Born in America, raised in Britain: what your US return actually looks like

Where you hold citizenship through birth, you file on worldwide income like any other citizen. That means a Form 1040 each year your income passes the threshold, with the same schedules an American at home would use.

So where you live changes the reliefs, not the duty.

The IRS page for citizens abroad confirms the rules are generally the same abroad.

It usually depends on your spouse. Single people simply file as single. Someone born in the US and married to a Briton usually files as married filing separately, because a joint return would bring the spouse's worldwide income into the American system.

The threshold for that separate status is $5, so almost any income requires a return.

Head of household can apply in some cases where a qualifying dependant lives with you.

Choosing wrongly is fixable, but amending later costs time. Decide once, with both incomes in front of you.

It is reported in full and then relieved. You choose between excluding foreign earnings up to an annual cap, or claiming a credit for the British income tax paid on them. Either way, the American tax on a typical salary usually falls to nothing.

That is because British tax rates are generally higher than American ones on the same pay.

We compare the two routes in Form 2555 or Form 1116.

Bonuses and benefits in kind count too, so use the full P60 and P11D figures rather than net pay.

For most British salaries the credit is the stronger choice. Britain usually taxes more than America would, so the credit wipes the American liability and leaves excess credits to carry forward. The exclusion can leave you worse off when other income sits on top.

Choosing the exclusion and later revoking it locks you out for five years. The IRS page on the exclusion sets out the rules, and the credit runs on Form 1116.

So the first year's choice deserves real thought.

In the places Britain shelters and America does not. Cash ISA interest is taxable on the American return with no British tax to credit against it. Gains and income from British funds can fall under the passive foreign investment company rules, which are deliberately harsh.

In practice, a small savings account rarely matters.

However, a large stocks and shares ISA almost always does.

That is why a review of your holdings comes before anything else. Selling a fund later can cost more than fixing it now.

Often, though not always. Most British unit trusts, OEICs and ETFs are foreign pooled funds, and American law treats many of them as passive foreign investment companies. The default treatment taxes gains at the highest rate with an interest charge.

Small holdings can fall under a de minimis exception from the annual form.

We explain how to check in is my fund a PFIC?, and the IRS page for Form 8621 links the form.

The treaty helps a great deal here. Growth inside a British pension scheme is generally taxed in America only when paid out, and that protection survives the saving clause for citizens.

Contributions, however, are a different question with narrower relief.

In our practice an ordinary workplace pension rarely produces American tax before retirement.

Personal pensions and SIPPs raise more questions, because their treatment under American rules is less settled.

All of them, on the FBAR, once the combined highest balances pass $10,000 in a year. That includes current accounts, savings, ISAs and some pensions. Form 8938 is a separate report with higher thresholds for people living abroad.

Reporting an account is not the same as paying tax on it. The IRS page for Form 8938 sets out the higher thresholds.

The two reports overlap but are not identical, as we explain in Form 8938 vs the FBAR.

Child benefit is a British payment, and the American return generally has no line designed for it. Its treatment is not settled by any IRS guidance we can point to, so we look at it case by case rather than assuming.

American credits for children usually need the child to hold a Social Security number, and some need earned income that the exclusion has not removed.

So families often find the American child credit only works when they claim the foreign tax credit instead of the exclusion.

Yes, for employees on a British payroll. The totalisation agreement means earnings covered by National Insurance do not also attract American social security tax. Self-employed people need to look more carefully at which country covers them.

However, anyone seconded or self-employed should check whether a certificate of coverage applies.

Self-employment abroad is where American self-employment tax can appear.

Only at the edges while you live in it. Mortgage interest on a British home can be deductible on the American return, although most people abroad take the standard deduction instead, because it is larger.

The sale is where the home matters. American rules exclude a limited gain on a main residence, while currency movements on the mortgage can create a separate gain of their own.

Consequently, anyone planning to sell should model the American side before accepting an offer.

Renting the home out later changes the picture again, because rental income then appears on both returns.

Citizens living abroad get an automatic extension to 15 June for filing. Interest on any tax due still runs from 15 April, so a return showing tax to pay should not wait.

After that, a further extension to 15 October is available on request.

Still, for most people born in the US and paying British tax, nothing is due anyway.

Every figure goes into dollars. For income spread across the year, the IRS publishes yearly average rates that most people use. For a single large transaction, the rate on the day is often more accurate.

By contrast, account balances for the FBAR use a year-end rate.

So pick a method, write it down and use it consistently.

No. Nothing in the filing rules requires one, and many people born in the US and living in the UK never hold an American account at all. The return, the FBAR and any payment can all be handled from Britain.

Refunds can be awkward without one, since cheques in dollars cost money to bank here. In practice most returns for people in your position show nothing to pay or refund anyway.

Opening an American account from abroad is often harder than it sounds, because many banks decline non-resident customers.

Then this year's return is not the first thing to do. Filing only the current year leaves earlier years open and can make a structured route back harder to use later.

For people abroad who did not know, the Streamlined Foreign route usually fits better, because it covers three years of returns and six of FBARs together.

Once that package is in, the ordinary annual return becomes routine.

Follow this order, since each step feeds the next one.

Take a nurse in Glasgow born in the US while her mother studied there. She earns a British salary, pays into the NHS pension and holds a Cash ISA.

Her credit for British tax removes any American tax on the salary. Her pension growth is deferred. Her Cash ISA interest is taxable in America, but at a few hundred pounds the bill is small.

She files separately from her British husband and reports four accounts on the FBAR. This example is illustrative, not advice.

Her total American tax for the year comes to a few dozen dollars. The paperwork takes longer than the payment.

Longer the first time, because every account, pension and fund has to be identified, converted into dollars and classified before any figure goes on the form. After that, each year mostly repeats the last with new numbers.

Funds add the most time, since each one needs its own analysis.

Our clients typically find the second year takes a fraction of the first, provided the workpapers were kept.

Keep your P60, any Self Assessment calculation, and a year-end statement for every account. Add fund statements showing purchases, sales and distributions, because those drive any passive foreign investment company figures.

Store the exchange rates you used alongside the return.

Then keep everything for at least six years, since the reporting obligations reach back that far.

First, filing jointly with a British spouse without understanding the consequences.

Second, leaving ISA income off the American return because it is tax-free in Britain.

Third, choosing the exclusion by habit when the credit works better.

Fourth, forgetting that reporting accounts and paying tax are separate obligations.

Fifth, discarding fund statements. Without purchase history, the American figures for British funds cannot be rebuilt accurately.

We prepare US federal returns for people who have never seen one, starting from the British paperwork you already have. We check the funds, choose the relief and file the FBAR alongside.

Where past years are missing, we also look at the route back first.

This article is general information, not personal tax advice. Talk to us about your own return.