I’ve been troubled by taxes recently.  We all grumble about high taxes and not having enough left over to live on, so I won’t go there.  But, I’m still trying to understand how and what taxes are taken out.

I suppose I’m lucky that my employer takes out the taxes for me.  It’s the same in the US when you work for a company.  And it looks relatively simple – they take out PAYE and NI.  NI, or National Insurance, is kind of like Social Security and PAYE is all the other taxes.  I don’t recall if they ever asked about my marital status.  Unlike the US, they don’t have “exemptions”, where you claim for yourself and all your dependents, and your taxes vary according to this.  However, they do allow for a certain amount of your pay to be tax-free.

I still cannot get used to being paid monthly.  Of course, it’s been only two months.  And the way they worked out the monthly pay was extremely baffling until I called them and they ran through it with me. They did admit it was a bit strange, but they felt it was the fairest way.  So, even if I work more days one month, I may get less pay.  It made it difficult to understand the taxation as well.

I had worked out my taxes using calculators on the internet and the figures there differed from each other as well as my actual taxes.  I’m not sure whether to be pleased or worried because it’s more in one and less in the other, NI and PAYE that is.

The other part of taxes that has me worried is filing.  In the US, you’re supposed to file, because sometimes you owe money and sometimes you’re due a refund, for various reasons.  Over here, it seems that most people aren’t required to file because their taxes should already be taken out correctly.  It’s only if you receive income from more than one source, if you have business-related expenses that you want to claim, or if you are self-employed that you have to file.

To make it more confusing, the deadline for filing by paper was at the beginning of October.  If you didn’t file it then, you will have to do it online and the deadline for that is the end of January.  I don’t understand why there is a 4-month discrepancy on that.  And that being the case, when is the actual tax year?  In the US, the tax year is the calendar year – January to January.  You receive your W-2s (tax statements) after January and you can file from that point until April 15th.

Then there’s the question of Child Tax Credits.  I believe I qualify for this, but do I claim for it by filing taxes?  Is this similar to “exemptions” for dependents in the US?

I may sound ignorant about the tax system, but if the Chancellor needs tax advice, then I shouldn’t feel so bad.

It’s a good thing that I haven’t worked long enough or earned enough to pay double taxes this year.  My US income tax form will be relatively blank.  It may be a different story next year, but by then, I hope to have learned enough about the UK taxes so that I won’t be cheated of my income. 

Finally, we managed to get money from our US account into our UK account.  The best advice our US bank gave us was to use our Visa card to get a cash advance against our US account.  It worked, although the manager seemed a bit skeptical.  Was she suspicious that we were trying to run off with someone else’s money?  It’s our money, in our account, and we have ID to prove who we are.  Granted, the initial advice to initiate an international wire transfer from the receiving end was dud advice, but that wasn’t our fault.

One of the reasons that we had such difficulty is that we are transferring money internationally, which meant dealing with the currency exchange.  Another reason, and probably the bigger reason, is that the US cards do not contain a special chip that the UK ones do.  We can use it to draw money from ATMs, but there are daily limits and you need to know the exchange rate, etc.  However, you may not use it as a debit card at any place here.  That’s because they have a special card reader that reads the chip.  At some places, they may be able to swipe it and use it as a Visa.  There’s no guarantee that it will work.  Our card has been rejected at several places.  Some places cannot even manually input the card numbers.

My question is, is this chip technology required in the EU?  Do all European countries implement it?  Will the US follow suit?  How much revenue is or will be lost if the UK shops cannot accept US cards?

It seems the move to “go paperless” is well and truly under way in Britain. Far more than in the US. Here, it seems to be a small part of a far broader agenda that you can never be far from no matter where you are or what you do: going green, doing your bit for the environment, saving the rainforests, countering climate change, fighting global-warming (or whatever the current in phrase the custard-slingers are bandying about).

Some bills are still sent in paper form, but many companies take bank details over the ‘phone at the time service commences and, unless you specify to the contrary, will proceed to set up a direct debit facility for regular monthly payment. Some companies are so anxious that you adopt this method of payment that they even offer discount incentives for going paperless.

In my experience, the following set up direct debit facilities at sign-up time: British Telecom (phone, internet service), the local government (council tax) and Swinton Insurance (car insurance).

The benefits of this system extend far beyond doing your small bit for the environment. It means you’ll never pay bills late and fewer visits to (and less time standing in line at) the post office. The downside is that it can be easier to lose track of your finances with multiple entities helping themselves to their cut month to month.

Well, I figured out how to input a foreign address into the TaxCut Online version.  You had to go back to a previous page and mark that you have a foreign address in order for it to adjust the form.  Sorry, my mistake.  However, if that was the case, they should have included that into their answer rather than tell the user that they can accept a foreign address and don’t tell you how.

Anyhow, it looks like we’ll be able to file online for free this year.  Same with the state tax – but we have been able to file that for free in previous years.

We used to do our own taxes on paper. But when the children were born, we found that we might have extra deductions and were confused about them. That’s when we decided to buy TurboTax to help with our tax preparation. However, after a couple years, we switched to H&R Block’s TaxCut because it was cheaper. We found no difference in the quality of the software. After many years of doing our taxes via software, and filing electronically in the last couple years, it seems we have forgotten many basics about tax preparation. And what we have just realised is that using tax software was completely unnecessary.

We’ve made our mistake and I worry that we will have some difficulty in rectifying it. It was easy to go along with all the hype that TurboTax and TaxCut want you to believe – that you might be doing your taxes wrong, you might be missing out on deductions, etc. They will help you through all the new legislation, blah, blah, blah. All you have to do is punch in the numbers and data they ask for and they do all the work. In later years, you can import data from the last return. They made it so easy. But then I realise I had done our taxes by hand previously. Yet, when I look back at the paper files we had, I find that I cannot understand how we did it back then. This year, we may have to go back to paper filing and I find the task almost daunting as we have been pampered in the last several years.

Yes, there may be many advantages to using tax software. For example, it is true that they update their software (even while you’re using it) to encompass any new tax legislation that come out during the tax year. And, some even offer tax help or advice via phone or email. Both TurboTax and TaxCut have different versions, with different levels of service from Basic to Premium. We were fooled into getting Premium one year, but found it was unnecessary and have stuck with Basic since. All that nonsense about getting the DeductionPro as an added benefit to either program is a waste for most people. We recently found TaxCut also has a Standard, which is cheaper than Basic. I do not have all the details but I believe it may be because the DeductionPro is not included. Do you need DeductionPro? As I said, for most people, no. To determine if you do, find out what your standard deduction is for the tax year. If you think that your gifts, donations and contributions to charities, etc., for the tax year exceeds the standard deduction, then you will want DeductionPro. This program allows you to itemise all your deductions to maximise on your refund.

In preparing for the tax season this year, we also found some free online software. One is available through H&R Block. However, in order to use it, you must answer all questions in sequential order according to what they want. Although they claim they can use your international address, the software did not accept our responses. We had to put in fake details in order to get through the program and see what our refund would be. It’s a nice way to get a preliminary. There may be others like this out there but we have not explored all of them yet. We also came onto the IRS website and found that they have two free online options. One is free software, which you need to download from one of several companies. This option is only available to those who made less than $56,000. The other option is essentially a blank IRS form which you can go through and fill in, then file electronically. This is sort of a ‘help-yourself’ option as it only offers help by having you scroll through the instructions. If we are unable to find a software that can support our international address, we will be forced to use this option. We would rather file electronically as the refund gets deposited into our account directly and quickly. Paper filing would mean they would have to cut us a check, mail it to our international address, then we’d have to mail it back to our bank.

Of course, to even complete the task of filing, I will need to dig into our boxes and find our last year’s return. That will be a task unto itself.

Tax time again. Just got my W-2s, so I’ll have to get down to filing that return. Unfortunately, I’ve already run into some obstacles. The first is that we now have an international address and that may cause problems. And until we resolve those issues, we cannot file.

Yes, even though we’ve moved out of the country, we still have to file taxes. Our reason is obvious, though. We are expecting a refund. However, even if we weren’t, they recommend that we do. This is to ensure that we will be able to claim deductions in the future. Apparently, expatriates are not aware of that. However, their website does state that those expatriates who want to make up for the past should download the last 3 years of tax forms and start filing. There are no deadlines and they will not be fined. In addition, the filing deadline each year for those living abroad is automatically extended until June 16th. Nevertheless, if you owe money, it needs to be sent by April 15th. If you cannot file by June 16th, you must submit a request for extension by that date, in order to extend the deadline until October 15th. They will accept whatever date is postmarked on the envelope as the filing date.

Expatriates need to also be aware that if they live and work outside the US, their income may be liable to taxation from both the US and the foreign country. The current level of income that is excluded from US taxation is now at $85,700. Anything above that would be liable for US taxes. However, when you file, you may be able to claim foreign tax credit – that is, you may be able to deduct the taxes that you paid towards the foreign government. For more information, you should contact a tax advisor at the US embassy.

I think the real killer in this taxing business is the exchange rate. It is not based on the current exchange at all, but on the rate in 2007. For example, the UK exchange rate is currently at $2.0018 per pound sterling. That means, if I earned 40K in the UK it equals a little over 80K in the US, rather than closer to 60K, at the current exchange rate. Only a few more grand and I would be liable to double taxation. Fortunately, or unfortunately, I am currently unemployed.

Some people may be confused about which forms to fill out for filing their taxes. The simple rule is to assume your status in the US prior to living abroad. That is, if you are a US citizen or if you had been a resident alien, you should file Form 1040. If you were and are a US nonresident alien, then you use Form 1040NR. Nonresident status only applies to those who were not given full residential rights, such as temporary students.

Finally, if you choose to file your taxes on paper (we have not done this in years), you may either turn it into the US Embassy in London, Paris, or Frankfurt (depending on where you live), or you may send it to Austin, Texas. And, if you have any questions, the US Embassy may be able to answer them. Or, if you were as lucky as I was, you will get a message stating they are understaffed and you may not have your call answered. They will instead direct you to call their Philadelphia office. I wonder what their walk-in service would be like.

There are lots of banks in England and with the vast number, you’d think you have a “choice”.  However, it turns out that some banks are actually owned by others, so the number is less than it appears.  In addition, what each of these banks offer to make themselves attractive are all really similar, so it doesn’t seem to matter where you bank, you’re getting pretty much the same thing. 

Right now, Lloyds TSB is trying to buy up HBOS (Hallifax Bank of Scotland), which would make it the largest bank in England.  Although this step would make it appear that Lloyds is quite stable, there are no guarantees in the current economic climate.  Nevertheless, we did open an account there.  Which isn’t saying much since we opened it with a zero deposit.  (I don’t think I’ve ever been able to open an account in the US without putting some money into it initially.)  Of course, the account is just sitting there open and we are unable to do anything with it except use a debit card to withdraw money at the bank’s ATM (it cannot be used elsewhere).  They call this a Cash Only Account.  Any withdrawals are unlikely given the balance.

Because of the current recession, the government recently lowered the interest rate.  Although it sounds very good to consumers who are spenders, it is not so good for the savers.  I’m a saver by nature, so the lower interest rate doesn’t do much for me.  In fact, it means I’m getting less interest on my savings.  That’s not good news for me.  The lower interest rate is to encourage spending and get  money circulating; however, given the recent “bust” in the housing market, etc., I’m surprised anyone would want to go out and get a mortgage right now.

The first thing I noticed over here is that the cost of living is relatively high when compared to the States.  Of course, this is taking into account the exchange rate.  It seems that most things you buy are equivalent in numeric value to those in the US, but with the exchange rate, it means it actually is at least one-and-a-half times more expensive.  Occasionally, you may find a bargain on an item that is quite exotic in the States but not here.  I wonder if that means that raw ingredients in an item are more costly over here.

Since moving here, England has gone into a recession.  The US had been drifting into it for a very long time.  I wonder what will happen once Obama has taken over.  Will we have to go back to the US because the cost of living is too high over here?

When we first moved here, the rate was very favorable to England, but now it is more favorable to the States.  So, in essence, the cost of living has improved somewhat.  Fortunately, or unfortunately, the rate is in constant flux.  If the rate continues in favor of the US, we will be unable to go back to the States in comfort.  It’s a sticky situation.