-saving mindset, opting for a DIY approach. However, this limited his expertise to the time he could dedicate to research, leaving him and his business exposed to potential IRS complications. In the 2022 tax year, John landed a $1,500 tax bill, not fully realizing the long-term financial implications of taking tax matters into his own hands. Moreover, errors in US tax filings lead to considerable financial and time expenditures in correcting mistakes and resolving misunderstandings.

Turning to Bright!Tax

In 2023, John discovered Bright!Tax at an in-person event in Portugal. His CPA, Nicolas Castillo, conducted in-depth 1:1 meetings with John, meticulously reviewing his prior years’ returns to assemble a complete picture of his tax situation up to the present year.

On its face, John’s tax strategy was tax efficient — for someone based in the US. But when it comes to taxpayers living abroad, there is more than just US taxation to take into consideration. While your business structure and tax positions may be creating maximum US tax efficiency, if the country you reside in taxes you and your business in a way that varies from US tax treatment — and most often it does — your worldwide tax bill may very well present an unwelcome surprise.

The 2022 Savings

Following the initial engagement with Bright!Tax in 2023, John’s Tax Team first focused on amending and optimizing the 2022 tax year, leveraging their expertise to enhance John’s US tax filing and financial strategy. This approach yielded remarkable results. By tapping into the Foreign Earned Income Exclusion over the Foreign Tax Credit, the $1,766 tax owed under his previous strategy for the 2022 tax year was transformed into nearly $10,176 in tax refunds. 

This financial windfall not only improved John’s immediate financial situation but also set the stage for ongoing reinvestment and the growth of his business. His case illustrates the transformative impact that expert tax guidance can have on maximizing immediate tax savings while maintaining a nuanced, forward-thinking approach for the years to come. There is top-dollar value in seeking professional tax assistance, especially for expatriates navigating complex international tax regulations.

Restructuring for Ongoing Tax Efficiency

Beyond rectifying the 2022 tax year, John and his Bright!Tax CPA embarked on a strategic journey to restructure his business for ongoing tax efficiency. This approach was aimed at ensuring that future tax obligations were minimized while complying with all relevant regulations. 

When John & his wife began their professional services firm, they lived in California and were subject to both Federal & California state taxes. Once they hit a threshold of net business earnings of $80,000-$100,000, it made sense for them to change their default Schedule C reporting business and elect S-Corp treatment. 

With an S-Corp election, taxpayers are able to differentiate between owners pay, which is subject to US FICA tax, and business earnings, effectively saving the 15.3% FICA on business earnings that they would have paid through a Schedule C. All of their income, both salary and business profits, were subject to both Federal and California tax. But at least they were saving on FICA taxes.

Fast forward to today, John & his wife now reside in Portugal. As Portuguese tax residents, both their salaries and business profits, which the Portuguese system attributes to them as individual taxpayers, are now subject to Portuguese tax as well – a system in which tax rates range from 14.5% all the way up to 48%.

The Transformation and Trust

Since their partnership began in 2023, John has been working closely with his dedicated CPA at Bright!Tax, meeting virtually each quarter to revisit and refine his tax strategy. The pivotal decision to transition his US S-Corp to a C-Corp marked a significant turning point. This strategic move effectively shielded his business profits from Portuguese taxation, optimizing his tax position.

John and his wife now enjoy greater financial flexibility. They manage their salaries to minimize tax liabilities, leveraging the Foreign Earned Income Exclusion (FEIE) for US tax benefits while remaining mindful of FICA obligations. Additionally, they can continue to deduct business expenses to lower their net profits, further benefiting from the US corporate tax rate of 21%.

John’s journey with Bright!Tax is more than a success story; it’s a testament to the power of expert guidance in navigating the complex world of expat taxation. His experience highlights the significant benefits of strategic tax planning and the value of partnering with knowledgeable professionals.

Take Control of Your Expat Taxes with Bright!Tax

Don't let the complexities of expat taxation hold you back. Partner with Bright!Tax and step confidently into a future of financial clarity and success. Contact us today to begin your journey toward optimized taxation and peace of mind.

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The post Maximizing Returns: How Bright!Tax Helped John Save Thousands on His Taxes appeared first on Bright!Tax Expat Tax Services.

It may not seem fair, but Virginia is one of a handful of states that make it extra challenging for former residents to change their state residency and, by extension, their state tax obligations. Here’s what you need to know. 

State tax liability for US expats

All Americans — even those who have moved abroad — must file a federal income tax return, provided that their income meets the minimum reporting requirements. Whether or not expats must file and pay state taxes, however, depends largely on how the state they most recently lived in defines tax residency.

Related: Do Expats Pay State Taxes? What to Know When Living Abroad

Understanding state residency requirements

Each state defines tax residence slightly differently, but most won’t consider former residents who moved abroad to be tax residents as long as they don’t maintain significant ties to the state after their departure, such as:

• Maintaining a domicile (i.e. true and permanent home) there
• Spending more than 183 days out of the tax year there or frequently returning for long stays
• Physically working in state or earning income sourced there (e.g. income from a rental property located in the former state)
• Having business or financial interests based there (e.g. a business registered in the former state)
• Having dependents or immediate family that live there

Related: 5 Reasons to Maintain a US Address while Living Abroad

In many states, people who fail to qualify as residents based on the above criteria simply file a part-year tax return for the year they left the state to be freed of their tax obligations. Regardless of how your state filing requirement wraps up, you should always be ready to provide proof that you don’t live there anymore if the state tax authority contacts you.

However, expats should always check the specific requirements of the last state they lived in to make sure they follow the appropriate protocols.

What is a sticky state?

A few states, in particular, make it more challenging to terminate residency (and therefore avoid state income tax liability). Unfortunately, one of these so-called “sticky states” is Virginia (the other four are California, New Mexico, New York, and South Carolina).

Virginia state tax obligations for expats

The Virginia Department of Taxation requires residents, part-year residents, and certain nonresidents to file a state tax return if they earn a Virginia Adjusted Gross Income of at least $11,950 for single individuals or married individuals filing separately and $23,900 for married couples filing jointly.

Frustratingly, moving directly from Virginia to another country is not enough to exempt you from having to file a Virginia state tax return. To truly end your tax residency, you must establish a domicile in another state (more on that later).

Virginia state income tax rates for 2024

Expats who must file a Virginia state tax return can expect to pay taxes at the following marginal rates for the 2023 tax year (e.g. taxes filed in 2024):

Filing procedures for expats from Virginia

The deadline for filing Virginia state taxes from abroad is typically May 1st, but those who are outside of the US on the May 1st deadline have until July 1st to file. If you can’t file by then, however, the state offers an automatic six-month extension. Note that all tax payments should still be made by May 1st, to avoid interest and penalties.

To satisfy their Virginia tax filing requirement, residents must fill out Form 760, part-year residents must fill out Form 760PY, and nonresidents must fill out Form 763. Those who earn an adjusted gross income of less than $32,000 can complete these forms for free on 1040 Now.

If you earn more than that amount, however, you’ll have to file using a different tax software provider, have a tax professional file on your behalf, or print the completed form and mail it to the appropriate office in the city or county where you most recently lived.

Should you change your Virginia state residency?

Some expats who previously lived in Virginia choose to change their state residency when moving abroad to a state that has fewer filing requirements or lower/no income taxes. Among the most popular options are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

It’s important to note, though, that changing state residency isn’t right for everyone, such as those who plan to eventually return to their former state of residence. Before starting the process, it’s best to talk through your options with a tax professional well-versed in the implications of moving abroad. 

Establishing residency in a more favorable state

If you do choose to end your Virginia state residency, you must prove that you are domiciled in another state. To do so, you must sever any existing ties you maintain in Virginia (look to the “Understanding state residency requirements” section above for reference) and then establish ties in your desired state, such as by:

• Buying or renting real estate there
• Transferring your vehicle registration there
• Obtaining a driver’s license or official ID from there
• Registering your business there
• Moving your belongings there
• Spending 183 or more days of the year there
• Opening financial accounts there
• Applying for pet licenses there
• Updating your mailing address

Make sure to have proof of any of these changes you make — and remember, domiciling in another state isn’t always straightforward, so it’s best to talk to a tax professional or lawyer to ensure you’ve taken the appropriate steps.

Related: How to Change State Residency for Taxes [Expat Strategies]

US expat taxes made easy

Whether you’re thinking about changing your state residency or just want to get a better grasp on your tax obligations, Bright!Tax is here for you. We’ve helped thousands of US expats in hundreds of countries file their taxes accurately, optimally, and on time — and we’d love to help you, too.

Meet Your Dedicated CPA

References:

1. How to Establish State Residency (And Why It Matters)
2. How to stop paying state tax when I move overseas?
3. Who Must File | Virginia Tax
4. Residency Status | Virginia Tax
5. Draft 2023 Form 760 Resident Individual Income Tax Instructions
6. When to File | Virginia Tax

The post Virginia State Taxes for Expats: Breaking Down the Complexities of Foreign Income Reporting appeared first on Bright!Tax Expat Tax Services.

This query introduces a fundamental yet often misunderstood element of global tax systems. 

Marginal tax rates, require a nuanced understanding to fully appreciate their impact on individual fiscal responsibilities. 

In the following article, we will define marginal tax rates, introduce strategies to potentially reduce your marginal tax rate, and offer tailored insight for expatriates with US tax obligations. 

Tax systems and marginal tax rates

US expatriates must understand how marginal tax rates work, regardless of where they live. That’s because they’re a staple of the US tax system — and due to the US’s citizenship-based taxation system, all permanent residents and citizens who meet the minimum income threshold are subject to federal income taxes (even if they live abroad). 

As a result, even expatriates currently living in countries that don’t impose income taxes — such as the United Arab Emirates — would do well to understand marginal tax rates. Not only will this help them better understand their tax obligations — it will also allow them to better optimize their tax strategy.

Defining marginal tax rates

Marginal tax rates refer to the tax percentages applied to every dollar of income earned beyond a certain threshold.¹ Many countries use marginal tax rates in conjunction with a progressive tax system, in which there is a wide range of marginal rates according to different levels of income. 

Under progressive tax systems, as your income rises, your tax rate increases. Conversely, as your income falls, your tax rate decreases.

Difference between marginal tax rate and effective tax rate

The term “effective tax rate” frequently surfaces in conversations around marginal tax rates as well. This phrase refers to the true percentage at which your income is taxed, as opposed to the marginal tax rate applied to your income.

Granted, these concepts can seem quite abstract without context. To understand the nuances of marginal tax rates and effective tax rates, let’s walk through a few concrete examples.

What are the marginal tax rates for 2023?

The US marginal tax rates for the 2023 tax year — in other words, the taxes you’ll file in 2024 — are 10, 12, 22, 24, 32, 35, and 37 percent. Those taxpayers in the lowest brackets of income pay the lowest tax rates, while those bringing in the highest amount of income pay the highest tax rates.

US Marginal Tax Rates for 2023 Tax Year²

For this example, let’s say you’re a US citizen and single filer earning taxable income of $80,000 per year. At this income level, you fall into the 22% income tax bracket. 

Contrary to what you might think, you won’t pay 22% of your income ($17,600) in federal income taxes. Instead, your tax obligations will add up according to the aforementioned US marginal rate of taxation. For our single filer with an income of $80,000, this looks like:

• 10% on the first $11,000 of your income: $1,100
• 12% on the next $33,725 of your income: $4,047
• 22% on the remaining $35,275 of your income: $7,760

In total, you would owe $12,907 ($1,100 + $4,047 + $7,760) in income taxes. This is significantly less than the $17,600 you would owe if you were subject to a flat tax rate of 22%.

To calculate your effective tax rate, you can divide the total you owe in taxes by your total taxable income. In the example above, the effective tax rate is about 16.13% ($12,907 ÷ $80,000).

Note: These figures are for illustrative purposes of this very specific and simplified example only and do not take additional taxes, credits, or deductions into account.

Lowering marginal tax rate in the US

It’s worth noting that there are several ways to lower your taxable income, thereby lowering the amount you owe to the IRS in taxes. Tax deductions, for example, may shift you into a lower tax bracket, which can drastically reduce your tax bill.

One method of lowering your taxable income that is allowed to almost all taxpayers is claiming the standard deduction. The standard deduction allows single filers and married persons filing separately to deduct $13,850 from their total taxable income. Married couples filing jointly, on the other hand, can deduct $27,700, while heads of household can deduct a full $20,800.⁴ (Note: These numbers refer to the 2023 tax year, or taxes to be filed in 2024.)

An alternative to the standard deduction that also works to lower taxable income is claiming itemized deductions (e.g. medical expenses, charitable deductions, and property taxes, among others). Generally, people take this approach when their itemized deductions add up to more than the standard deduction. That being said, the right approach for you will depend on your unique situation and may even change year to year.

When in doubt, consult a professional in US expat taxes.

What are the marginal tax rates for 2024?

The specific tax rates and dollar amounts associated with them vary from year to year due to factors like inflation and changes to tax legislation. For the 2024 tax year — in other words, the taxes you’ll file in the 2025 calendar year — the marginal tax rates are as follows.

US Marginal Tax Rates for 2024 Tax Year⁵

Related: How to Complete Form 1040 With Foreign Earned Income (A Step-By-Step Guide!)

An expatriate example: US taxpayer living and paying taxes in England

As mentioned earlier, many different countries in the world employ marginal tax rates — including the United Kingdom. For this example, we’ll analyze how marginal tax rates would work for a US expatriate living in England.

Below are the marginal tax rates for the UK in the 2023 tax year (which apply to the taxes you will file in 2024).

UK Marginal Tax Rates for 2023 Tax Year⁶

Notice that the first band, personal allowance, has a tax rate of 0%. Here, the personal allowance functions similarly to the standard deduction in the US; it allows you to deduct a certain amount from your total taxable income. 

In the UK tax system, if your total income is between £100,00 – £125,140, the personal allowance is reduced by £1 for every £2 by which your income exceeds £100,000. The personal allowance is fully removed if your total income exceeds £125,140.

The marriage allowance lets married couples and civil partners transfer up to £1,260 (~$1,580 USD) of their personal allowance to their spouse or civil partner. This can reduce their spouse’s or civil partner’s tax bill by up to £252 (~$316 USD).⁷  To benefit from the marriage allowance, the giver’s income must be less than £12,570 and the receiver’s income must be less than £50,270.

Related: Taxes in the UK vs. US: The Full Breakdown

How to calculate marginal tax rate

Calculating your marginal tax rate in the UK isn’t too dissimilar from calculating your marginal tax rate in the US. In this case, we’ll examine a US citizen single filer earning £60,000 (~$75,226 USD). Under the UK’s Pay as You Earn (PAYE) system, this taxpayer would owe: 

• 0% on the first £12,570 (~$15,760 USD) of their income: £0 ($0 USD)
• 20% on the next £37,700 (~$47,280 USD) of their income: £7,540 (~$9,455 USD)
• 40% on the remaining £9,730 (~$12,205 USD) of their income: £3,892 (~$4,881 USD)

Thus, their total tax bill would be £11,432 (£0 + £7,540 + £3,892), or roughly $14,336 USD ($0 + $9,455 + $4,881), in UK income taxes.

How to lower marginal tax rate (UK)

Much like in the US, the UK offers certain deductions and credits that allow taxpayers to lower their taxable income — and possibly even end up in a lower tax bracket. A few ways of restructuring your income that may lower your marginal tax rate (besides claiming the personal allowance and marriage allowance that we discussed above) include: 

Contributing to your personal pension

Another way to significantly lower your taxable income in the UK — and as a result, your marginal tax rates — is by directing your pre-tax income toward your personal pension. In the UK, individuals can contribute to multiple personal pension accounts, but to remain tax-free, the sum of those contributions must not exceed £60,000 (~$75,226 USD). 

That being said, the personal pension limit may be lower in respect of taxpayers who are considered ‘high earners’. The pension limit becomes tapered once adjusted income is in excess of £260,000 and the pension limit is fully tapered once adjusted income is £360,000+. The minimum tapered limit is £10,000.

Making charitable contributions

Making charitable contributions is a win-win for those who value philanthropy and tax efficiency. Not only can it potentially reduce your taxable income, it also allocates funds to charitable causes. Typically, individuals claim charitable contribution tax relief by giving through the Gift Aid scheme or establishing a charitable trust.⁸

Charitable giving tax benefits in the UK aren’t quite as straightforward as they are in the US, however. In light of that, you may want to read up on how charitable tax relief in the UK works and/or speak with a UK tax professional to understand how feasible a tax mitigation strategy is.

Simplify your US expat taxes by partnering with experts.

Bright!Tax has been correctly and efficiently filing US expat taxes since 2013. Connect with one of our experts today and enjoy a seamless, stress-free tax season.

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References 

1. Marginal Tax Rate
2. 2023-2024 Tax Brackets And Federal Income Tax Rates
3. What Americans in the UK Need to Know About Marriage and Tax
4. IRS provides tax inflation adjustments for tax year 2023
5. 2024 Tax Brackets
6. Income Tax rates and Personal Allowances
7. Marriage Allowance
8. How giving to charity can reduce your tax bill

The post What are Marginal Tax Rates? (With Examples for Expats) appeared first on Bright!Tax Expat Tax Services.

Below, we’ll go over the difference between employees and independent contractors, the tax implications of each, how they may affect your ability to work in certain countries, and more.

Why understanding your worker classification is important for US expats

Understanding differences in worker classification is especially important when it comes to taxes. Each work classification has its own tax implications, and not understanding which one you fall into could cost you thousands of dollars in back taxes, or require you to file amended tax return(s). That said, sometimes filing amended returns leads to financial benefit to the taxpayer, so either way, concerns over your work classification are worth discussing with your expat tax CPA.

Regardless of their worker classification, US citizens have unique tax liabilities

Even if you’re living outside of the US, most expats still must file an annual tax return. Whether you’re an independent contractor or employee (or sometimes, even both) affects how you approach filing US taxes. This includes which taxes you pay, which forms you file, and which tax breaks you can claim, among others. To stay tax-compliant and optimize your tax strategy, knowing your worker classification is an absolute must.

Beyond your US taxes, your worker classification can also affect how other countries tax you. Those who relocate to another country as an employee are often considered tax residents of those countries and taxed accordingly. On the other hand, independent contractors who frequently move from place to place, may not stay long enough in a country, or maintain strong enough ties there, to be classified as a tax resident. 

Related: Citizenship Based Taxation – What US Expats Need to Know

Independent contractors and employees: What’s the difference?

Let’s start by going over a high-level definition of “independent contractor” and “employee.”

Independent contractor status

The IRS defines independent contractors as those who have “the right to control or direct only the result of the work and not what will be done and how it will be done.”¹ A few signs that you’re an independent contractor include if you:^2,3

• Don’t receive employee benefits (e.g. pension plan, health insurance, paid time off, etc.)
• Can seek out other business opportunities
• Set your own hours
• Supply your own equipment
• Are responsible for deliverables, and maintain control of how you achieve them.

Independent contractor taxes: Fast facts

Generally, independent contractors:

• Receive a Form 1099-K from any US businesses they work with
• File an income tax return if they earn more than $400 USD in self-employment income in a given tax year
• Pay a self-employment tax of 15.3% — 12.4% for Social Security, 2.9% for Medicare — in addition to income taxes and state taxes (and, in rare cases, local taxes) as applicable
• Make quarterly estimated tax payments
• Fill out Schedule SE and Schedule C, in addition to Form 1040

Employee status

An employee is someone who performs services for a business that has a significant degree of control over their work, including what they do and how they do it.⁴

A few signs that you’re an employee include if you/your:⁵ 

• Company withholds taxes from your paycheck
• Receive benefits associated with full-time employees (e.g. pension plan, health insurance, paid time off, etc.)
• Have a boss
• Company sets your work schedule
• Company supplies your work equipment
• Must attend mandatory training and meetings

Employee taxes: Fast facts

Generally, employees:

• Must file an income tax return if they earn more than ​​$12,950 USD in gross income in a given tax year (for single filers under 65; exact limits vary based on age, marital status, and more)
• File Form 1040
• Receive a W-2 if the company they work with is US-based
• Have FICA taxes withheld from their paycheck, including the Social Security tax (6.2%) and Medicare tax (1.45%, plus .9% for anyone who earns more than $200,000 USD per year)⁶
  • Other taxes you may have withheld from your paycheck include bonus taxes (22%, or 37% on bonuses exceeding $1 million USD),⁷ state taxes, and in rare cases, local taxes
• Have income taxes withheld from paychecks after filling out Form W-4

Is there a difference between self-employed and independent contractor?

The difference between self-employed and independent contractor statuses is that all independent contractors are self-employed, but not everyone who’s self-employed is an independent contractor. Other types of self-employed workers include sole proprietors, members of a partnership, and small business owners.

Another term often involved in conversations about self-employment is “freelancer.” Freelancer and independent contractor are sometimes used interchangeably, but they can have slightly different connotations. 

The term “freelancer” often refers specifically to those who take on shorter or one-off projects, work offsite, and have a variety of clients. Independent contractor, on the other hand, often refers to those who work with companies for longer stints and who may or may not work onsite or have been hired by a staffing firm.⁸

Related: Location Independence and Starting an LLC: What to Know 

Which work status is preferable for US expats?

There’s not necessarily one right work status for US expats — it depends largely on factors like where you plan on going, how long you’ll be there, visa requirements, etc. That being said, you may encounter additional logistical hurdles when moving abroad as an employee vs. as an independent contractor.

Is it easier to move abroad as an employee or independent contractor? 

US citizens are commonly concerned with the bottom line: Which status is going to cause the least amount of logistical and planning headaches? Unfortunately, there is no clear-cut answer here, because the best status depends on a variety of factors including where you want to move, your skillset and professional background, and more.

Moving abroad as an employee

You may be able to move abroad as an employed person relatively easily if you work at a multinational company with overseas outposts or a business with a work from anywhere policy. However, there are some challenges for employed individuals who want to move abroad. This is especially true for those who plan to stay and work in one place for a significant amount of time.

For example, US citizens will typically need a work visa to live and work in another country, which will require something called company sponsorship. Many employers are unwilling to sponsor due to how time-consuming and costly it can be.

Additionally, moving to another country for a significant amount of time may require your employer to comply with that country’s employment and tax laws, which they may not find worth the operational expense and headache.

Finally, your employer may decide that you wouldn’t be able to do your job effectively if the time zone is significantly different than that of your colleagues or customers.

Because of these reasons, many Americans seek to find a full-time job with an employer based in their host country, although, bearing the aforementioned challenges in mind, this strategy is likely best reserved for those with highly in-demand skills. 

Moving abroad as a location-independent freelancer

Freelancers often find it easier to move abroad since they organize their own contracts, work schedules, and locations. If they move around often enough, they may not even need to pay taxes in another country. That being said, moving abroad as a freelancer can have its own challenges.

To start, current or potential US-based clients may prefer to work with someone based in their own time zone or who’s closer to them. (Establishing freelance connections prior to departing can be helpful in overcoming this obstacle.) 

If you plan to move around from place to place, keep in mind that in many countries it is technically not legal to work on a tourist visa. (That said, many do assess the risk and carry on, but we would be remiss if we did not note the potential risk.)

With great mobility comes great responsibility… and often unreliable WiFi

While being your own boss and organizing your schedule may sound great in theory, freelancing comes with a host of responsibilities. These responsibilities can take on weight, leaving you feeling surprisingly lethargic or unenthused about your work. Additionally, moving around frequently makes it challenging to establish a routine, which can lead to underproductivity or burnout. 

On the other hand, moving abroad to a specific location as a freelancer comes with distinct challenges

If you plan to settle down in one particular country, you’ll likely need to secure your own visa. These visas may be specific digital nomad visas or perhaps self-employment visas, but they often require some form of foreign taxes to be paid. 

Given the plethora of pathways that exist for freelancers to move overseas, it’s just important to research your options and prepare beforehand. As we mentioned, digital nomad visas, which allow foreign remote workers to live and work there for an extended period of time, make a great starting point. 

Related: Digital Nomad Taxes: A Complete Guide

Many people move abroad without realizing their work status impacts their US taxes

If you moved abroad without understanding your US tax obligations or how your worker classification impacted them, you may have fallen behind on your taxes. If that’s the case, don’t panic. You may qualify for the IRS’s amnesty program, the Streamlined Procedure. 

This voluntary program gives those who misunderstood filing requirements the ability to catch up on past tax returns without additional fines or penalties. To qualify for the Streamlined Procedure, your non-compliance must have been unintentional, you must not be currently under IRS investigation, and the IRS must not have already contacted you regarding past tax returns.

Let Bright!Tax guide you through your cross-border US taxes.

Whether you’re an employee or an independent contractor, Bright!Tax’s expat tax team can help you file your taxes correctly, strategically, and on time while minimizing your tax liability.

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References 

1. Independent Contractor Defined
2. Independent Contractor (Self-Employed) or Employee?
3. Eight Signs You’ve Been Misclassified as a 1099
4. Employee (Common-Law Employee)
5. IRS 20 Factor Test – Independent Contractor or Employee?
6. Payroll Tax Rates (2023 Guide)
7. Minimum wage and tax facts
8. Independent Contractor vs. Freelancer: What’s the Difference?

The post Differences Between an Independent Contractor and an Employee appeared first on Bright!Tax Expat Tax Services.

But what exactly are the benefits of maintaining a US mailing address, and how can you do so? We’ll answer both of those questions and more below.

Keeping a mailbox in the US while living abroad

For some, maintaining a US mailing address simply involves updating their primary address to that of a parent, another family member, or a trusted friend. Others might opt for a US virtual mailbox or retain their US property to preserve their address.

There are several good reasons for doing so:

1. US tax purposes & IRS filing requirements

Relocating abroad does not exempt you from US tax obligations. In fact, all American citizens and permanent residents who meet the minimum income requirements must file a US return. Maintaining a US address while living abroad can make things easier when it comes to:

IRS correspondence

A US mailing address facilitates easier contact from the IRS if necessary. And if there’s one letter you don’t want to miss, it’s one from the IRS. If you receive an audit notice or a request to amend your return and don’t comply with their instructions, you may face serious legal and financial consequences. 

Should you put your US address or foreign address on your US tax return?

If you have family and friends that you trust to receive and notify you of personal mail, it may be better to list their address on your return instead of your foreign address. Foreign mail services can be slower and less reliable than domestic ones, depending on your location.

Even if you don’t receive an audit notice or a request to amend your return, it’s not uncommon for the IRS to send follow-up communications — and maybe even a refund check. You may also choose to use a virtual mailbox (more on that in a bit).

State taxes

Some states will require you to file a tax return even if you live abroad (especially the “sticky states”: California, New Mexico, New York, South Carolina, and Virginia). It is crucial for the state tax authority to be able to contact you.

US business correspondence

Freelancers and business owners must maintain a physical address to keep their US business registration active.¹ Employers may also require remote employees abroad to have a US address for the delivery of essential work-related documents.

2. Maintain access to US financial services & credit cards

Ease of opening accounts

Whether you want to switch banks, start a bank account for your business, or create a dedicated account for savings, opening any kind of US-based financial account typically requires you to provide a US mailing address.²

Staying the course on your US investment strategy

Many foreign financial institutions decline American clients because of stringent US reporting requirements. Additionally, expats should know that most foreign mutual funds receive much less favorable tax treatments than domestic ones. Withdrawing funds from a US retirement account for reinvestment abroad may result in penalties if you are not yet of retirement age. As such, many US expats choose to keep their US-based investment accounts.

Of course, you should always research your options carefully and consult with a professional — but generally, keeping a mailbox in the US while living abroad makes it easier to maintain your US-based investment accounts.³ Especially if you don’t plan on living abroad in the long term, moving your investments abroad and back again can be more of a headache than it’s worth.

Accessing your credit score (and continuing to build credit)

Maintaining a good credit score simplifies returning to the US or making significant purchases, such as real estate. With a US-based address, you can keep your credit card, which will give you visibility into your credit score and even allow you to build credit if you choose.

3. Holding and/or proving state residency status

Residency for tax purposes

As we mentioned earlier, it’s common for those who most recently lived in the sticky states — California, New Mexico, New York, South Carolina, and Virginia — to have to file a state tax return. And unfortunately, some of those states (especially New York and California) have high tax rates. Each state has different residency requirements, but having a US mailing address is one of several factors that can help you establish residency — which can in turn allow you to change your state residency to one with lower or no taxes.

Access to benefits

Maintaining a US address may allow you to continue to receive benefits offered by your state, such as in-state tuition.⁴ You may need more than an in-state mailing address to keep those benefits, but it can certainly help in some situations.

4. Receiving physical mail & packages

If you’re expecting any important physical mail, maintaining a US address while living abroad can help ensure that nothing critical slips through the cracks. Meanwhile, if you want, need, or are expecting a package from a US-based company or organization, having it sent to your US address and picking it up during a planned visit to the States can be easier than having it shipped abroad.

5. Participating in US elections

An in-state address can facilitate continued voting in your last state of residence or another state where you maintain residency. Not all states allow you to vote from abroad, however, so you’ll need to check your state’s rules.⁵ Although your mailing address does not affect your federal tax liability, it can influence state tax obligations, underscoring the importance of registering with an in-state address.⁶

Related: Filing State Taxes as a US Expat: What You Need to Know

How to maintain a US address while living abroad 

There are a few ways US expats can maintain a US address while living overseas.

Via a physical address

As previously noted, you can maintain a physical address by updating it to a family member or friend’s address, if permitted by the state. However, ensure that this person is trustworthy enough to handle sensitive documents such as bank statements and tax returns.

Should you choose this option, remember to update your address in the following areas:⁷

• Your tax return
• A US Postal Service change of address form
• Voter registration records
• Bank or other financial accounts
• Your company’s HR platform (for employees)
• Your business registration records (for business owners)
• Subscription service accounts
• Utility company accounts
• Any account or profile from a business or organization that you regularly receive mail or packages from

Virtual mailbox

If you don’t have a friend or family member whose address you feel comfortable using — or if the state they reside in prohibits it — you may want to consider a virtual mailbox. 

Virtual mailboxes give you a real, physical US address (in the location of your choice) where you can have mail and packages delivered. Then, they scan any incoming mail you receive and upload it to a digital mailbox you can access on any device. Many services automatically deposit any checks and give you the ability to forward any packages or important incoming mail. You can also shred or toss any mail that you don’t care about.

While there is no US Postal Service virtual mailbox, there are many different virtual mailbox vendors. Some of the most well-known ones include US Global Mail, Earth Class Mail, and Anytime Mailbox.

Keeping a property

Your third option to maintain a US mailing address is to hold onto the property that you already own in the US. While many Americans who move abroad sell their property, keeping it can provide you not only with a home address in the US but also a place to stay during visits or even rent out to earn some passive income while overseas.

US tax implications of keeping a US property while living overseas

That said, keeping a property can have an impact on your taxes. You’ll still have to pay any property taxes associated with it and keep in mind that you can’t exclude any rental income under the Foreign Earned Income Exclusion since that income is passive, not earned. And if you’re a tax resident of another country, they may require you to report and pay taxes on your worldwide income — which would include US property rental income.

The good news is you can often avoid double taxation with the Foreign Tax Credit, which gives you credits for any foreign income taxes you’ve paid to apply toward your US tax bill. 

Coordinate cross-border tax obligations effortlessly with Bright!Tax

With a fully remote team of expat tax professionals — many of whom live overseas themselves — Bright!Tax is deeply familiar with the ups and downs of expat life. Partner with us, and we’ll help make filing your US tax return as seamless as possible.

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References 

1. Do You Need a Physical Address for Your Small Business?
2. How to open a bank account in the US without address proof?
3. What expats need to know about Brokerage Accounts for non-US residents
4. Can I become a state resident by using your mailbox service?
5. VOTING & REPRESENTATION INFORMATION
6. How to Determine Your Voting Residency
7. Change of Address Checklist: Who to Notify When You Move

The post 5 Reasons to Maintain a US Address while Living Abroad appeared first on Bright!Tax Expat Tax Services.

Despite how common it is to move large sums of money internationally, doing so can trigger additional reporting obligations or incur expensive transfer fees. In fact, the average transfer fee is about 6% of the amount transferred.¹

Below, we’ll go over some of the most important details about transferring large sums of money overseas, from the most cost-efficient approach to typical fees, tax implications, and more. 

Is it legal to send money overseas?

Did you know that nearly $5 trillion USD is transferred internationally each day?² If not, you can breathe a little easier while reviewing a commonly asked question about sending money internationally: “Is it legal to send money abroad?” 

The answer, for the most part, is a resounding “Yes!” (As long as the mechanisms through which you do so do not commit a crime, such as money laundering.³) 

Another common question is, “Are there rules for transferring large sums of money internationally?” In this case, the answer can vary depending on the country. For example, some countries may have rules or regulations about how much you can send, how often you can send, or whether you must report such transfers. Always take care to review the cross-border rules in the country from which you are sending the money with the country to where you are sending the money. 

Considerations when sending large sums of money overseas

Before deciding how you want to send a large sum of money overseas, consider the following.

Fees & exchange rates

Exchange rates will vary depending on the currencies you are converting from or to, as well as which transfer method you use. Because these rates fluctuate on a day-to-day basis, you may get a much more favorable rate one day than the other. Some services may guarantee locked exchange rates for a certain period, such as 24-72 hours. In addition to exchange rates, some services also charge processing fees.

Country

Depending on where you’re transferring money from and to, you may encounter different: 

• Transfer method availability and preferences
  • For example, when transferring large sums of money to the UK, you may want to confirm that your transfer method is covered by the British Financial Conduct Authority
• Required documents & information

• Transfer limits
  • For example, India limits transfers to the US at $264,104 USD per resident per fiscal year
• Tax and/or reporting obligations

Security

Certain methods of transferring funds (e.g. bank transfers, transfer services) are much more secure than other ways (e.g. mailing a check or cash). Even with the more secure services, however, it’s possible to enter recipients’ information wrong, encounter scams, or have personally identifying information compromised — so do your due diligence beforehand.

Technology

Some international transfer methods, like cryptocurrency transfers, will require more technological know-how than others. 

Speed 

Depending on the service you use, transfers may be sent instantly or could take several days (or, in the case of snail mail, weeks) to arrive.

Documentation required

Transferring funds via bank may require you to provide documents to verify your identity, which can add an extra obstacle to the process.

Customer support

Some international transfer methods may offer built-in customer support — but even then, some may offer better levels of support than others. For particularly large amounts of money, it’s a good idea to research the reputation your desired transfer method has for customer service.

Purpose: Is it a gift? 

Certain types of transactions may incur additional fees or tax and/or reporting obligations.

Many services, for example, place additional fees on business payments. Transferring large sums of money to family internationally, on the other hand, may trigger the gift tax (more on that in a bit).

Related: Selling Gifted Property VS Selling Inherited Property

Ways to transfer large sums of money internationally

There are a couple of primary ways of making large international transfers: international bank transfers, and via international money transfer services. Each of these options has its own distinct timeline, requirements, and associated fees. While international bank transfers are the more traditional method, that doesn’t necessarily mean that it’s the best option for you. Below, we break down these two options in more detail so that you can help yourself determine the right method for you.

International bank transfer

Transferring large sums of money between bank accounts internationally usually involves a wire transfer (aka an electronic funds transfer) administered by the bank itself. To complete a wire transfer, you must typically:⁴

• Navigate to your bank’s wire transfer section
• Specify how much you want to send, when, and why
• Enter your recipient’s information, including their:
  • Name & address
  • Name & address of their bank 
  • Bank account number and type (e.g. checking, savings)
  • Bank routing number
  • SWIFT or BIC code, if applicable
• Confirm the details
• Accept the fees, terms, and conditions
• Authorize and complete the transfer

Some financial institutions may charge a flat fee for international wire transfers (at an average of $44 USD⁵), while others charge a percentage of the amount sent. Keep in mind that if you’re converting the money into another currency, an exchange rate will apply. Funds may take up to five days to transfer.⁶

Although most US banks allow account holders to make international wire transfers, some offer quicker, cheaper, or more reputable wire transfer services than others. A few of the best US banks for making international transfers include:⁷

• Bank of America
• Chase
• Citibank
• PNC Bank
• US Bank
• Wells Fargo

International money transfer services

The other main way of transferring money overseas is through an online money or wire transfer service. These are third-party sites or apps that facilitate transfers between accounts. Many expats choose these services because they are quicker and cheaper than completing a wire transfer through their bank. A couple of the more well-known international money transfer service options include:

Wise

Formerly known as Transferwise, Wise supports money transfers in 40 currencies to over 80 countries. Most tranfers are completed in less than 24 hours, with longer transfers taking up to two days. In some cases, transfers occur instantly. The exchange rates are executed at mid-market rates, and fees vary by currency, but may be as low as 0.43%. 

Clear Currency

A more bespoke option, Clear Currency supports transfers in 35 currencies to over 130 countries. Transfers typically take place same-day, but some take up to three working days. Exchange rates vary by country and there is no transfer fee. Additionally, a dedicated account manager is assigned to each member. 

Other services include Revolut, Western Union, Xe, CurrencyFair, WorldRemit, OFX, MoneyGram, Ria, and others.

Other methods of transferring large sums of money overseas

A few more ways to transfer large amounts of money internationally include:

• Mailing a check or cash
• Cryptocurrency transfers
• Money orders

Transferring large sums of money to the US: Tax implications

The US’s citizenship-based taxation system means that even if you move to another country, you’re still subject to taxation. And if you’re sending and receiving large amounts of money internationally, that may have implications for your US tax and reporting obligations. 

Foreign Bank Account Report (FBAR)

If the international transfers you make to the US come from a foreign financial account containing $10,000 USD or more at any point in the year, you must file an FBAR.

The Foreign Account Tax Compliance Act (FATCA)

On a similar note, anyone with over $200,000 USD in foreign financial assets by the end of the year — or over $300,000 USD in foreign assets at any point during the year — must report them on Form 8938 per FATCA.

Gift Tax Return (Form 709)

If the international transfers you make include gifts of more than $17,000 USD to any one recipient during the 2023 tax year, you will be subject to filing a gift tax return. Note that there is an exception here if the person in question is your foreign spouse, in which case, the limit jumps to $175,000 USD. 

Make only the best US expat tax moves when you parter with Bright!Tax.

At Bright!Tax we’ll pair you with a dedicated expat tax professional who will take the lead in filing your taxes quickly, correctly, and on time — with as little tax liability as possible.

Meet My CPA

References 

1. International Bank Transfer Fees: All Costs Revealed [2023]
2. Explaining the history of how money is transferred internationally
3. International Money Transfers: What You Should Know Before Sending Money
4. The Total Guide to International Wire Transfers
5. How much are wire transfer fees?
6. How Long Does a Wire Transfer Take?
7. 6 Best Banks for International Money Transfers and Alternatives [2023]
8. Keeping an American bank account when you move abroad

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The post Transferring Large Sums of Money Internationally appeared first on Bright!Tax Expat Tax Services.

Even if aspects like these aren’t terribly exciting, though, they are important. Your state residency can have major tax implications, so it’s worth taking the time to read up on it. Fortunately, our team of expat tax experts is here to break this complex topic down for you in an easy-to-understand way. 

Continue reading to understand the concept of “sticky states”, how to determine resident taxpayer status, change tax residency, and more.

What does it mean if your last state of residency is “sticky”?

Although all US expats who meet the minimum reporting thresholds must file a federal return, they aren’t necessarily on the hook for state taxes. Most states exempt Americans who have moved abroad, as long as they no longer maintain ties like:

• Maintaining a permanent abode 
• Retaining significant social ties (e.g. having dependents that live there)
• Retaining significant financial ties (e.g. holding bank/investment/pension accounts based there)
• Owning a valid state driver’s license or other official ID/registration
• Frequently returning to the state or living there for significant periods during the year
• Physically working from the state

In certain states, if the residency definition no longer fits, you can stop filing tax returns. However, if you relocate mid-year, you’d need to file one last part-year resident return. In that case, however, you should still have proof of your move on hand in case of an audit.¹

Other states may require you to change your state residency. While most states make this relatively easy, others are considerably more complex. States that pose challenges for transferring residency out are termed “sticky.”

Sticky states

Sticky states for tax purposes include California, New Mexico, New York, South Carolina, and Virginia. These states all define residency in a way that makes it more difficult to prove you no longer maintain ties there. As a result, they may expect you to file a state tax return — and in some cases, even pay state taxes — after you’ve moved.

Related: Do Expats Pay State Taxes? What to Know When Living Abroad

How to determine state residency for tax purposes

Each state defines tax residency differently. It’s crucial to check the rules specific to your former state. Here are some common criteria:²

• Where you live or maintain a domicile
• Where you work or hold professional ties
• Where you physically spend your time
  • Note: Many states classify you as a tax resident if you spend a certain amount of time there (often more than 183 days) in a given tax year
• Where you keep your personal belongings
• Where your immediate family live

How to change state residency for taxes

Fortunately, there are things you can do to either sever ties with your former state or change your residency to a state with more favorable state income tax rates. Again, specific rules vary by state, but taking the following steps — and gathering the relevant documentation as proof if needed — is a good place to start.3

Terminating state residency

In order to terminate your state residency, consider:

• Selling in-state real estate
• Selling your car or any other property registered there
• Limiting how much time you spend in the state each year (typically, less than 183 days)
• Closing financial accounts based there
• Moving all of your belongings (including pets) out of state
• Canceling state-specific IDs, registrations, memberships, and subscriptions

Establishing residency in a new state

In some cases, you may want to establish residency in a new state. This would apply to, for example, a freelancer who wants to maintain a US-registered LLC or someone planning to move to a particular state after spending time abroad. It may also apply to someone who is departing a state that doesn’t consider a foreign country to be a new domicile.

There are multiple methods to establish state residency. Key steps include renting a primary residence in the state or transferring your vehicle registration. Opening a bank account and changing official IDs, including voting registration, are other means of establishing residency.

Other “softer” steps you can take to evidence residency include establishing official connections with local professionals such as a doctor or dentist, becoming affiliated with local social clubs and organizations, and updating your mailing address. Other substantive means of proving state residency status include applying for pet licenses and storing your belongings in the state in which you wish to acquire residency. 

Spotlight on: California

While you can’t count on automatically leaving California tax residency behind after a move abroad, it’s certainly not impossible to terminate or change your Californian tax residency status. And since California taxing residents who leave the state (especially those still earning income from California sources) is fairly common, proactivity is key.

California defines tax residents as those who are a) in California for any other reason than temporary stays or transitory purposes or b) domiciled in California.⁴ Here, domicile refers to a true, fixed, permanent home — i.e. the place they plan on returning, even if they’re away for a while.

To change that domicile, it’s not enough to plan to leave. Instead, you must actively establish a new domicile by a) abandoning your previous domicile, b) physically moving to and residing in a new locality, and c) planning to stay there permanently or indefinitely. (Note that there is a caveat with the third point in that this may be a case where the state doesn’t consider a foreign country to fall within the definition of a new domicile.)

Some extra steps you might want to take to terminate your residency in California include:⁵

• Filing form 540 NR (if you moved mid-year) and including it in your last state tax return
• Waiting to sell major assets until you’ve established your new residence
• Not returning to California for significant periods of time for at least a few years
• Logging your emails and phone calls to California
• Not voting in California state or local elections
• No longer seeing professionals in California (e.g. doctor, dentist, attorney, etc.)

Related: California State Taxes For US Expats

Spotlight on: New York

In New York, tax residency again depends principally upon whether or not you maintain a domicile in the state (in this case, domicile means primary residence). To change that domicile, you must a) abandon your former domicile and b) change your residence.⁶

But New York may also consider you a state tax resident even if you don’t maintain a domicile there, particularly if you maintain a permanent abode (i.e. a place of residence, whether it’s primary or not) and spend 184 days or more in the state during the tax year.

Some extra steps you might want to take to terminate your residency in New York include:⁷

• Filing Form IT-203 (if you moved mid-year) and including it in your last state tax return
• Naming a successor for any New York-based business for which you make significant business decisions
• Establishing a consistent pattern of living outside New York
• Unenrolling your children from New York schools

Considerations when changing state residency

Before changing your state residency, consider that if you intend to return to your former state soon, the official change might not be worth the hassle. Returning quickly might signal to tax authorities that you never truly left, potentially making you liable for taxes during your absence. Additionally, if you own a small business, your business may need to move with you, and former state of residence-sourced income may still require you to file a non-resident state tax return. 

Let Bright!Tax prepare your expat state tax strategy.

When you’re living overseas, dealing with US taxes is enough of a headache without factoring in state taxes, too. Fortunately, Bright!Tax CPAs are specialized in filing both federal and state tax returns for US expats, ensuring you the most advantageous outcome.

Get Started

References 

1. How to stop paying state tax when I move overseas?
2. How to Establish State Residency (And Why It Matters)
3. Effect of State Domicile on Expat Moves: Helping Taxpayers Determine When and How to Keep or Terminate State Domicile
4. Residency and Sourcing Technical Manual
5. Breaking Up Is Hard to Do: Ending Your California Residency
6. Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax
7. Just When They Thought I Was Out, They Pull Me Back In: Changing New York Residency and Domicile

The post How to Change State Residency for Taxes [Expat Strategies] appeared first on Bright!Tax Expat Tax Services.

The IRS requires detailed information about all sources of worldwide income, including lottery winnings. But, what is classified as lottery winnings, how much is it taxed, and what do you do if you win the lottery abroad? Conversely, what if you’re a foreign national who wins the lottery in the US? We dig into all this and more in this article.

Related reading: Minimum Income Thresholds Required for Expats to File US Taxes

What does the IRS consider lottery winnings?

Net lottery winnings are the total amount of winnings that remain after subtracting the cost of the lottery ticket. The exact amount of tax applied will depend on your tax bracket, which is based on the overall amount of income you have for the year. 

How much tax does the IRS take from lottery winnings?

The IRS automatically withholds 30% of net lottery winnings in the US. The rate at which the net winnings are ultimately taxed though depends on the amount you won. The first winnings up to $599.99 are tax-free, with winnings above that amount required to be reported on your upcoming tax return. 

At the highest tax band, winnings may be taxed by as much as 38%. However, there are strategies you can implement to buffer your winnings from IRS. One common strategy is to elect for your winnings to be paid out in distributions over an extended period of time – this will effectively result in an overall lower tax liability.

Are foreign lottery winnings taxable by the US? 

While the IRS automatically withholds tax on US lottery winnings, they won’t do the same for foreign lottery winnings. That doesn’t mean they don’t need to be reported on your US tax return though. Any gambling winnings, which include foreign lottery prizes, are subject to the same graduated tax rates that apply to your other income. Whether you’ll have additional taxes to pay has nothing to do with the country in which you won the lottery. Instead, it depends on how much the lottery winnings are and the other types of income you report.

Strategies to minimize taxes on foreign lottery winnings

If you win the lottery abroad, you need to report that income on your US expat tax return. Assuming that you reside abroad and are a tax resident of a foreign country, you will likely pay taxes on the lottery winnings first to the foreign country. After, you may take the Foreign Tax Credit to offset your US tax liability for the lottery winnings.

How to report lottery winnings on federal taxes

When you win a qualified US lottery, you will be issued Form W-2G: Certain Gambling Winnings. Foreign lottery winnings will not be reported on a standard US tax form, and how they are reported will vary depending on the foreign country. US Citizens and Green Card holders report their winnings on a 1040 or Form 1040-SR. Nonresident alien US lottery winners, however, will report via Form 1040-NR. 

Related: How to Complete Form 1040

Deducting US-based gambling losses on US expat taxes

Gambling losses can be deducted by amateur gamblers who choose to itemize their gambling losses.¹ These itemizations are claimed on Schedule A. However, you will not have the opportunity to deduct gambling losses if you claim the standard deduction.

If you’re a professional gambler, on the other hand, gambling losses (and winnings) should be reported on Schedule C: Profit or Loss from Business. 

You cannot deduct gambling losses that amount to more than the winnings you report on your return. For example, if you won $100 on one bet but lost $300 on a few others, you can only deduct the first $100 of losses. If you had no gambling winnings for the year, you won’t be able to deduct any of your losses.

When reporting gambling losses, careful bookkeeping is important. According to the IRS, “to deduct your [gambling] losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.”

Foreign lottery winnings may also trigger FBAR filing

If your gambling winnings amount to larger amounts and you deposit them into a foreign account, you’ll need to keep in mind the US reporting requirements regarding holding monies in foreign accounts. The Foreign Bank Account Report, (FBAR), is required when the total balance in one or more foreign financial accounts reaches $10,000 or more. The foreign account might be a checking, investment, or pension, and the balances of each count toward the $10,000 threshold. 

In order to determine whether you are required to file an FBAR, you must also add up the highest balances in each foreign financial account on which you have signatory authority. 

A quick example:

Jess is a US expat living in France. She won the lottery and opted for annuity payments. The first payment arrives in her US Schwab account as a deposit worth $14,000. She converts the money to Euros and sends it to two locations – her personal checking account with the French bank CIC, and the joint checking account she shares with her partner through his bank, BNP Paribas. She deposits the equivalent of $5,000 into her CIC account and the equivalent of $9,000 into the joint BNP Paribas account. Question for you, reader: does Jess need to file an FBAR? 

The answer is yes. The reason is that she must add up the total maximum held by each foreign account. 

Note: This example has been simplified for clarity. In real life, Jess would have lost some of the money in currency conversion and transfer fees.  

Read more: FBAR Filing Online in 2023: A Guide for Expats

Tax on lottery winnings by state

Many US expats retain US state residency, which is important to keep in mind if you win the lottery. The reason for this is that states tax lottery winnings at different rates. New York, for example, taxes the most at up to 13%. 

Generally, states that impose an income tax charge between 2.9%-8.82%. There are nine states that do not impose an income tax, which means you’re off the hook for state taxes on your lottery winnings if you’re registered in any of the following states: 

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Do foreigners pay taxes on US lottery winnings?

US lottery winnings and gambling prizes are subject to taxation at source. This means that taxes on winnings won by foreign nationals playing the lottery in the US are deducted directly by the lottery organization, the federal government, and the state where the lottery ticket was purchased.² 

Important callout: Certain gambling winnings are exempt from US tax, including blackjack, craps, baccarat, roulette, or big six wheel.³

Non-US residents who win the national lottery will be subject to a 30%-38.8% withholding rate if winnings exceed $599.99.⁴ 

That said, there are select countries that have a tax treaty with the United States that will reduce withholding tax.

The nationals of these countries are exempt from US tax on gambling winnings

How to claim tax-exempt status for your US lottery winnings as a foreign national

If you are a national of one of the listed countries when you win the US lottery, you must present Form W8-BEN to the withholding agent or payer in order to claim your US tax exemption. 

Note: Do not send Form W8-BEN to the IRS. 

Connect with an expert in US expat tax after you win, and before you file your tax return.

Filing taxes from abroad is complicated as a baseline, and it takes time and research to ensure that you’re not shortchanging yourself. At Bright!Tax, we’re experts in US expat tax and our team are dedicated to minimizing your tax liability.

References

1. Gambling losses may be deductible
2. US lottery winnings taxed at source
3. How do taxes on US lottery winnings work?
4. Income tax for foreign nationals
5. California Lottery Tax Handbook

The post Taxes on Lottery Winnings for US Expats & Nonresident Aliens appeared first on Bright!Tax Expat Tax Services.

Of course, the specific ways that capital gains taxes on the sale of residential property function differ slightly in each country. This makes it important for Americans residing in the UK who plan on selling residential property to read up on the corresponding tax implications.

The rules regarding UK capital gains taxes on residential property disposals can be complex. But, that’s what we’re here for! Below, we dig into who pays the UK capital gains tax on residential property disposals, what the rates are, how to mitigate the costs, and more.

Understanding British tax terminology: What is the meaning of property disposal?

First things first, let’s clarify what exactly “property disposal” means. Essentially, it refers to the process of transferring control or ownership of a property from one owner to another. This transfer may occur as a transaction or arrangement.

Most often, it occurs through a sale. However, property disposal could also be done through a transfer, gift, trade, or by receiving compensation for it. An example of the latter would be receiving an insurance payout for your home after being destroyed by a fire.¹

Who pays capital gains tax (CGT) in the UK?

Generally, you will be subject to capital gains taxes on residential property disposals if you meet the following criteria:

• The property is located in the UK or you are a UK resident (or were a temporary non-resident and later returned)²
• The property has appreciated in value since you first acquired it, to the point where the gains of the disposal exceeded the personal capital gains tax allowance for the year in which you sold it³ (£6,000 per person for the 2023-2024 tax year)⁴
• The property has not been your main residence throughout the period of ownership.

If you are resident at the date you sell a UK property, you will be required to complete an online property return to report the disposal to HMRC, if you need to pay capital gains tax.

If you are non-resident on the date you sell the UK property, you will be required to complete an online property return to report the disposal to HMRC. This requirement is irrespective of whether capital gains tax is payable or not.

You must report the disposal and pay the capital gains tax within 60 days of the completion date.

Related: Filing US Taxes in the UK: A Complete Expat Tax Guide

CGT rates on residential property in the UK

Capital gains tax rates levied on residential property gains are progressive and depend on your level of income.

The first £6,000 of gain will be exempt from CGT. However, this will be reduced to £3,000 in the 2024/25 tax year.

If your income levels are above £50,270, the gain less the exemption will be taxed at 28%.

If your income levels are below £50,270, the gain less the exemption will be taxed at 18% up to £50,270. Any gain in excess of £50,270 will be taxed at 28%.

Note: if the asset you dispose of is owned jointly with someone else, you will only pay CGT on your portion of the gain.⁵

How is the CGT on UK property calculated?

Capital gains taxes on UK property are calculated by multiplying the capital gains tax rate you qualify for by the profit you made from disposing of the property. Review the following graphic to understand where to enter which numbers to figure out the total CGT bill.

Let’s say, for example, that you earn £85,000 per year, putting you into the higher rate income band. This would require you to pay a 28% rate in capital gains taxes. Imagine that you purchased an apartment for £250,000 in 2010. In 2023, you sold it for £500,000 for a profit of £250,000. In this scenario, you would end up paying £70,00 in capital gains taxes.

As you can see above, capital gains taxes can take a pretty significant bite out of your earnings. Fortunately, you can employ a few strategies to help reduce the amount you’ll end up paying in taxes.

Annual allowance

As we mentioned earlier, everyone can claim an annual capital gains tax allowance. While it’s £6,000 for the 2023-2024 tax year, this will be cut to £3,000 beginning in 2024.

Spousal transfers

Properties gifted to your husband, wife, or civil partner are typically capital gains tax-free.⁶ This can be particularly beneficial if your spouse or partner has a lower income than you. The reason for this is that they may qualify for a lower capital gains tax rate.

There may be inheritance tax implications for gifts between a UK citizen and a US citizen and therefore, tax advice should be sought before making the gift.

Emma McDermott, Founder & CEO of Global Tax Consulting

Charitable gifts

Similarly, properties that are gifted to charities are typically not subject to taxation. This makes gifting property to a charity a strategic option. By so doing, an owner would in turn be able to claim part of that donation as a tax deduction.

Principle Private Residence relief 

Providing that the property has been your main residence and has been physically occupied at some point during ownership, private residence relief will be available which will reduce the taxable gain.

In effect, if the property has been your main residence and physically occupied throughout the full period of ownership, private residence relief will reduce the gain to nil. Therefore, no capital gains tax will be payable.

There is an additional provision. Providing that the property has been your main residence and physically occupied at some point during ownership, the last nine months of ownership always qualify for private residence relief under the deemed occupation rules.

To provide some context, imagine you are planning to move to the UK from the US. If you currently own a family home in the US that has been your primary residence and occupied by you until the moment you relocate to the UK, there’s good news for you. As long as you manage to sell the property within nine months of your relocation, you won’t have to be concerned about UK capital gains tax. This exemption occurs because of private residence relief, which applies whether the occupation is physical or deemed, and effectively reduces the gain from the sale to zero.

Deemed occupation

Certain periods of absence can be treated as occupation, providing that the period of absence is preceded and followed by a period of physical/actual occupation. The three periods of absence that will qualify, are as follows:

• Absences of up to three years for any reason
• Absences where you were living and working overseas
• Absences of up to four years where you were either a) required by your employer to live somewhere else or b) worked too far from your property to live there.

How residency status can affect how much you pay on a UK property sale

As mentioned earlier, capital gains taxes related to residential property disposals are typically levied on a) UK residents and b) those who dispose of UK-based properties. This applies whether or not they’re UK residents.

If you are a non-resident and dispose of a UK property, only the gain from 6 April 2015 is taxable. There are various methods to calculate the gain as a non-resident. However, typically, your base cost (acquisition cost) is rebased to the value of the property on 6 April 2015.

How this tax is calculated (and the most beneficial method for you) will depend largely on your circumstances.

Report & pay UK capital gains taxes on residential property disposals with confidence.

Our team of US expat and UK tax experts will work together to ensure that your residency statuses, purchase dates, and a host of other factors contribute to tax returns optimized on both sides of the ocean.

References

1. Capital Gains Tax – HMRC
2. Capital Gains Tax for Individuals Not-Residents in the UK
3. Who Pays Capital Gains Tax?
4. Capital Gains Tax Rates and Allowances – HMRC
5. CGT Relief Allowances and Exemptions
6. Capital Gains Tax – What you pay it on, rates and allowances – HMRC

The post UK Capital Gains Tax & Residential Property Disposals appeared first on Bright!Tax Expat Tax Services.