Life in the UK comes with a lot of perks, free healthcare, cozy pubs, and the ease of hopping over to Europe for a long weekend. But there’s a downside many Americans don’t see coming: the U.S. tax system doesn’t care that you’ve moved. You’re still on the hook.
A surprising number of U.S. expats in the UK get tripped up by this. If you’ve been winging it or avoiding it altogether, you’re definitely not alone. Here are some of the biggest mistakes Americans abroad make with their U.S. taxes, plus how to fix them before they become a real headache.
1. Thinking You Don’t Have to File U.S. Taxes Anymore
This one’s incredibly common. Many people assume that once they’re living overseas, especially if they’re paying local taxes and earning less than the U.S. filing threshold, they’re off the IRS’s radar.
Not quite.
If you’re a U.S. citizen or green card holder, you still have to file a tax return every single year. Doesn’t matter if:
- You live in London full-time
- You already pay tax to HMRC
- You earn below U.S. income thresholds
The IRS taxes you based on citizenship, not location. That doesn’t go away unless you’ve formally renounced.
2. Forgetting to Report UK Bank Accounts (FBAR)
Have more than $10,000 combined in your UK accounts at any point in the year? That triggers the FBAR (FinCEN Form 114). It’s separate from your regular tax return and easy to miss.
Accounts that count include:
- Your UK checking and savings
- ISAs
- Pensions
- Investment accounts
The penalties for ignoring it are, frankly, brutal. It can go up to $10,000 per violation if it’s deemed non-willful. If they think you knew and skipped it anyway? Way worse.
3. Confusing FBAR with FATCA (Form 8938)
They sound similar, but they’re not the same. FATCA kicks in if your total foreign assets cross certain thresholds, starting at $200,000 if you’re single and living abroad.
Many expats miss one or both just because they don’t realize these are two separate reporting requirements. And yes, you can be penalized twice if you skip both.
4. Assuming UK Tax-Free Means IRS Tax-Free
ISAs are great in the UK. No local tax on growth or withdrawals sounds like a dream, right? But the IRS doesn’t recognize that benefit.
- ISAs? Taxable.
- SIPPs and employer pensions? Often taxable or reportable, sometimes as foreign trusts.
- UK mutual funds or unit trusts? They might be treated as PFICs. A nightmare to report and heavily taxed if mishandled.
Just because something is “tax-free” locally doesn’t mean it’s invisible to the IRS.
5. Not Claiming Exclusions or Credits You’re Actually Entitled To
A lot of expats either overpay or end up with a scary IRS letter because they didn’t use the tools available to them.
- The Foreign Earned Income Exclusion (FEIE) is a US tax tool that lets you exclude up to around $130,000 of income you made in the UK from your US taxes.
- The Foreign Tax Credit (FTC) gives you credit for the tax you already paid to HMRC.
Used properly, these can eliminate your U.S. tax bill entirely. But if you don’t file, or file wrong, you can’t claim them.
6. Falling Behind and Thinking You’re Doomed
If you’ve missed a few (or several) years of U.S. returns or FBARs, don’t panic. There’s something called the Streamlined Foreign Offshore Procedure. It’s basically a no-penalty catch-up program if your mistake was unintentional.
You’ll need to:
- Be living outside the U.S.
- Prove your non-compliance was non-willful
- File 3 years of late tax returns
- File 6 years of FBARs
- Submit a statement explaining the oversight
It’s not fun, but it’s absolutely manageable and a huge relief once you’ve done it.
7. Believing Renunciation Fixes Everything Instantly
Some people get so fed up, they start looking into renouncing their U.S. citizenship. That can solve future tax problems—but it’s not a quick escape hatch.
To renounce, you’ll need:
- 5 years of clean, fully compliant tax filings
- To pay the $2,350 renunciation fee
- Possibly deal with an exit tax if your assets are over a certain threshold
And once it’s done, it’s done. No turning back. For most, it’s something to consider only after you’re fully caught up and sure it’s the right long-term move.
Bottom Line
Taxes as an American expat are complicated, no way around that. But they’re not impossible. If you avoid these common missteps, and get the right help from Expat Tax Online, staying compliant is doable (and less scary than it sounds). The worst thing you can do is ignore it and hope it goes away.
It won’t. But you’ve got options.