Two things in life are certain: death and taxes. What's not certain is what taxes you have to pay when you're a US citizen moving to the UK for two years. There's a lot of misinformation out there about paying taxes as an American expat in London, so I thought I'd clear it up for those who may be curious. I actually read a New York Times article not too long ago about American expats renouncing their citizenship while abroad so that they could avoid double tax. Obviously, this is a cause of concern, since Uncle Sam already takes about half of our paycheck. Luckily for me, and not so lucky for the Gray Lady, the article interviewed people who were misinformed and was poorly researched.
I'm not a tax professional, but this is what I gleaned from speaking with one:
Federal taxes - US citizens get a tax credit for foreign taxes paid. We will be paying UK taxes, and we will get credit from the US gov't dollar for dollar for taxes paid. This, in effect, wipes out any US taxes owed since UK taxes are a bit higher. You also get a deduction for housing expenses (after the first $15k), and a deduction on income income up to $91k. I'm not sure if the deductible income amount varies by salary, but that's the relevant number in our situation. However, the deductions are basically moot, because of the first point: Tax credit for foreign taxes paid.
State taxes - Since we're intending on staying abroad for longer than 18 months, we do not owe any state (CA) taxes for the time we're gone. The corollary to that is, you have to pay state taxes if you intend to leave the state for a period shorter than 18 months.
We've also got a condo that we're thinking of renting out. The rental income will be less than our mortgage, HOA, property taxes, etc., so we don't need to pay any taxes since we're actually losing money on the property. We would also lose our tax credits for interest paid on the mortgage and property taxes.
This is all for US taxes, and we're supposed to talk to another tax professional re: UK taxes once we arrive. Will keep you posted!
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