Introduction: Expat Tax Phoenix Planning in the State That Credits HMRC
The expat tax Phoenix story is the one piece of good news in American state taxation for British families. Arizona charges a flat 2.5%, the lowest flat rate of any state with an income tax. More importantly, Arizona is one of the very few states that credits income tax you pay to a foreign country. Consequently, UK tax on your London flat can wipe out the Arizona tax on the same profit.
At TaxYork, we prepare returns for British founders, engineers, healthcare executives and retirees in Phoenix, Scottsdale, Paradise Valley and Chandler. In our experience, almost none of them claim the Arizona foreign credit. Their preparers assume Arizona behaves like Massachusetts or Georgia. It does not. Therefore the expat tax Phoenix opportunity usually sits unclaimed on returns already filed.
Expat Tax Phoenix Basics: Three Systems, One Household
A British household in Phoenix deals with three tax systems at once. First, federal income tax reaches worldwide income, softened by the foreign tax credit on IRS Form 1116. Second, Arizona taxes the same worldwide income at 2.5%. Third, the United Kingdom keeps taxing UK property, UK workdays and certain pensions. Accordingly, sound expat tax Phoenix compliance treats all three as one computation.
Who This Guide Is Written For
This guide addresses high-net-worth British nationals, dual national US UK families and accidental Americans living in the Phoenix metro area. Specifically, it suits company owners, investment professionals, senior executives and retirees who hold UK property, pensions and portfolios. If your household income reaches six figures, every expat tax Phoenix rule below carries a real cost or a real refund. For the national picture, read our complete guide to UK expat tax in the USA.
Why Phoenix Beats Boston, Atlanta and Chicago
We have written about several other states in this series. Massachusetts adds a 4% surtax and credits only Canada. Georgia honours the exclusion but credits no foreign country at all. Illinois charges 4.95% with no foreign credit. Arizona combines the lowest rate with a genuine foreign credit. As a result, the expat tax Phoenix position is the strongest of any major metro we cover.
How Arizona Builds the Expat Tax Phoenix Bill
The rate is low. Nevertheless, the base and the credits decide what the expat tax Phoenix bill actually is.
The Flat 2.5% Rate for 2026
Arizona charges a single 2.5% rate on taxable income for 2026. The state moved to a flat rate in 2023 and has held it there since. Importantly, Phoenix and the other Arizona cities levy no local income tax. Therefore 2.5% is the complete state charge on income, whatever your level of earnings.
Arizona Starts From Federal Adjusted Gross Income
Arizona computes taxable income from federal adjusted gross income, then applies its own additions and subtractions. That design matters. Anything the Internal Revenue Code removes before AGI never reaches the Arizona return. Consequently, federal planning flows directly into the expat tax Phoenix result.
The Foreign Earned Income Exclusion Survives
The foreign earned income exclusion reaches $132,900 for 2026 under Revenue Procedure 2025-32. It removes salary before federal AGI. Arizona contains no add-back for it. Therefore the exclusion survives into the Arizona computation, just as it does in Georgia. Massachusetts, by contrast, recaptures it by statute.
House Bill 4168 and the 2026 Conformity Update
Governor Hobbs signed House Bill 4168 on 13 June 2026. It moved the Arizona conformity date to 1 January 2026, adopting much of the 2025 federal legislation. However, Arizona decoupled in important places. Notably, it caps the state deduction for state and local taxes at $10,000 from 2026, well below the federal figure. It also refuses federal bonus depreciation. Accordingly, itemising British homeowners in Paradise Valley may see a different deduction on each return.
Arizona Form 309: The Credit Most States Refuse
This section contains the single most valuable fact in the guide. Almost no competing page states it.
What Section 43-1071 Actually Says
Arizona grants residents a credit for "net income taxes imposed by and paid to another state or country." The words "or country" change everything. The text sits in Arizona Revised Statutes section 43-1071. Furthermore, the statute defines a foreign net income tax as one that qualifies for the federal credit under sections 901 and 903. UK income tax meets that test.
The Source Rule That Decides Eligibility
The credit has a firm condition. It applies only to income "derived from sources within" the foreign country and taxable there "irrespective of the residence or domicile of the recipient." In plain terms, the UK must have the right to tax you as a non-resident. UK rental profits pass that test. So do earnings for workdays physically spent in Britain. Therefore the credit reaches exactly the income British families in Phoenix most often keep.
The Reciprocity Rule and Why It Rarely Bites
The statute denies the credit where the other country gives Arizona residents a credit for Arizona tax. Britain does not do that for someone living in Phoenix. HMRC relieves foreign tax for UK residents, not for non-residents paying UK tax on UK income. Consequently, the reciprocity bar does not normally block an expat tax Phoenix claim.
The Limit, the Timing and the Paperwork
The credit cannot exceed the Arizona tax on the same income. At 2.5%, that cap is usually lower than the UK tax paid, so the Arizona charge on qualifying income disappears. Additionally, you claim it only in the year the income is taxed, with no carryforward. You must complete Arizona Form 309 even if you never filed Form 1116 federally.
Claiming Both the Federal and Arizona Credits
The Arizona credit operates on its own. Claiming the federal foreign tax credit does not remove it. Therefore one pound of UK tax can relieve federal tax on Form 1116 and Arizona tax on Form 309 together. That dual relief is the heart of the expat tax Phoenix advantage.
What the Arizona Credit Cannot Reach
The source rule cuts both ways. Britain does not tax a non-resident on UK dividends, UK bank interest or gains on UK shares. Consequently, no UK tax exists on that income, and nothing reaches Form 309. The same applies to income inside an ISA. Therefore a Phoenix resident with a large UK share portfolio pays the full 2.5% on it, with no state relief at all.
Selling a UK Property From Phoenix
A sale of UK residential property is different. Britain taxes non-residents on gains from UK land under the non-resident capital gains rules, whatever their residence. That UK tax is UK-source and imposed irrespective of residence. Accordingly, it qualifies for the Arizona credit. However, Britain usually taxes a non-resident only on growth since April 2015, while Arizona taxes the whole federal gain. The credit therefore covers the portion Britain taxes, where the UK charge at 24% far exceeds Arizona's 2.5%. Any earlier growth still bears the Arizona rate. Even so, this point makes the expat tax Phoenix result on a London sale far cleaner than in any other state we cover.
The Cap and the Lost Excess
The credit never exceeds the Arizona tax on the same income. Because UK rates run far above 2.5%, most UK-taxed income produces an excess that simply vanishes at state level. Moreover, Arizona allows no carryback and no carryforward. Therefore timing matters less than in the federal system, but the claim must be made in the right year.
Converting Pounds and Proving Payment
Arizona needs the UK tax expressed in dollars. We use the same exchange rate basis as the federal Form 1116 so both returns agree. Additionally, keep the HMRC calculation, the non-resident landlord statements and proof of payment. The Arizona Department of Revenue can ask for them, and a Form 309 claim without evidence fails on examination. Good records are therefore part of every expat tax Phoenix file we prepare.
Your UK Pension in Arizona
Pension treatment in Arizona is less generous than the credit, and British retirees often misjudge it.
Private and Workplace Pensions Are Fully Taxable
Arizona gives no subtraction for private pensions, which surprises many expat tax Phoenix retirees. Its $2,500 pension subtraction covers only United States federal, Arizona state and Arizona local government pensions. A UK SIPP, personal pension or company scheme therefore reaches Arizona in full at 2.5%. Meanwhile, the UK usually stops taxing that pension under the treaty once HMRC issues a no-tax code. As a result, there is normally no UK tax to credit.
Watch the Emergency Tax Code
HMRC often deducts tax from the first pension payment under an emergency code. That deduction is refundable, not a final liability. Accordingly, it is not a tax "paid" for credit purposes. Reclaim it from HMRC rather than claiming it on Form 309. Otherwise, a later refund triggers repayment under section 43-1071(B), with interest.
NHS, Teachers' and Local Government Pensions
UK government pensions follow a different treaty rule. Article 19 generally reserves them to Britain. For a British national holding a green card, the US saving clause usually lets America tax the pension too. In that case, the UK tax paid is exactly the kind the Arizona credit can reach. By contrast, a British executive on an E-2 or L-1 visa may be exempt in America altogether. The US-UK double taxation convention sets the rules, and the expat tax Phoenix result depends on your immigration status.
Social Security and the UK State Pension
Arizona exempts Social Security entirely, a helpful expat tax Phoenix point for dual national US UK retirees. The UK State Pension is taxable in America and flows through federal AGI into Arizona. Britain does not tax it for a US resident. Therefore it attracts 2.5% in Arizona with no credit available.
Residency, Winter Visitors and Community Property
Arizona residency rules suit British snowbirds, but the expat tax Phoenix position still needs care.
The Nine-Month Presumption
Arizona presumes you are a resident if you spend more than nine months of the tax year in the state. That is a longer threshold than the 183 days used elsewhere. You can rebut the presumption by showing a temporary or transitory purpose. The definitions sit in section 43-104. Therefore a British retiree wintering in Scottsdale usually remains a non-resident, provided the facts support it.
Domicile Still Counts
Presence is only one route. Anyone domiciled in Arizona stays a resident while temporarily absent. Consequently, a British family that buys a Paradise Valley home, registers to vote and moves its children's schooling has become resident, whatever the day count. Our expat tax Phoenix reviews always test both routes.
The Arrival Year
Families arriving mid-year file as part-year residents, and the expat tax Phoenix arrival year always deserves a second look. Arizona then taxes worldwide income only from the date residency began. In our experience, many arrivals file a full-year return instead. That mistake hands Arizona months of pre-arrival UK income.
Arizona Is a Community Property State
Arizona is one of nine community property states. Income earned during marriage generally belongs half to each spouse. Where both spouses file jointly, the split rarely matters. However, where one spouse is a nonresident alien, section 879 of the Internal Revenue Code overrides the community split for earned income. That rule shapes every expat tax Phoenix return for a mixed-nationality couple.
UK Property, Portfolios and Reporting From Phoenix
Most British arrivals keep UK assets. Therefore their treatment shapes the real expat tax Phoenix cost, often more than the rate itself.
UK Rental Profits Under the Non-Resident Landlord Scheme
A British expat in Phoenix who lets a UK property pays UK tax through the non-resident landlord scheme. British nationals generally keep the UK personal allowance after leaving. Federally, Form 1116 relieves the American charge. In Arizona, Form 309 relieves the state charge. Consequently, UK rental income is the best-protected income a Phoenix resident holds.
Your UK Return Still Matters in Arizona
The Arizona credit depends on UK tax that is properly assessed. Therefore the UK Self Assessment return is part of the expat tax Phoenix file, not a separate chore. Most British landlords living abroad file the SA109 residence pages each year. HMRC confirmed that SA109 filers are temporarily exempt from Making Tax Digital for Income Tax for 2026 to 2027. However, the exemption ends in April 2027 for anyone whose gross UK property receipts exceed £30,000. From then on, quarterly digital updates apply, and a late or estimated UK figure weakens the Arizona claim.
Keep the Two Years Aligned
The UK tax year ends on 5 April, while Arizona uses the calendar year. Consequently, UK tax for one calendar year straddles two UK returns. We apportion it by month and document the method, so the Form 309 figure ties back to HMRC calculations. That reconciliation is dull, but it is exactly what an Arizona examiner asks for first in any expat tax Phoenix review.
ISAs, Dividends and Offshore Funds
An ISA has no American equivalent. Income inside it is taxable federally and in Arizona. Moreover, Britain charges no tax on it, so no credit exists. Similarly, UK dividends carry no UK withholding for a non-resident, leaving nothing to credit. UK funds are usually passive foreign investment companies, and the resulting income flows straight into the Arizona base.
FBAR, Form 8938 and Missed Reporting
Any US person with foreign accounts above $10,000 in aggregate must file the FBAR with FinCEN. Separately, Form 8938 under FATCA applies at higher thresholds. Our FBAR and FATCA reporting service handles both. Where returns are late, the IRS offers the Streamlined Filing Compliance Procedures to taxpayers whose failures were not wilful.
Moving From California to Arizona
Many British families reach Phoenix from California. That route creates its own expat tax Phoenix questions in the move year.
California Credits No Foreign Tax
California taxes residents on worldwide income at rates up to 13.3%. It also refuses any credit for foreign income tax, and it does not follow the US-UK treaty. Consequently, UK rental profit earned while living in San Francisco suffers full California tax with no relief. Moving to Arizona therefore changes two things at once: the rate falls sharply, and UK tax starts to count.
The Part-Year Split Between Two States
In the move year, you file part-year returns in both states. California taxes worldwide income until residency ends, and Arizona taxes it afterwards. Each state also taxes income sourced within it during the other period. Accordingly, UK rental profit must be split by date, and only the Arizona portion can use Form 309.
Restricted Stock and Deferred Pay After the Move
California continues to tax equity that vests after you leave, in proportion to the workdays you spent there between grant and vest. Arizona then taxes the same income as a resident. However, Arizona does credit tax paid to another state on income sourced there. Therefore a British executive who moves with unvested restricted stock needs a workday record that satisfies both states. We build that record into every expat tax Phoenix relocation file.
Worked Case Study: A British Founder in Scottsdale
Numbers make the expat tax Phoenix position concrete. The following composite case uses 2026 figures.
The Position Before Review
Oliver, a British national with a green card, runs a software company from Scottsdale. He earns $600,000, including $65,000 for 40 workdays spent in London. He also lets a Fulham flat producing UK profit of £80,000. His wife Emma, also British, draws an NHS pension of £30,000. The couple pay UK tax of roughly $20,000 on Oliver's London workdays, $24,700 on the flat and $4,400 on Emma's pension.
Where the Money Leaked
Their previous preparer filed accurate federal returns with full Form 1116 relief. However, he never filed Arizona Form 309. As a result, Arizona charged 2.5% on all three UK-taxed items with no relief. The annual Arizona tax on those items came to roughly $1,625 on the workdays, $2,540 on the flat and $950 on the pension.
What Changed After Review
We filed Form 309 for 2026 and amended the open prior years. Because UK tax exceeded Arizona tax on every item, the credit removed the Arizona charge on all three entirely. The recurring saving is about $5,100 a year. Across three amended years, the recovery reached roughly $15,300 plus interest.
The Wider Lesson
At 2.5%, the sums are smaller than in Boston. Nevertheless, every dollar here is a pure refund. In our experience, expat tax Phoenix households overpay because nobody files the form, not because the law is against them.
How TaxYork Can Help
We prepare US and UK returns together for high-net-worth British and dual national families across the Phoenix metro. Specifically, we claim Form 309 wherever UK tax qualifies and test residency against the nine-month presumption. Furthermore, we handle missed FBAR filings, missed US tax returns and unreported UK pension or investment accounts through the right catch-up route. Our US tax return preparation service covers the federal and Arizona filings together.
Our work covers annual expat tax Phoenix compliance, Article 19 pension positions, non-resident landlord reporting and community property allocations. In addition, we coordinate with UK advisers so both returns agree. Professional guidance from the ICAEW and the Chartered Institute of Taxation informs how we document every position.
Conclusion
Arizona is the most favourable major state for British households. The rate is 2.5%, cities levy no income tax and the federal exclusions flow straight through. Above all, section 43-1071 credits UK income tax, which almost every other state refuses. That credit can remove the Arizona charge on UK rents, UK workdays and many UK government pensions.
However, the credit is not automatic. You must file Form 309, the UK tax must be a final liability, and the income must be UK-source. Ultimately, the expat tax Phoenix outcome depends on claiming relief that most preparers overlook. To summarise, review your filed Arizona returns before the open years close.
Contact Us
If you hold UK property, pensions or investments while living in the Phoenix area, we can review your expat tax Phoenix position. Please contact us to discuss your circumstances, or book a consultation with a specialist who prepares both sides of the Atlantic. You can reach the team at hello@taxyork.com or on 020 3488 8606.
Disclaimer
This article provides general information only and does not constitute tax advice. Tax rules change frequently, and their application depends entirely on your individual circumstances. TaxYork accepts no liability for action taken or not taken on the basis of this content. You should obtain professional advice tailored to your position before acting. Useful background reading is available from the IRS international taxpayers pages and HM Revenue and Customs. Further guidance comes from MoneyHelper and Investopedia on the foreign tax credit.