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You are correct - as a permanent resident (green card holder) - you are required to file income tax return.
All income worldwide for US citizens and resident aliens should be reported on the federal tax return and in general is subject for US federal income tax.
The person may qualify for the foreign earned income exclusion - he/she should: -- Work and reside outside the United States for at least 330 days during the year, or -- Meet either the Bona Fide or Physical Presence tests.If the person qualifies, he/she may exclude up to $85,700 (2007) $87,600 (2008) in foreign wages. To receive that exclusion - the taxpayer should file either form 2555 or 2555EZ.
Here are forms you likely need:
Please be aware that - the exclusion above will not affect self-employment taxes - only income taxes. Only earned income is excludable. For instance dividends, investment income, etc - are not excludable.
In additional - if the same income is taxable in the US and abroad - the person may claim a credit for taxes paid in foreign country - so the same income would not be taxed twice. Use the form 1116 - http://www.irs.gov/pub/irs-pdf/f1116.pdf please find instructions here - http://www.irs.gov/pub/irs-pdf/f1116.pdf
If you don't mind, I need something a little more substantial and clear as to what we should do. I already know of the FEIE and PPT. What I really need to know is a plan to minimize our taxes. For instance:
1) Do we pay pay income taxes in the UK?
2) How does FEIE work against the taxes I have paid in the UK and should we apply for the exclusion?
3) Can we continue to claim deductions on our US tax return for mortgage interest payments?
4) We contribute heavily to charity and will continue to do so from the UK. Can we deduct these contributions from our US tax returns?
My wife and I each earn approximately $300K/annum, if that would help in providing some advice.
1) Do we pay income taxes in the UK?
If you are residents of UK - yes - your income would be taxable - you will find here some information about UK income tax rates and allowances - http://www.hmrc.gov.uk/rates/it.htm
The Foreign Earned Income Exclusion (FEIE) is used on US tax return - it has no affect on your UK taxes. The amount of foreign earned income you can exclude per year is limited by $87,600 ($91400 in 2009) for each person - so together, you can exclude as much as $175,200 for the 2008 tax year. In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct from their foreign earned income a foreign housing amount. For 2008, the housing amount limitation is $26,280 for the tax year.
Yes - - assuming you are not filing US tax return as a not-resident alien - you may claim mortgage interest deduction for one primary home and one secondary home.
You may deduct charitable contributions to qualified organizations in the US that have required registration with the IRS. You will not be able to deduct contributions to UK charities.