P85 and National Insurance Contributions

[simonschus 58]

Hi all.

 

I'm in a bit of a confused pickle.

 

I moved over to the USA last year as LPR on a K1, However, I am still getting paid by my UK employer and will continue to do so for a few more months. I pay US income tax on my UK income (i.e. my IRS Form 1040).

 

I intend to submit P85 to avoid double taxation. However, and here is my question:

 

Will submitting this P85 return only my income tax? Or will it return any of the following made during the tax year after I left:

- National Insurance contributions?

- UK pension contributions?

- Student loan contributions?

 

I'm panicking right now because I need to ensure that I pay either national insurance in the UK or social security in the USA. I feel like it is a bit of a grey area as to which I should be paying given that I'm working for a UK company for less than 5 years.

[Wuozopo 4,293]

This page says you can't claim back National insurance https://www.gov.uk/tax-right-retire-abroad-return-to-uk

 

On the other topic-- the tax treaty says you pay to the country where you reside so you follow all IRS rules just like if your employer was in your town. The IRS has definitions of what is considered an "employee". The alternative is you could also be considered a self-employed "Contractor" for that company.

 

If your are their employee, they have to get an EIN (employer identification number) from the IRS. They have to withhold US federal taxes, social security and Medicare from your pay. They have to submit payment to the IRS every month electronically via the EFTPS (an IRS thing) that money held out from your check. At the end of the year, they have to issue you a W2 and submit same to the IRS.  

 

If you are a contractor, they do not hold out federal taxes, social security, or Medicare. They do have to get an EIN so they can issue you a 1099-MISC wage statement at the end of the tax year and submit same to the IRS.  As a contractor, you are considered self-employed by the IRS. You complete Schedule C (Profit and Loss from Business). You also complete Schedule SE which computes your self-employment tax. That is simply your social security and Medicare contributions.  Instead of your employer holding out those two things from each check, you pay it in yourself when you file your tax return. Also since nothing is getting held out of your checks toward federal taxes, you need to hold out yourself and send to the IRS as a quarterly estimated payment.  It may seem like you are paying more, but you would be getting a bigger paycheck with nothing held out of it. It's on you to hold out and pay in for yourself, not monthly but quarterly. 

 

I would say say go with Social Security (well you have to) and skip any further payments to NHS and state pension because you are early in your career.  If you had already worked in the UK 25 years, then yeah pay up the extra five years to get full state pension. But I see no value in paying 25 more years to the UK. There  is a plan in place where if you collected a state pension from the UK, then your Social Security retirement benefits would be reduced by that much. You can't collect full state pension plus full Social Security benefits.

 

Somebody else will have to address how you pay back student loans. I don't have any experience with that.

 

 

Edited April 10, 2017 by Wuozopo

[simonschus 58]

Thanks Wuozopo - that is the situation as I had interpreted it myself today. I had originally, incorrectly thought that I could pay taxes in the UK for the 2 years, include that income on my IRS Form 1040, file IRS Form 1116 to get a tax credit of my UK taxes, and then never file Form P85. However, I didn't realise that Form 1116 has a question about residency and then that led me down the rabbit hole that I found myself in today whereby I realised I'd made a mistake.

Edited April 10, 2017 by simonschus

[Wuozopo 4,293]

Additional info to my post above. I called the IRS to confirm what I understood was the process before I commented just to be sure I was giving you correct information.  I spoke to employee badge number 10000144333 with international tax issues. Her specific job is issuing EINs to foreign companies. She confirmed what I thought was correct.

 

The state pension and social security information is something I learned previously from the SSA.gov website.

[simonschus 58]

You've been so helpful! I'm going to give the IRS a call as well for some clarity Thank you so much Such a wonderful resource for sounding things out.

[Wuozopo 4,293]

15 hours ago, simonschus said:

Thanks Wuozopo - that is the situation as I had interpreted it myself today. I had originally, incorrectly thought that I could pay taxes in the UK for the 2 years, include that income on my IRS Form 1040, file IRS Form 1116 to get a tax credit of my UK taxes, and then never file Form P85. However, I didn't realise that Form 1116 has a question about residency and then that led me down the rabbit hole that I found myself in today whereby I realised I'd made a mistake.

 

I think you qualify for the foreign tax credit. Why do you think not?

Form 1116 is not for the faint of heart. 

 

You can also exclude all your foreign earned income while you were living in the UK as an alternate strategy. (form 2555)  BUT if you exclude income you can't also take a tax credit on the same income. If you excluded for example Income for months 1-5 while living in the UK, those taxes paid in 1-5 don't qualify for the tax credit. But the UK taxes you paid for months 6-12 would qualify because you don't exclude income paid to you once you are in the US.

Edited April 11, 2017 by Wuozopo

[simonschus 58]

The reason why I don't think I can use the foreign tax credit is because I wasn't a UK resident anymore when I earned the income (I wasn't on secondment, but had legally moved out to the US and in possession of a Green card). I'm a US resident but not a US resident: I was not legally required to pay income tax in the UK but instead was required to pay it in the place I earned the money (i.e. the USA). The credit can't be used for taxes I wasn't legally required to pay and so the taxes would be considered 'voluntary'. I took this interpretation from the Form 1116 instructions:

 

 

Quote

 

Foreign Taxes Not Eligible for a Credit
You can't take a credit for the following foreign taxes. 

1. Taxes paid to a foreign country that you don't legally owe, including amounts eligible for refund by the foreign country. If you don't exercise your available remedies to reduce the amount of foreign tax to what you legally owe, a credit for the excess amount isn't allowed. The amount of tax actually withheld by a foreign country isn't necessarily 100% creditable. See Regulations section 1.901-2(e)(2)(i). 

 

 

My original approach was exactly as you described... either to use just i) Form 1116 for the whole year given I was electing to be treated as a US resident for the full year or ii) use both Form 1116 and Form 2555 for the relevant parts of the year: Form 2555 for the time living and working in the UK and Form 1116 for the time after that I became resident in the USA. I had prepared two returns to that effect, and I got a nice little refund from each  However, I felt that I could not justify claiming the Foreign Tax Credit (through Form 1116) because of the issue I mentioned above: the credit can't be used for taxes I wasn't legally required to pay. After I received my EAD and Green card, I would no longer (legally) be deemed a UK resident but instead would be a US resident. Per the UK-US tax treaties, I am required to pay tax to the country where I am resident. I felt that I was not legally required to pay income tax in the UK but was required to pay the tax in the USA. Any payment I make to the UK would therefore be voluntary and ineligible for tax credit. Given the above issues, I felt that using Form 1116 implicitly misrepresented my US residency which would have implications for N400 application whereby I will be asked a question about whether I had ever indicated I was a non-US resident for US federal or state taxes. I didn't feel that filing Form 1116 would allow me to tick anything other than "yes", and I didn't want to jeopardise any future applications in the USA. 

 

As such, I went with the approach of Form 2555 prior to moving out to the USA, and then treating myself as self-employed for US taxes (i.e. paying my own income tax and self-employment tax from the income tax I'll claim back from the UK through my P85. On the US side of things, this involved filling in in IRS Forms 1040, Schedule C and Schedule SE but I didn't have a 1099-MISC to attach unfortunately). It is possible to claim back UK National Insurance contributions by writing to either your employer or the HMRC but that isn't through the P85 process, and I don't know the likelihood of success). I am aware that my approach was tax-inefficient but I think I have paid everything that I am required to pay and likely much more.

Edited April 12, 2017 by simonschus

[simonschus 58]

[my above post got curtailed because I pressed the wrong button, continuing it here]

 

... Perhaps I paid more than required, and I'm aware that there is an issue re: employer vs contractor too. However, I wanted to ensure that I was paying what was required and that I could honestly tick the relevant tick boxes in the future on N400 and other applications. Plus, there is an honour thing involved. I'm a little worried to see what comes back, but I'm crossing my fingers that it is deemed appropriate.

Edited April 12, 2017 by simonschus

[Wuozopo 4,293]

5 hours ago, simonschus said:

[my above post got curtailed because I pressed the wrong button, continuing it here]

 

... Perhaps I paid more than required, and I'm aware that there is an issue re: employer vs contractor too. However, I wanted to ensure that I was paying what was required and that I could honestly tick the relevant tick boxes in the future on N400 and other applications. Plus, there is an honour thing involved. I'm a little worried to see what comes back, but I'm crossing my fingers that it is deemed appropriate.

I wouldn't worry what comes back from the IRS. Nothing will. They don't check up very well unless it's something the computer could match up like your W2 said $80,000 and you claimed to have earned $40,000. Your foreign income is pretty much your word. 

 

I understand your situation a little better now. Maybe.  But you shouldn't pay tax twice, nor should you claim a credit for foreign taxes which I believe you said you are seeking to get back. 

[simonschus 58]

Quote

 But you shouldn't pay tax twice, nor should you claim a credit for foreign taxes which I believe you said you are seeking to get back. 

 

For clarity, I didn't put in for a tax credit (i.e. Form 1116). I did file Form 2555 to exclude my income prior to moving out to the USA though. As for after that date, I'll claim back my taxes paid on anything after that date because I'll have paid them in the USA through the income and self-employment taxes. None of the UK taxes I claim back using my P85 will will relate to anything I included on Form 2555 (this was a huge concern of mine so I made absolutely sure to avoid doing anything that would cross-taxes).

 

I've been so worried by this (that is what I generally do for major issues). However, I'm glad I've had a space to vent here. I've answered most of the questions myself through advice external to VJ, but there is something lovely about being around people who can offer additional advice, guidance or just support. I'm a huge fan of the website.

 

I'm crossing my fingers that everything is deemed correct as I just want to my wife and I to pay our way, not have anybody else foot the bill, and pay all of our obligations (and then some just to be sure).

Edited April 12, 2017 by simonschus

[Wuozopo 4,293]

15 minutes ago, simonschus said:

 

For clarity, I didn't put in for a tax credit (i.e. Form 1116). I did file Form 2555 to exclude my income prior to moving out to the USA though.

 

Yep, I got that. I think you did it exactly right. I too file Schedule C and SE, so know there is a place to enter non-1099 income on C.  I don't think you have anything to worry about. 

Edited April 12, 2017 by Wuozopo