Doing taxes

US Tax Frequently Asked Questions

  

Which tax form should I use? – Form 1040 or 1040NR?

Resident aliens and U.S. citizens must use Form 1040. Nonresident aliens must use Form 1040NR or 1040NR-EZ. The determining factor is whether your tax status is resident or nonresident alien. There are a number of issues related to making this determination.

 

What is the due date for filing tax returns?

For taxpayers living and working abroad, the filing deadline for payment is extended automatically to June 15th. Note that the deadline for payment is not extended; to avoid penalties and interest, any anticipated balance due should have been paid to IRS on or before April 15.

Taxpayers who cannot file by June 15 should file Form 4868 (“Application for Automatic Extension of Time to File U.S. Individual Income Tax Return”) on or before that date. By writing “Taxpayer Abroad” across the top of Form 4868 before filling it in, the filing deadline will be extended to August 15th. Copies of Form 4868 are available in the forms rack outside the IRS office in the Embassy or the IRS website. Taxpayers filing their first overseas return may elect to file Form 2350 anytime before the due date of their return (including extensions) in order to meet residency requirements to exclude foreign income.

 

How should I file my return? Are foreign postmarks acceptable?

You may send your return either to the Philadelphia Service Centre or to the US embassy in London. Postmarks from any official postal system, foreign or domestic, are valid as a record of timely filing/payment.

 

What is the foreign earned income (FEI) exclusion?

Central to the tax rules for certain filers of US tax returns who live and work abroad is the ability to exclude up to $92,900 of foreign earned income annually. Earned income that may be excluded means wages, salaries, professional fees, and other compensation received for personal services performed in a foreign country. It does not include pensions, annuities, social security, interest, dividends, capital gains, or alimony. The exclusion is available to both spouses on a joint return assuming both persons meet the qualifications.

 

I paid tax when I was working in the United States last year on a visa. How can I get it back?

A nonresident alien must file Form 1040NR or 1040NR-EZ to claim a refund of any overpaid taxes.

 

If I am able to exclude all my income, why do I have to file?

A U.S. citizen or lawful resident alien is required to report worldwide income if he/she exceeds the minimum filing requirements. If your tax liability is zero there is no penalty for not filing, but you may risk eligibility for future exclusions or deductions by not filing a timely and accurate return.

 

Will the Internal Revenue Service representatives at the Embassies answer questions about tax laws of our home state and the laws of the foreign country where we reside as well as U.S. federal income tax laws?

No. The IRS representatives are authorised only to answer tax questions on U.S. federal income tax. You should write your home state’s tax office for state tax information and contact the tax officials of the country where you reside for information regarding their taxes.

 

Can Internal Revenue Service personnel recommend tax practitioners who prepare returns?

No. IRS employees are not permitted to recommend tax practitioners who prepare income tax returns.

 

I just filed my return. How long will it take to get my refund?

It may take up to 10 weeks to issue a refund on a return that is properly made out. A refund may take longer than that if the return is filed just before the filing deadline.

An error on the return will also delay the refund. Among the most common causes of delay in receiving refunds are unsigned returns and incorrect social security numbers.

 

I have not received my refund from last year’s return. Can I claim the credit against this year’s tax?

No. That would cause problems to both years’ returns. If your last year’s refund is overdue, write to the Internal Revenue Service Center where you filed your return and ask about the status of the refund. Be sure to include your social security number (or individual taxpayer identification number) in the letter.

 

I forgot to include interest income when I filed my return last week. What should I do?

To correct a mistake of this sort you should prepare Form 1040X. Include the omitted interest income, refigure the tax, and send the form as soon as possible along with any additional tax due to the Internal Revenue Service Center where you filed your return. Form 1040X can be used to correct an individual Form 1040 income tax return filed for any year for which the period of limitation has not expired (usually 3 years after the due date of the return filed, or 2 years after the tax was paid, whichever is later).

 

Do I need an ITIN?

Generally, anyone who must file a U.S tax return but does not qualify for a Social Security number must apply for an ITIN. The same requirement applies to anyone who will be claimed as a dependent on a U.S. return. Please note persons must be either a U.S. citizen or resident to be claimed as a dependent. If legally adopted by a U.S. citizen then he or she is considered a U.S. citizen.

 

Can I claim my stepchildren as depends on my tax return?

If you are married to a nonresident alien who has children from a previous relationship, generally you may not claim them as your dependents. There are five dependency requirements that must be met, one of which is that the person must be a U.S. citizen or resident, or reside in Canada or Mexico for at least some part of the tax year. Since citizenship is conferred by adoption and not by marriage, your stepchild will not qualify as your dependent, unless legally adopted.

 

What is Alternative Minimum Tax (AMT)?

Over the years, legislative changes have created a number of avenues through which taxes can be avoided legally, most of which are available only to high-income taxpayers. In order to ensure that all taxpayers pay at least some income tax, Congress enacted the Alternative Minimum Tax.

Overseas, taxpayers who offset their US income tax with a substantial foreign tax credit often become liable for AMT, and the resulting calculations can be extremely complex. AMT is computed using IRS form 6251.

 

What is the maximum gift I can give without incurring a liability for gift tax?

Generally, you may give any one person up to $13,000 in any year, with no limit on the number of persons. There is no requirement for the recipients to be related to the donor. If you give anyone more than $13,000 in cash or property in any one year, you must file a gift tax return, IRS Form 709. See IRS Publication 950 for more information.

A recipient of a gift does not incur a tax liability on the gift itself. However, if the recipient invests the gift, any subsequent earnings on that investment are subject to tax.

 

My British employer did not give me a Form W-2. Is that a problem?

No. W-2s are used primarily to verify Federal Income Tax Withheld from wages, which is not done by British employers. Therefore, it is not necessary to attach any wage statement.

 

Can I file my state tax returns with the IRS in London?

IRS London does not have the resources to accept state tax returns or provide information regarding tax requirements of individual states. However, each state has its own website; URLs can be found listed at the Federation of Tax Administrators website. You may request information and forms from the website or by mail or phone.

 

When are US income tax returns due?

Generally, for the calendar year taxpayers, U.S. income tax returns are due on April 15. If you are a U.S. citizen or resident and both your tax home and your abode are outside the United States and Puerto Rico on the regular due date, an automatic extension is granted to June 15 for filing the return. Interest will be charged on any tax due, as shown on the return, from April 15.

 

Will a check payable in foreign currency be acceptable in payment of my U.S. tax?

Generally, only U.S. currency is acceptable for payment of income tax.

 

I am a U.S. citizen and have no taxable income from the United States, but I have substantial income from a foreign source. Am I required to file a U.S. income tax return?

Yes. All U.S. citizens and resident aliens, depending on the amount of the foreign source income, are subject to U.S. tax on their worldwide income. If you paid taxes to a foreign government on income from sources outside the United States, you may receive a foreign tax credit against your U.S. income tax liability for the foreign taxes paid. Form 1116 is used to figure the allowable credit.

 

I am a U.S. citizen who has retired, and I expect to remain in a foreign country. Do I have any further U.S. tax obligations?

Your U.S. tax obligation on your income is the same as that of a retired person living in the United States. (See publication 17).

 

How do I qualify for the foreign earned income exclusion?

To be eligible, you must have a tax home in a foreign country and you must be a U.S. citizen or a resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. You must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or you must be a U.S. citizen or resident and be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Your tax home must be in the foreign country or countries throughout your period of residence or presence. For this purpose, your period of physical presence is the 330 full days during which you are present in a foreign country, not the 12 consecutive months during which those days occur.

 

Is it true that my foreign earned income exclusion cannot exceed my foreign earned income?

Yes. The amount of the exclusion is limited each year to the amount of your foreign earned income after reducing that income by the foreign housing exclusion. The foreign earned income must be earned during the part of the tax year that you have your tax home abroad and meet either the bona fide residence test or the physical presence test.

 

My wife and I are both employed, reside together, and file a joint return. We meet the qualifications for claiming the foreign earned income exclusion. Do we each figure a separate foreign earned income exclusion and foreign housing exclusion?

You figure your foreign earned income exclusion separately since you both have foreign earned income. The amount of the exclusion for each of you cannot exceed your separate foreign earned incomes.

If you each have a housing amount, you can figure your housing exclusion either separately or jointly.

 

I am going abroad this year and expect to qualify for the foreign earned income exclusion. How can I secure an extension of time to file my return, when should I file my return, and what forms are required?

a) You should file Form 2350 by the due date of your return to request an extension of time to file. Form 2350 is a special form for those U.S. citizens or residents abroad who expect to qualify under either the bona fide residence test or physical presence test and would like to have an extension of time to delay filing until after they have qualified.

b) If the extension is granted, you should file your return after you qualify, but by the approved extension date.

c) You must file your Form 1040 with Form 2555 (or Form 2555-EZ).

 

My entire income qualifies for the foreign earned income exclusion. Must I file a tax return?

Generally, every U.S. citizen or resident must file a U.S. income tax return unless total income without regard to the foreign earned income exclusion is below your standard deduction (depending on your filing status).

 

I was sent abroad by my company in November of last year. I plan to secure an extension of time on Form 2350 to file my tax return for last year because I expect to qualify for the foreign earned income exclusion under the physical presence test. However, if my company recalls me to the United States before the end of the qualifying period and I find I will not qualify for the exclusion, how and when should I file my return?

If your regular filing date has passed, you should file a return, Form 1040, as soon as possible for last year. Include a statement with this return noting that you have returned to the United States and will not qualify for the foreign earned income exclusion. You must report your worldwide income on the return. If you paid a foreign tax on the income earned abroad, you may be able to either deduct this tax or claim it as a credit against your U.S. income tax.

However, if you pay the tax due after the regular due date, interest will be charged from the regular due date until the date the tax is paid.

 

I have been a bona fide resident of a foreign country for over 5 years. Is it necessary for me to pay estimated tax?

U.S. taxpayers overseas have the same requirements for paying estimated tax as those in the United States. Overseas taxpayers should not include in their estimated income any income they receive that is, or will be, exempt from U.S. taxation.

Overseas taxpayers can deduct their estimated housing deduction in figuring their estimated tax. The first instalment of estimated tax is due on April 15 of the year for which the tax is paid.

 

I have met the test for physical presence in a foreign country and am filing returns for 2 years. Must I file a separate Form 2555 (or Form 2555-EZ) with each return?

Yes. A Form 2555 (or Form 2555-EZ) must be filed with each Form 1040 tax return on which the benefits of income earned abroad are claimed.

 

Does a Form 2555 (or 2555-EZ) with a Schedule C or Form W-2 attached constitute a return?

No. The Form 2555 (or 2555-EZ), Schedule C, and Form W-2 are merely attachments and do not relieve you of the requirement to file a Form 1040 to show the sources of income reported and the exclusions or deductions claimed.

 

On Form 2350, Application for Extension of Time to File U.S. Income Tax Return, I stated that I would qualify under the physical presence test. If I qualify under the bona fide residence test, can I file my return on that basis?

Yes. You can claim the foreign earned income exclusion and the foreign housing exclusion or deduction under either test as long as you meet the qualification requirements. You are not bound by the test indicated in the application for extension of time. You must be sure, however, that you file the Form 1040 return by the date approved on Form 2350, since a return filed after that date may be subject to a failure to file penalty.

If you will not qualify under the bona fide residence test until a date later than the extension granted under the physical presence rule, apply for a new extension to a date 30 days beyond the date you expect to qualify as a bona fide resident.

 

I am a U.S. citizen who worked in the United States for 6 months last year. I accepted employment overseas in July of last year and expect to qualify for the foreign earned income exclusion. Should I file a return and pay tax on the income earned in the United States during the first 6 months and then, when I qualify, file another return covering the last 6 months of the year?

No. You have the choice of one of the following two methods of filing your return:

a) You can file your return when due under the regular filing rules, report all your income without excluding your foreign earned income, and pay the tax due. After you have qualified for the exclusion, you can file an amended return, Form 1040X, accompanied by Form 2555 (or 2555-EZ), for a refund of any excess tax paid.

b) You can postpone the filing of your tax return by applying on Form 2350 for an extension of time to file to a date 30 days beyond the date you expect to qualify under either the bona fide residence test or the physical presence test, then file your return reflecting the exclusion of foreign earned income. This allows you to file only once and saves you from paying the tax and waiting for a refund. However, interest is charged on any tax due on the postponed tax return, but interest is not paid on refunds paid within 45 days after the return is filed. (If you have moving expenses that are for services performed in two years, you can be granted an extension to 90 days beyond the close of the year following the year of first arrival in the foreign country.)

 

I am an employee of the U.S. Government working abroad. Can all or part of my government income earned abroad qualify for the foreign earned income exclusion?

No. The foreign earned income exclusion applies to your foreign earned income. Amounts paid by the United States or its agencies to their employees are not treated, for this purpose, as foreign earned income.

 

I qualify under the bona fide residence test. Does my foreign earned income include my U.S. dividends and the interest I receive on a foreign bank account?

No. The only income that is foreign earned income is income from the performance of personal services abroad. Investment income is not earned income. However, you must include it in gross income reported on your Form 1040.

 

My company pays my foreign income tax on my foreign earnings. Is this taxable compensation?

Yes. The amount is compensation for services performed. The tax paid by your company should be reported on line 7 of Form 1040 and in item 22(f) of Part IV, Form 2555 (or line 17 of Part IV, Form 2555-EZ).

 

I live in an apartment in a foreign city for which my employer pays the rent. Should I include in my income the cost to my employer ($1,200 a month) or the fair market value of equivalent housing in the United States ($800 a month)?

No. You must include in income the fair market value (FMV) of the facility provided, where it is provided. This will usually be the rent your employer pays.

 

My U.S. employer pays my salary into my U.S. bank account. Is this income considered earned in the United States or is it considered foreign earned income?

If you performed the services to earn this salary outside the United States, your salary is considered earned abroad. It does not matter that you are paid by a U.S. employer or that your salary is deposited in a U.S. bank account in the United States. The source of salary, wages, commissions, and other personal service income is the place where you perform the services.

 

What is considered a foreign country?

For the purposes of the foreign earned income exclusion and the foreign housing exclusion or deduction, any territory under the sovereignty of a country other than the United States is a foreign country. Possessions of the United States are not treated as foreign countries.

 

What is meant by the source of earned income?

The word “source” refers to the place where the work or personal services that produce earned income are performed. In other words, income received for work in a foreign country has its source in that country. The foreign earned income exclusion and the foreign housing exclusion or deductions are limited to earned income from sources within foreign countries.

 

I qualify for the foreign earned income exclusion and earned more than $92,000 during the year. Am I entitled to the maximum $92,000 exclusion?

Although you qualify for the foreign earned income exclusion, you may not have met either the bona fide residence test or the physical presence test for your entire tax year. If you did not meet either of these tests for your entire tax year, you must prorate the $92,000 maximum exclusion based on the number of days that you did meet either test during the year.

 

In 2008 I qualified to exclude my foreign earned income, but I did not claim this exclusion on the return I filed in 2008. I paid all outstanding taxes with the return. Can I file a claim for refund now?

It is too late to claim this refund since a claim for refund must be filed within 3 years from the date the return was filed or 2 years from the date the tax was paid, whichever is later. A return filed before the due date is considered filed on the due date.

 

I recently came to Country X to work for the Orange Tractor Co. and I expect to be here for 5 or 6 years. I understand that upon the completion of 1 full year I will qualify under the bona fide residence test. Is this correct?

Not necessarily. The law provides that to qualify under this test for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, a person must be a “bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year.”

If, like most U.S. citizens, you file your return on a calendar year basis, the taxable year referred to in the law would be from January 1 to December 31 of any particular year. Unless you established residence in Country X on January 1, it would be more than 1 year before you could qualify as a bona fide resident of a foreign country. Once you have completed your qualifying period, however, you are entitled to exclude the income or to claim the housing exclusion or deduction from the date you established bona fide residence.

 

I understand the physical presence test to be simply a matter of being physically present in a foreign country for at least 330 days within 12 consecutive months; but what are the criteria of the bona fide residence test?

To be a bona fide resident of a foreign country, you must show that you entered a foreign country intending to remain there for an indefinite or prolonged period and, to that end, you are making your home in that country. Consideration is given to the type of quarters occupied, whether your family went with you, the type of visa, the employment agreement, and any other factor pertinent to show whether your stay in the foreign country is indefinite or prolonged.

To claim the foreign earned income exclusion or foreign housing exclusion or deduction under this test, the period of foreign residence must include 1 full tax year (usually January 1–December 31), but once you meet this time requirement, you figure the exclusions and the deduction from the date the residence actually began.

 

To meet the qualification of “an uninterrupted period which includes an entire taxable year” do I have to be physically present in a foreign country for the entire year?

No. Uninterrupted refers to the bona fide residence proper and not to the physical presence of the individual. During the period of bona fide residence in a foreign country, even during the first full year, you can leave the country for brief and

 

Due to illness, I returned to the United States before I completed my qualifying period to claim the foreign earned income exclusion. Can I figure the exclusion for the period I resided abroad?

No. You are not entitled to any exclusion of foreign earned income since you did not complete your qualifying period under either the bona fide residence test or physical presence test. If you paid foreign tax on the income earned abroad, you may be able to claim that tax as a deduction or as a credit against your U.S. tax.

 

Can a resident alien of the United States qualify for an exclusion or deduction under the bona fide residence test or the physical presence test?

Resident aliens of the United States can qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction if they meet the requirements of the physical presence test. Certain resident aliens can qualify under the bona fide residence test.

 

I am a U.S. citizen and, because I expect to qualify for the foreign earned income exclusion, all my foreign income (which consists solely of salary) will be exempt from U.S. tax. Do I get any tax benefit from income tax I paid on this salary to a foreign country during the tax year?

No. You cannot take either a tax credit or a tax deduction for foreign income taxes paid on income that is exempt from U.S. tax because of the foreign earned income exclusion.

 

I am a U.S. citizen stationed abroad. I made a personal loan to a nonresident alien who later went bankrupt. Can I claim a bad debt loss for this money?

Yes. The loss should be reported as a short-term capital loss on Schedule D (Form 1040). You have the burden of proving the validity of the loan, the subsequent bankruptcy, and the recovery or non-recovery from the loan.

 

I am a retired U.S. citizen living in Europe. My only income is from U.S. sources on which I pay U.S. taxes. I am taxed on the same income in the foreign country where I reside. How do I avoid double taxation?

If you reside in a country that has an income tax treaty with the United States, that country may allow a credit against the tax you owe them for the U.S. tax paid on U.S. source income. Non-treaty countries, depending on their laws, may give the same type of credit against the tax you owe them for the U.S. tax paid on U.S. source income.

If double taxation exists and you cannot resolve the problem with the tax authorities of the foreign country, you can contact the Internal Revenue Service, International Section, P.O. Box 920, Bensalem, PA 19020-8518.

 

My total income after claiming the foreign earned income and housing exclusions consists of $15,000 taxable wages. Am I entitled to claim the refundable earned income credit?

No. If you claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you cannot claim the earned income credit.

 

Last May my employer transferred me to our office in Puerto Rico. I understand that my salary earned in Puerto Rico is tax exempt. Is this correct?

As long as your employer is not the U.S. Government, all income from sources within Puerto Rico is exempt from U.S. tax if you are a bona fide resident of Puerto Rico during the entire tax year. The income you received from Puerto Rican sources the year you moved to Puerto Rico is not exempt. The tax paid to Puerto Rico in the year you moved to Puerto Rico can be claimed as a foreign tax credit on Form 1116.

 

I am a U.S. citizen married to a nonresident alien. I believe I qualify to use the head of household tax rates. Can I use the head of household tax rates?

Yes. Although your nonresident alien spouse cannot qualify you as a head of household, you can qualify if (a) or (b) applies:

a) You paid more than half the cost of keeping up a home that was the principal home for the whole year for your mother or father for whom you can claim an exemption (your parent does not have to have lived with you), or

b) You paid more than half the cost of keeping up the home in which you lived and in which one of the following also lived for more than half the year:

  • Your unmarried child, grandchild, stepchild, foster child, or adopted child. A foster child will qualify you for this status only if you can claim an exemption for the child.
  • Your married child, grandchild, stepchild, or adopted child for whom you can claim an exemption, or for whom you could claim an exemption except that you signed a statement allowing the non-custodial parent to claim the exemption. Any relative listed below for whom you can claim an exemption.
      • Parent
      • Father-in-law
      • Grandparent
      • Brother-in-law
      • Brother
      • Sister-in-law
      • Half-brother
      • Half-sister
      • Sister
      • Son-in-law
      • Stepbrother
      • Daughter-in-law, or
      • Stepsister
      • If related by blood:
      • Stepmother
      • Uncle
      • Stepfather
      • Aunt
      • Mother-in-law
      • Nephew
      • Niece

If your spouse was a nonresident alien at any time during the year and you do not choose to treat your nonresident spouse as a resident alien, then you are treated as unmarried for head of household purposes. You must have another qualifying relative and meet the other tests to be eligible to file as head of household. You can use the head of household column in the Tax Table or the head of household Tax Rate Schedule.

It may be advantageous to choose to treat your nonresident alien spouse as a U.S. resident and file a joint income tax return. Once you make the choice, however, you must report the worldwide income of both yourself and your spouse.

 

I am a U.S. citizen married to a nonresident alien who has no income from U.S. sources. Can I claim an exemption for my spouse on my U.S. tax return?

Yes. You can claim an exemption for your nonresident alien spouse on your tax return if your spouse has no income from sources within the United States and is not the dependent of another U.S. taxpayer.

You must use the married filing separately column in the Tax Table or the Tax Rate Schedule for married individuals filing a separate return unless you qualify as a head of household.

A U.S. citizen or resident married to a nonresident alien also can choose to treat the nonresident alien as a U.S. resident for all federal income tax purposes. This allows you to file a joint return but also subjects the alien’s worldwide income to U.S. income tax.

 

What exemptions can be claimed by a U.S. citizen for a nonresident alien spouse who was blind and 65 years of age? The spouse did not have income from U.S. sources and was not a dependent of another U.S. taxpayer.

A U.S. taxpayer can generally claim one exemption for his or her spouse. In addition, if the U.S. taxpayer does not itemise deductions on Schedule A (Form 1040), the taxpayer may be entitled to a higher standard deduction if his or her spouse is age 65 or older or is blind at the end of the year.

 

I spend $375 a month to support my parents who live in Italy. I am sure this provides the bulk of their support. Can I claim exemptions for them?

It depends on whether they are U.S. citizens or residents. If your parents are not U.S. citizens or residents, you cannot claim exemptions for them even if you provide most of their support. To qualify as a dependent, a person generally must be either a citizen or national of the United States or a resident of the United States, Canada, or Mexico for some part of the tax year. The other tests of dependency also must be met.

 

Should I prorate my own personal exemption and the exemptions for my spouse and dependents, since I expect to exclude part of my income?

No. Do not prorate exemptions for yourself, your spouse, and your dependents. Claim the full amount for each exemption permitted.

 

Are U.S. social security benefits taxable?

Benefits received by U.S. citizens and resident aliens may be taxable, depending on the total amount of income and the filing status of the taxpayer. Under certain treaties, U.S. social security benefits are exempt from U.S. tax if taxed by the country of residence.

Benefits similar to social security received from other countries by U.S. citizens or residents may be taxable. (Refer to our tax treaties with various countries for any benefit granted by the treaty.)

 

As a U.S. citizen or resident, how do I figure the amount of my U.S. social security benefits to include in gross income?

See Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure if any of your benefits are includible in income.

 

How can I get my employer to stop withholding federal income taxes from wages while I am overseas and eligible for the foreign earned income exclusion?

File a statement in duplicate with your employer stating that withholding should be reduced because you meet the bona fide residence test or physical presence test. See also the following question.

 

Does the Internal Revenue Service provide forms to be used by employees requesting employers to stop withholding income tax from wages they expect to be excluded as income earned abroad?

Yes. Form 673 is a sample statement that can be used by individuals who expect to qualify under the bona fide residence test or the physical presence test. You can get this form by writing to the Internal Revenue Service, International Section, P.O. Box 920, Bensalem, PA 19020-8518.

 

I am a U.S. citizen residing overseas, and I receive a dividend and interest income from U.S. sources from which tax is being withheld at a rate of 30%. How can I have this situation corrected?

File Form W-9 (indicating that you are a U.S. citizen) with the withholding agents who are paying you the dividends and interest. This is their authority to stop withholding the 30% income tax at the source on payments due you.

 

As a U.S. citizen receiving a dividend and interest income from the United States from which tax has been withheld, do I report the net dividend and interest income on my return, or do I report the gross amount and take credit for the tax withheld?

You must report the gross amount of the income received and take a tax credit for the tax withheld. This is to your advantage since the tax withheld is deducted in full from the tax due. It is also advisable to attach a statement to your return explaining this tax credit so there will be no question as to the amount of credit allowable.

 

Can I claim a foreign tax credit even though I do not itemise deductions?

Yes. You can claim the foreign tax credit even though you do not itemise deductions.

 

I had to pay customs duty on a few things I brought back with me from Europe last summer. Can I include customs fees with my other deductible taxes?

No. Customs duties, like federal excise taxes, are not deductible.

 

Some taxes paid in the United States are not deductible if I itemise my deductions. Which ones are they?

Sales taxes, as well as the state and local taxes, levied specifically on cigarettes, tobacco, and alcoholic beverages are not deductible. In addition, no deduction can be taken for drivers’ licenses or gasoline taxes. Auto registration fees cannot be deducted except when they qualify as personal property taxes. To qualify as personal property taxes they must be based on the value of the auto.

Some state and local taxes are deductible, such as those on personal property, real estate, and income.

 

What types of foreign taxes are deductible?

Generally, real estate and foreign income taxes are deductible as itemized deductions. Foreign income taxes are deductible only if you do not claim the foreign tax credit. Foreign income taxes paid on excluded income are not deductible as an itemized deduction.

Note. Foreign income taxes are usually claimed under the credit provisions, if they apply, because this is more advantageous in most cases.

 

I taught and lectured abroad under taxable grants. What expenses can I deduct?

You may be able to deduct your travel, meals, and lodging expenses if you are temporarily absent from your regular place of employment. For more information about deducting travel, meals, and lodging expenses, get Publication 463.

 

I am a professor who is teaching abroad while on sabbatical leave from my position in the United States. What records am I required to keep to prove my expenses? How do I allocate my meals and lodging if my wife and children live with me in an apartment and my wife does the cooking?

Keep a day-to-day record of expenses, with receipts where possible. Allocate meals by dividing the total expense by the number in your family and take your proportionate share. Generally, your deduction for rent will be limited to the amount you would have paid had you been abroad alone.

 

Does the June 15 extended due date for filing my return because both my tax home and my abode are outside the United States and Puerto Rico on the regular due date relieve me from having to pay interest on tax not paid by April 15?

No. An extension, whether an automatic extension or one requested in writing, does not relieve you of the payment of interest on the tax due as of April 15 following the year for which the return is filed. The interest should be included in your payment.

UK Tax Frequently Asked Questions

hmrc coins logo4 lo 30880555406 o© HMRC

 

I think I have paid too much tax, what can I do?

If you are self-employed, Inland Revenue (IR) opens a tax account for everyone who gets a Tax Return and sends out statements. If your Statement of Account shows you are due to a refund, IR will:

  • Repay it if you have asked them to (you can do this on your Tax Return).
  • Credit it to your account, if you are not asking them to repay it.

If you are an employee on PAYE, your employer will normally pay it back to you on the next pay day after you get your proper code. If the tax year ends before you get your proper code, the Tax Office will send you the repayment. It is important to get a form P45 from your employer if you leave your job. If you don’t go to another job and don’t start claiming unemployment benefit, you may be entitled to a tax repayment. After a month, ask for a repayment claim form P50 which you should complete and return to your Tax Office with your P45 Parts 2 and 3 if you have them. Inland Revenue gives repayment claims top priority and tries to make sure you get any refund you are due within 28 days.

If you paid the wrong amount of tax, contact your Tax Office to ask them to check the amount you have paid is correct. If you have paid too much tax, the Tax Office will send you a repayment

I’m a full time student, why am I paying tax?

All individuals regardless of their age are liable to pay Income Tax if their income exceeds their personal allowance. If you only work during the three holiday periods (Christmas, Easter and Summer) and you estimate that your total income for the tax year will be less than the personal allowance, ask your employer for a form P38(S). Return the completed form to your employer to enable your wages to be paid without deduction of Income Tax.

Completion of this form is not applicable if you are working during term time (e.g. evenings or weekends).

What do I do when I go self-employed?

It is important that you notify the Inland Revenue and HM Customs and Excise when you start self-employment. You can notify both departments using just one form: CWF1, which asks for some basic information about your business. You should keep complete records of all your business income and expenditure so that they can be used to calculate your taxable profit at the end of your accounting period. The records should be kept in case the Inspector asks to see them.

Visit the Inland Revenue Starting up in Business pages for comprehensive advice and the form CWF1. You can also register by calling the Helpline for the Newly Self-Employed on 08459 15 45 15.

What expenses can I claim when I am self-employed?

Expenditure can be split into two main categories, ‘Capital’ and ‘Revenue’.

Capital Expenditure – Capital expenditure is expenditure on such items as the purchase or alteration of business premises, purchase of plant, machinery, and vehicles, or the initial cost of tools.

You cannot deduct ‘Capital expenditure’ in working out your taxable profits, but some relief may be due on this type of expenditure in the form of Capital Allowances. Your Tax Office can give further advice on these allowances.

Revenue Expenditure – It is impossible to list all the expenses that can be deducted but, generally speaking, allowable expenditure relates to day to day running costs of your business. It includes such items as wages, rent, lighting and heating of business premises, running costs of vehicles used in the business, purchase of goods for resale and the cost of replacing tools used in the business.

Examples of non allowable expenditure are your own wages, premiums on personal insurance policies, income tax and National Insurance contributions.

Where expenditure relates to both business and private use, only the part that relates to the business will be allowed, examples are lighting, heating, and telephone expenditure. If a vehicle is used for both business and private purposes then the capital allowances and the total running expenses will be split in proportion to the business and private mileage. You will need to keep records of your total mileage and the number of miles travelled on business to calculate the correct split.

Which Tax Office deals with my Income Tax affairs?

If you are self employed you will be dealt with by a Tax Office locally. Employed persons and persons receiving pensions from former employers are dealt with by the Tax Office dealing with the employer’s Head Office. Your local Tax Office will be able to tell you which Tax Office deals with your affairs, or, if you are employed, your employer will also know.

I suspect someone of evading tax, what can I do?

Any suspicion can be reported in confidence to any local Tax Office. Alternatively, you can call the Inland Revenue Anti-fraud Helpline on 0800 788887. It is open Monday to Friday 8:30am to 5pm

Why does the tax year start on April 6?

The reason for the tax year running from 6 April to 5 April is primarily historical and has its origin in the switch from the Julian to the Gregorian calendar in 1752.

It had been calculated in the 16th Century that the Julian calendar had lost 9 days since its introduction in 46 BC. Most of Europe changed to the new, more accurate, Gregorian calendar in 1582, but this country continued with the old one until September 1752 by which time the error had increased to 11 days.

These 11 days were ‘caught up’ by being removed from the calendar altogether – 2 September was followed by 14 September. In order not to lose 11 days’ tax revenue in that tax year, though, the authorities decided to tack the missing days on at the end, which meant moving the beginning of the tax year from the 25 March, Lady Day, (which since the Middle Ages has been regarded as the beginning of the legal year) to 6 April.

The dates were adopted for income tax on its re-imposition in 1842 and have not changed since.

What is Self Assessment?

Under Self Assessment it is clearer what you have to do to get your tax right first time, when you have to do it, and what happens if you don’t meet the deadlines.

It applies to everyone who gets a tax return. However most people do not get a tax return and pay through PAYE or other deduction at source arrangements.

The first Self Assessment tax return was issued in April 1997.

The Self Assessment tax return is made up of a basic core return together with separate supplementary pages – which ones you get will depend on your circumstances and the type of income you receive.

One of the biggest changes is that your tax bill will be based on the figures that you provide on your tax return without IR first checking them in detail and agreeing them. They will check them later, within a year of the final deadline for sending the return back to them (31 January).

You need to fill in your return giving full details of all taxable income and gains you received in the year, and claim any allowances as well. This means that you are responsible for ensuring that you pay the right amount of tax, even if you do not actually work out the tax yourself.

If you have any queries about your tax affairs you can contact your local Inland Revenue office (the telephone number is shown on the front of your tax return). Outside office hours there is also a Helpline facility which you can call on 0845 9000 444 for general advice. (If phoning from abroad the telephone number is: 44 161 931 9070)

What’s better under Self Assessment?

Self Assessment provides:

  • An easy-to-follow return tailored to your circumstances covering all your sources of income and gains, and your reliefs, deductions and allowances for one year.
  • A separate section where you can calculate your own tax, if you wish. If you don’t want to, IR will do it for you
  • One set of payment dates for tax not paid at source
  • One main point of contact for your tax affairs
  • A clear statement of your account with IR, showing payments due and payments made.
  • Who does Self Assessment apply to?

Self Assessment applies to:

  • Self employed people including business partners
  • Company directors
  • Other people with more complicated tax affairs including people who pay higher rate tax
  • Pensioners with more complex tax affairs
  • People who received rent or other income from land and property in the UK
  • Trustees and personal representatives
  • Trustees of approved self-administered pension schemes
  • Non-resident company landlords
  • Must I employ an accountant?

It’ll still be up to you whether to use an accountant or not.

The majority of self-employed people already use accountants and they may want to carry on doing that. Self Assessment brought in new rules that made it easier for you to understand your tax. So if you didn’t use an accountant under the old system, you’re unlikely to need one for Self Assessment.

People find it useful to have accountants for reasons other than dealing with their tax affairs, for example, proper accounting helps them manage their business better.

What are the important dates under Self Assessment?

The important dates for taxpayers are:

Dates for the Tax Return

6th April –The tax year starts on 6 April and ends on 5 April. Therefore the tax year 2012/13 starts on 6 April 2012 and ends on 5 April 2013.

31 October – Final deadline for sending in your paper tax return

31 January – Final deadline for sending in your tax return by submitting it online. If you decide to work out your tax bill yourself you must fill in your return and the calculation and send your Return in by 31 January after the end of the tax year.

You can send in the return earlier if you want. This does not mean that you will have to pay your tax any earlier.

Dates for payments

31 January – This is due date for tax due on your return . This is also the due date for the 1st payment on account for the following tax year.

31 July – This is the due date for the 2nd payment of account.

The payment dates do not change, even if you send your return in early.

Please note that in a few rare cases the payment dates may change, for example if your return was sent to you later than everyone else’s.

How do I know what records I should keep?

You will find it easier to manage your tax affairs if you keep them up to date. If you get behind, you may have to pay interest, surcharges and penalties.

Everyone must by law keep records of their income and their capital gains for at least 22 months after the end of the tax year to which they relate, so that they can fill in a tax return fully and accurately if they get one.

People who have businesses – such as the self-employed and partners and those letting property – must keep their records for at least five years and ten months after the end of the tax year to which they relate.

Where can I get more information on keeping records?

More information on keeping records can be found on the HMRC website on  www.hmrc.gov.uk

What if you need a return and haven’t had one.

You have to tell the IR if you get any income that should be taxed (i.e. taxable income or capital gains that have not been fully taxed at source) and that they might not know about.. They may or may not need to send you a tax return – some taxpayers will be able to pay the right amount of tax through an adjustment to their PAYE code.

Inform IR straight away as the amount of tax that has not been paid at the following 31 January will affect any penalties you may have to pay.

I pay tax through the PAYE (Pay as You Earn) system but I have received a Tax Return. Do I have to fill it in?

If you are sent a Tax Return you must complete and return it on time. The law says that any person may be required by notice to make a return of income and for this reason your Tax Return asks for full details of all your Income and Capital Gains.

Can I send my Tax Return over the Internet?

All tax returns must be submitted online. The due date for online returns is 31 Jan. If you want to submit a paper return , the due date for this is 31 October.

Do I have to send my P60 or a copy of my form P11D / P9D to the IR?

No. Just put all of the details from these forms on your tax return. You should keep your P60 and copy of form P11D / P9D with the rest of your tax records in case there are any queries about your return.More information on keeping records can be found on www.hmrc.gov.uk

If I don’t have the right information can I guess / estimate?

Normally you will have the information you need. But if there is something you are not sure of, you should enter your best estimate in the return and tell IR why a final figure is not yet available and the date by which you expect to give them the final figures. You should then let them have the correct figure as soon as it’s available. You should not leave the relevant box blank, or enter ‘details to follow’ as your return will be incomplete.

Remember: you must send in your return on time, for information on dates and deadlines, plus a handy chart to print out, see ‘Key Dates’.

What do I do if there’s information that I think you need but I can’t find the box / you haven’t asked for it?

The return and guidance notes will help you or your tax adviser decide what information is required to complete your return and self assess. If you’re in doubt about whether additional information needs to be included with the return you can consult your tax adviser or discuss the matter with the IR.

The return has been designed to enable you to include all the details required to self assess, but you can send in additional information if you consider that it is relevant to your tax liability, and it cannot be entered in the spaces and boxes provided in the return. IR will accept any additional information sent in with the return, but recommend that you provide an explanation of why you think its relevant.

I have some unused Personal Allowance, can I set these against my Capital Gains?

No. The Personal Allowance is only available for relief against Income Tax not Capital Gains Tax.

What do I do if I disagree with my employer / bank / etc. about the figures?

You are responsible for the accuracy of your return. If you disagree with the information provided by your employer or bank, you should include the information which you think is correct. You should not delay in sending your return because you cannot agree with your employer or bank over particular figures.

My employer hasn’t shown all my expenses on form P11D / P9D. He says he has a dispensation. What is it?

It’s an arrangement an employer has with the tax office. It saves you the trouble of declaring those expenses covered under the dispensation, and then making a claim for the same amount of allowable expenses you’ve paid out.

I am self-employed. Does the IR want me to send in accounts?

No. The new tax return has been designed to enable the vast majority of taxpayers to provide all the information they need without accounts and computations. For example; IR will ask you to put your accounts information in a special section of the return called ‘Standard Accounts Information’.

Although IR will not normally request accounts, this does not mean that you cannot send in accounts with the return if you want to, for example they may contain additional information you would like the IR to see.

It is the IR’s view that accounts are unlikely to provide them with additional information unless your business is particularly large or complex.

Where do I send my Tax Return back to?

You should normally send your Tax Return to the address on the front of the form. This will usually be headed Officer in Charge. If your Inland Revenue office has changed since your Tax Return was issued you should return it to you current office. You can also hand it in at any Inland Revenue Enquiry Centre (IREC) or local Inland Revenue office if more convenient.

What will happen / What can I expect after I’ve sent in the return?

Normally you will only know that the Revenue has processed your return when you receive your statement of account, showing the tax due based on the figures which you have declared. The only time they will contact you following receipt of your return is when they have had to correct an entry on the return, or they have worked out the tax for you. In these cases they will send you a Revenue Calculation (form SA 302).

How will I know if HMRC will  make an enquiry into my return?

If the IR starts enquiries into your return, they will tell you in writing. They will also write to your tax adviser if you have one.

Is my return more likely to be subject to an enquiry if I self calculate? / file early?

No. Most enquiries will be made on the basis that there is a risk that something might be wrong. A minority of cases will also be randomly selected for enquiry. The date of submission of a return, or whether you self-calculate or not, will have no affect on whether your return is taken up for enquiry.

Will there be random enquiries?

Yes. IR will make enquiries into returns – they will be randomly selecting cases to review for possible enquiry. Some of the returns selected in this way will not result in an enquiry because they can check the entries in the return using the information already in their possession.

If they don’t do these checks, those who want to cheat might think they are quite safe from being caught. IR thinks that random enquiries will help to stop deliberate tax evaders.

They also think that random enquiries might highlight any problems that people have in filling in their returns. This will help IR make the form clearer.

Will IR check my details with my employer / bank / building society?

Yes. They will compare information on the return with information they get from elsewhere such as employers, banks and building societies. If they find any discrepancies they may want to enquire into your return. But you’re responsible for making sure you enter the right information on your return.

What happens if I realize I’ve made a mistake after I’ve sent the return in?

You have one year from the annual filing date (31 January) to make any changes. You can always contact the IR if you need further help.

Do I have to pay more tax under Self Assessment?

No. Self Assessment is simply a clearer and more effective way of making sure you pay the right amount of tax at the right time. It is not a new tax and does not affect the amount of tax you need to pay.

If I owe some tax can the IR collect it through my code number?

Yes, if you want IR to and the total amount is less than £2000. They will send you a statement confirming that it has been done or, if for any reason the amount cannot be collected through your coding, they will let you know.

Can I pay electronically?

Yes. You can pay electronically through your bank’s Internet or telephone banking service. IR also accepts payment by Debit Card over the phone or Internet. Electronic payments are generally more efficient and secure than payments by post.

For full details on how to pay electronically and for details of other methods of payment refer to link www.hmrc.gov.uk/payinghmrc/selfassessment.htm

What Is My NI Number And What Is It For?

Only one number is allocated to you and you keep that same number all your life. It is unique to you and ensures that Department of Work and Pension (DWP – a new Department comprising in parts the former Department of Social Security) correctly records NI contributions or credits to your NI account. You will need these contributions and credits when you come to claim benefit, whether it is for a short while, like Incapacity Benefit or long term, such as your Retirement Pension.

Your National Insurance (NI) Number is personal to you. It is your account number allocated to you for you to use in all your dealings with Inland Revenue and the DWP. It is not proof of your identity. It looks something like this: AB123456C. This National Insurance number is only an example and should not be used as your own number.

Who Else Uses My NI Number?

Your NI number will also be used by:

  • Employers, for the deduction of tax and NI contributions.
  • Jobcentre Plus, to administer Jobseeker’s Allowance.
  • Local Authorities, to administer Housing Benefit.

You must not let anyone else use your number.

What Do I Do With My NI Number?

You should quote it on letters or forms you send to the Inland Revenue, DWP (formerly DSS) or in Northern Ireland, the Social Security Agency.

Keep your number safe and do not disclose it to anyone who does not need it. Remember, its purpose is only to record NI contributions and credits you have paid or are entitled to; and to help decide how much benefit you are entitled to.

Tell your nearest Social Security office (This is a link to the DWP (formerly DSS) website) or Inland Revenue (NI Contributions) office at once if there is a change in your name, address or title so your NI account can be kept up to date. They may need to contact you if you need to pay more contributions in a particular year to make that year count for pension purposes or when you come to claim benefits like Retirement Pension.

If you are employed, you should tell your employer your number as soon as you know it.

Your employer will use it to make sure the contributions you pay are recorded on your NI account. These contributions earn you entitlement to benefit. If your employer does not have the correct NI number then there could be a delay in establishing how much benefit you should get when you claim.

If you are self-employed, you will need your NI number when you apply to pay self-employed NI contributions.

When Do I Apply For A NI Number?

No one has a legal right to a NI number but there are circumstances you are legally obliged to formally apply for one and to register for NI purposes.

Criteria for applying for a NI number

  • If you do not already have a NI number you must apply for one as soon as you start work or you or your partner claims benefit.
  • You must be over 16 years old and resident in Great Britain.
  • If you satisfy all the above conditions except for being resident in GB, and you still want to apply for a number, you must be liable to pay NI contributions or want to pay voluntary contributions and would benefit from doing so.

Providing you satisfy these conditions, you should contact your nearest Social Security office (This is a link to the DWP (formerly DSS) website) and ask for an appointment to be interviewed for a NI number. At the interview you will need to be able to prove your identity.

You can find out information about the types of documents you should provide to help establish your identity in leaflet GL25 available from any Social Security office (This is a link to the DWP (formerly DSS) website).

What If I Have Already Been Given A Number But I Can’t Remember What It Is?

If you think you already have a number but cannot remember it, see if you can find it on any official papers you may have at home. Look on any of the following:

  • An end of year statement of tax and NI paid. (P60)
  • Payslip, recent or old.
  • Official correspondence.
  • Annual tax return.
  • Sub contractors tax certificate. (CIS6)
  • Employers wage records.

Your number will not change. Even if for example, you go abroad, marry or change your name your NI number will stay the same.

If you can’t find your number, ask at your nearest Social Security office (This is a link to the DSS website) or Inland Revenue (NI Contributions) office and they will tell you what to do.

Will I Get A Number Automatically?

The only people who are automatically registered are those under 16 years old, who live in Great Britain and for whom Child Benefit is in payment. They are automatically registered and a NI number card sent to them just before their 16th birthday.

If these young people do not receive a card they will have to apply for a number in the same way as everyone else (see When do I apply for a NI number). This means they must both be working or claiming benefit and satisfy the criteria shown above.

The NI Number Card

A plastic NI number card is issued automatically when you first apply for a number or if you change your name on marriage.

It is meant to be a reminder of your number and nothing else. It does not provide proof of your identity and should not be used as such.

If you live abroad a card will not be sent to you. If you live in the United Kingdom but have no permanent address you will be able to collect your card from the Social Security office about 8 weeks after your application is made.

If you live in Wales, you may ask for your card to be printed in both English and Welsh. Tell the office where you apply for your NI number that you would like a bilingual card.

Take good care of your card. You will only be sent one replacement if you lose it.

I’ve Lost My NI Number Card

Report it to your nearest Social Security office (This is a link to the DSS website) or Inland Revenue (NI Contributions) office. If you want a replacement card you will need to complete an application form. Remember, you are only allowed one replacement.

Does DWP Need To Know If I Move Or Change My Name?

Yes they do. Please write to your nearest Social Security office (This is a link to the DWP (formerly DSS) website) or Inland Revenue (NI Contributions) office quoting your NI number. Tell them what change has occurred e.g., new address or change of name and when it happened.

If you do not tell them when you move, marry or otherwise change your name they will not be able to keep your records up to date. This means they will be unable to contact you if they need to; for example, if the contributions you paid in a tax year are not enough for that year to count for benefit purposes. They would normally write to let you know and to tell you how much you could pay in voluntary contributions to make that year count.

If you change your name, please return your old NINO card to your nearest Social Security Office when applying for a card in your new name.

Also, when you are nearing the State retirement age, they invite you to claim any Retirement Pension you are entitled to. They cannot do this if they do not have your current address. If you are a woman you should tell them if you get married or become divorced or widowed. All these things may help improve the amount of pension you are entitled to when you come to retire.

How much NICs must I pay on my wages?

The amount of NICs to be paid is calculated on the amount of gross pay an employee receives.

When do I start paying NICs?

An employed earner, between the ages of 16 and state pension age, must pay Class 1 contributions on gross earnings which fall between the Primary Threshold (PT) and the Upper Earnings Limit (UEL). However, NICs are treated as actually having been paid on earnings at the Lower Earnings Limit up to and including the Primary Threshold. As such, the Lower Earnings Limit is the point at which a person can start to build up entitlement to contributory benefits and the Primary Threshold is the point at which they start to pay NICs.

There is no UEL for employer NICs.

What benefits do I get from paying NICs?

Payment of Class 1 contributions gives entitlement to: -

  • Incapacity Benefit
  • Jobseeker’s Allowance
  • Maternity Allowance
  • Retirement Pension
  • Widowed Mothers Allowance
  • Widows Payment
  • Widows Pension

Each of the above has its own different “qualifying conditions” which must be satisfied before payment can be made. Further advice on the various qualifying conditions can be obtained by contacting your local Benefits Agency (this link will take you to another web site) office.

What happens if I become sick – does my employer continue to deduct NICs at the same rate?

If the employee’s gross pay, including any statutory or other sick pay is above the LEL, NICs are due.

What happens if I have more than one employment – do both employers have to deduct NICs at the full rate?

If a person has more than one job, both employers have to deduct contributions subject to the gross pay being above the Lower Earnings Limit. If the total employee contributions payable in the employments are likely to exceed the annual maximum contribution payable, a deferment certificate may be obtained.

If I have paid too much in NICs, how do I claim a refund?

Apply to:

Refunds Group
Inland Revenue National Insurance Contributions Office
Benton Park Road
Longbenton
Newcastle upon Tyne
NE98 1ZZ

© 2019 HT Tax Limited. All Rights Reserved.