With the results of Brexit causing some to think about exiting the UK, there may be an advantage that American expats in the UK can take advantage of when it comes to taxes – due to the tax reform changes that have been introduced by the new presidential administration.
Understanding the Net Investment Income Tax
The NIIT (otherwise known as Medicare tax) was enacted in 2013 as part of the Affordable Care Act (ACA), and it affects those who are considered ‘high earning’ by subjecting them to a 3.8% surtax on investments when their income is above:
- $200,000 for individuals
- $250,000 for married couples
This additional tax is a big reason why many American expats in the UK end up having to pay US expat taxes along with UK taxes, as they’re unable to offset their UK tax credits against the additional tax change in the form of the NIIT. You can learn more about the NIIT on the IRS website.
The Affordable Care Act and US Expats
The ACA as a whole has been a unique challenge for Americans living abroad, as many don’t carry US healthcare insurance and most foreign health care plans don’t qualify for the ‘minimum essential coverage’ that the ACA requires. However, there are several exemptions that can help expats, one being the Foreign Earned Income Exclusion (FEIE). You can be exempted from needing minimum essential coverage if you qualify for the FEIE, in one of two ways:
- Physical Presence Test: You’ll need to have foreign earned income, a tax home in a foreign country and be physically present in the foreign country for at least 330 days out of a 365-day period.
- Bona Fide Residence Test: You’ll need to have foreign earned income, a tax home in a foreign country and a bona fide resident of a foreign country for an entire calendar year with no intention of returning to the US permanently.
It’s worth noting that you don’t have to actually take the FEIE in order to be exempt from the ACA’s minimum essential coverage requirement – you must simply qualify for the FEIE. Also, some foreign health insurance plans that cover expats in and out of the US can qualify is minimum essential coverage.
How NIIT Changes Can Benefit Americans Expats in the UK
Generally speaking, there are a fairly large number of high-earning Americans living in the UK – and this group could see a big change with the proposed tax reform related to the Net Investment Income Tax (NIIT). According to President Trump’s proposed tax changes, the NIIT would be completely scrapped, meaning that American expats in the UK may be able to rest easier knowing they could save that 3.8% that would usually go toward the surtax.
However, the tax reform proposal is still in progress – while it has passed the House, the Senate has not yet given it the green light. If or when it does take effect, though, one thing is for sure: American expats in the UK – and in other countries abroad – may be relieved to know there’s one less tax to pay! Get more expat tax advice and tips for saving big by downloading a US expat tax guide.