As the world's largest economy and a country with close linguistic and cultural ties to the UK, the ...
As the world's largest economy and a country with close linguistic and cultural ties to the UK, the US is a very common destination for expats from the UK.
The US levies income taxes at the federal level, the state level and occasionally at the city or municipality level. The top federal rate is 35% and state rates vary between 0% and 9.3%.
The federal government does allow a broad range of deductions from income, including state income taxes and home mortgage interest, which means that most taxpayers would pay less in US taxes than they would in UK taxes on the same income.
The US also allows married couples to file a joint tax return, which reduces tax bills for couples where only one person is earning (the top federal tax rate of 35% is only due for a married couple on joint income in excess of around $350,000).
There are tax 'traps' for unwary Britons moving to the US. US residents pay tax on their worldwide income, so income and gains from UK Peps and Isas, which enjoy tax-free status in the UK, will be subject to tax in the US.
Determining the US taxable income from life insurance products and holdings of non-US collective investments, such as unit trusts, Oeics and investment trusts, is problematic and is often quite out of proportion to the amount of tax at stake. The US also requires annual reporting by its residents of non-US bank and financial accounts, transactions involving trusts outside the US, and receipt of gifts from foreigners totalling over a certain threshold.
Individuals moving to the US who are trustees will need to seek legal advice on whether the tax residence of the trust changes to the US.
On top of all this, the annual limits for tax-effective pension contributions are much lower in the US than the UK ($15,500 for employee contributions).
Many UK employees sent to the US will be allowed to continue to contribute to their employer's UK pension scheme, but if they want to avoid paying US income tax on the contributions they will need to remain below the US limits while they are resident there.
These tax 'traps' are best resolved before an individual moves to the US.
Financial institutions that have entered into 'qualified intermediary' agreements with the Internal Revenue Service will need to be able to identify customers who move to the US, as these customers may stop being 'foreign persons' and the US tax withholding and reporting position for their income may change.
In the US, virtually all taxpayers have to file annual income tax returns. The tax year ends on 31 December and tax returns and payments of tax are due by the following 15 April.
Few people would move from the UK to the US for tax reasons, but many more are pleasantly surprised by their tax liabilities once they get there.
John Pritchard is senior manager, international mobility, at PricewaterhouseCoopers LLP.
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