As an American living in the UK, you may be required to file both UK and US tax returns. The UK’s tax system is different from the US system, and understanding how UK tax documents—like the P60—affect your US tax return is crucial. In this article, we’ll break down what a P60 is, its significance, and how to report it accurately on your US tax return.
What is a P60?
A P60 is an official document issued by your employer at the end of the UK tax year, which runs from April 6th to April 5th of the following year. The P60 provides a summary of your income and tax deductions for the year. It includes important information, such as:
- Your total earnings from your employer during the UK tax year.
- The tax that has been deducted from your salary under the PAYE (Pay As You Earn) system.
- National Insurance contributions (similar to Social Security in the US).
- Other deductions like pension contributions.
In essence, the P60 is an official record of the income you earned in the UK and the taxes you paid on that income during the tax year.
Why Does the P60 Matter for US Taxpayers?
Even though you live in the UK, as a US citizen, you are still required to file a US tax return each year. The United States taxes its citizens on their worldwide income, meaning you must report any income earned abroad—including earnings reported on the P60—on your US tax return.
It’s important to remember that the UK taxes its residents on income earned within the country, and you will generally have already paid UK income tax through PAYE. However, the US requires that you report all income and tax paid, regardless of where it was earned. Thankfully, tax treaties between the US and the UK, as well as certain exclusions and credits, can help prevent double taxation.
How to report your P60 information on your US Tax Return
When filing your US taxes as an American expat, you’ll need to report your UK income, including that shown on your P60. Here’s a step-by-step guide to doing so:
1. Convert your UK Income to US Dollars
The first step in reporting your UK income is to convert it into US dollars. The IRS requires that you report foreign income in US dollars, so you must use the exchange rate that was in effect on the date the income was earned, or you can use the average exchange rate for the year. This conversion is necessary for accurately reporting your income and calculating taxes owed.
2. Report your Gross Income (Line 1 of Form 1040)
Your P60 will show your total salary or wages (gross income). On your US tax return (Form 1040, Line 1), report the converted amount of your gross income from the P60. If you have multiple P60s or income from different sources, sum them up and report the total amount.
3. Claim Foreign Tax Credit or Foreign Earned Income Exclusion
One of the key reasons to report your P60 is to take advantage of tax relief options for Americans living abroad. You can either claim a Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion (FEIE) to avoid double taxation.
- Foreign Tax Credit (Form 1116): If you’ve paid UK income taxes, you may be eligible to claim a credit for those taxes on your US tax return. The amount of the credit is based on the taxes you’ve paid to the UK, which will reduce your US tax liability. You’ll report the taxes paid based on your P60 on Form 1116.
- Foreign Earned Income Exclusion (Form 2555): If you qualify, you can exclude up to $126,500 (for the 2024 tax year) of foreign-earned income from your US taxable income. The P60 shows your gross income, which you can use to determine whether you qualify for this exclusion. Form 2555 is used to claim this benefit.
4. Social Security and National Insurance Contributions
Your P60 will also show contributions to the National Insurance (NI) system in the UK, which is similar to the US Social Security system. While these contributions are not directly deductible from your US taxes, you may be eligible to claim a Totalization Agreement benefit. This agreement between the US and the UK ensures that you do not have to pay Social Security taxes to both countries on the same income.
If you’ve paid into the UK National Insurance system and are not eligible to receive US Social Security benefits, the agreement can help reduce or eliminate double contributions.
What if your P60 Income isn’t the only income you earned in the UK?
If you have multiple sources of income in the UK, such as rental income, freelance work, or income from other employers, you’ll need to report those earnings as well. The P60 will only cover your employment income, so any other sources of UK income should be reported separately on your US tax return.
For rental income or self-employment income, you will need to report the earnings on Schedule E (for rental income) or Schedule C (for self-employment income), along with any related expenses. These income sources may also be eligible for the Foreign Tax Credit or the Foreign Earned Income Exclusion if applicable.
Additional Considerations for Americans Living in the UK
- State Taxes: If you are a resident of a US state that taxes your worldwide income (such as California or New York), you may need to report your UK earnings on your state tax return as well.
- Filing Extensions: As an American living abroad, you are automatically granted an extension to file your US tax return. The deadline is typically June 15th, but you can request an additional extension if needed.
Understanding how to report your P60 on your US tax return is essential for ensuring compliance with both US and UK tax laws. By accurately converting your income, claiming the Foreign Earned Income Exclusion or Foreign Tax Credit, and properly reporting your taxes paid, you can minimize your US tax liability and avoid double taxation.
If you need assistance with filing your US taxes from the UK or have specific questions about how to report your P60 income, feel free to contact Universal Tax Professionals.
