Minimising tax on employment
As an American living abroad, you will still be taxable in the US on employment income. However, you can use the foreign earned income exclusion to exclude up to $107,600 from US taxation. For those earning in excess of this amount (including the foreign housing exclusion), taxes paid in the UK are used to offset the US tax due, generally meaning that those who are employed in the UK don’t have to pay US tax on employment income.
In Mr Burton’s case, as with all our clients, we considered whether it is better to utilise the foreign earned income exclusion, or to rely on claiming UK taxes paid as foreign tax credits, to offset the US taxes. The latter made the most sense, as not using the foreign earned income exclusion but relying wholly on UK taxes paid, meant that there were more UK taxes paid than were needed in order to offset the US taxes.
These unused foreign tax credits can be very useful as they can be used to offset the US tax on tax relief opportunities in the UK, such as pension contributions and investments in enterprise investment schemes, both of which are UK tax-advantaged but are not on the US side, which is why having excess foreign tax credits is so useful. With our assistance, Mr Burton made use of these opportunities, allowing him to contribute more to a UK pension and also make a £30,000 UK investment (which saved him £9,000 tax). The excess he did not use can now be carried forward for up to 10 years.