Foreign Tax Credit


G

garagecapital

I am a high-earning US citizen in Australia; I am paying about AU
$100,000 in taxes this year. I assume I can take this AU$100,000,
about US$73,000, and keep it as ca carry over for 10 years against any
US taxes I might owe, right?

What, if because of losses on rental property, and tax-deferred
contributions, and M-T-M futures, FX and options losses, I have no US
income. Or I only owe, say US$10,000 in US taxes. I get to carry over
US$63,000 in a US tax credit. right?

Okay, now what if I come back to the states on Dec. 31, permanently.
Can I still use my US$63,000 carry over for US taxes?

Someone told me that I can only use this carry over IF I also have
foreign income for that same tax year, which means you lose your carry
over pretty much when you come home -- if you don't go abroad again.
This can't be true can it? Please tell me I can use this,
hypothetical, US$63,000 carry over for up to 10 years in the States
even if I never earn another buck abroad.
 
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B

brew.one

I am a high-earning US citizen in Australia; I am paying about AU
$100,000 in taxes this year. I assume I can take this AU$100,000,
about US$73,000, and keep it as ca carry over for 10 years against any
US taxes I might owe, right?

What, if because of losses on rental property, and tax-deferred
contributions, and M-T-M futures, FX and options losses, I have no US
income. Or I only owe, say US$10,000 in US taxes. I get to carry over
US$63,000 in a US tax credit. right?

Okay, now what if I come back to the states on Dec. 31, permanently.
Can I still use my US$63,000 carry over for US taxes?

Someone told me that I can only use this carry over IF I also have
foreign income for that same tax year, which means you lose your carry
over pretty much when you come home -- if you don't go abroad again.
This can't be true can it? Please tell me I can use this,
hypothetical, US$63,000 carry over for up to 10 years in the States
even if I never earn another buck abroad.
I would first determine my current U.S. tax liability (on worldwide
income). Not
too many people qualify as "traders" instead of "investors" and are
able to
use mark-to-market (and claim net losses greater than $3,000). And it
sounds
like your income would be to high to claim a current loss on rental
property.
 
K

Katie

I am a high-earning US citizen in Australia; I am paying about AU
$100,000 in taxes this year. I assume I can take this AU$100,000,
about US$73,000, and keep it as ca carry over for 10 years against any
US taxes I might owe, right?

What, if because of losses on rental property, and tax-deferred
contributions, and M-T-M futures, FX and options losses, I have no US
income. Or I only owe, say US$10,000 in US taxes. I get to carry over
US$63,000 in a US tax credit. right?

Okay, now what if I come back to the states on Dec. 31, permanently.
Can I still use my US$63,000 carry over for US taxes?

Someone told me that I can only use this carry over IF I also have
foreign income for that same tax year, which means you lose your carry
over pretty much when you come home -- if you don't go abroad again.
This can't be true can it? Please tell me I can use this,
hypothetical, US$63,000 carry over for up to 10 years in the States
even if I never earn another buck abroad.

--

I think your "someone" is right. The purpose of the foreign tax
credit is to offset the US tax on foreign source income -- not the US
tax on US source income. There is now a one-year carryback and 10-
year carryforward of unused foreign tax credits; however, under IRC
Sec 904, the credit claimed in any taxable year cannot exceed the
proportion of the US tax liability for that year that arises from
foreign source income.

Katie in San Diego
 
A

adwagner

Someone told me that I can only use this carry over IF I also have
foreign income for that same tax year, which means you lose your carry
over pretty much when you come home -- if you don't go abroad again.
This can't be true can it? Please tell me I can use this,
hypothetical, US$63,000 carry over for up to 10 years in the States
even if I never earn another buck abroad.
You don't have to go abroad to have "foreign earned income" once you
are back in the States. You have to earn the income while abroad, and
have it taxed when you are living in the States. I am not a
practicing CPA, but I could make a strong case for including part of
the distributions from your tax deferred plans. You earned the money
while overseas, and you are taxed on it when you take distributions
later in the US. You will have to do some allocating - how much was
deferred while here in the States vs. how much was deferred while
living overseas - and you may only be able to claim the principal that
you deposited into the tax deferred plan.

In your situation, I would look to see whether you can take any
distributions from your tax deferred plans within the next 10 years.
You may feel that taking early distributions is not necessary, but if
you can do so with zero tax.....then it may make a lot of sense.

If you received restricted stock or stock options while abroad, you
may be in luck. If you exercise your options while in the USA, that
gain may qualify as foreign source income. Same thing applies to the
income from having your restricted shares lapse while in the USA.

Best wishes.
 
G

garagecapital

You don't have to go abroad to have "foreign earned income" once you
are back in the States.  You have to earn the income while abroad, and
have it taxed when you are living in the States.  I am not a
practicing CPA, but I could make a strong case for including part of
the distributions from your tax deferred plans.  You earned the money
while overseas, and you are taxed on it when you take distributions
later in the US.  You will have to do some allocating - how much was
deferred while here in the States vs. how much was deferred while
living overseas - and you may only be able to claim the principal that
you deposited into the tax deferred plan.

In your situation, I would look to see whether you can take any
distributions from your tax deferred plans within the next 10 years.
You may feel that taking early distributions is not necessary, but if
you can do so with zero tax.....then it may make a lot of sense.

If you received restricted stock or stock options while abroad, you
may be in luck.  If you exercise your options while in the USA, that
gain may qualify as foreign source income.  Same thing applies to the
income from having your restricted shares lapse while in the USA.

Best wishes.
Ok, all of this is understood. So, basically only the rare case where
my US income tax liability is less than zero when I have taxes on
foreign earned income would I not have any use in the carry-over. If I
earned 300000 AU and paid $100000 au in Tax year 1 but because I had a
huge loss of of, say 3000000 AU and thus had no US tax liability, even
with my worldwide income. Then I would carry over the $100000 AU
foreign tax credit. And then, if I was in the US the following year
and had no non-US income I would be out of luck with the carryover. Do
I have this unlikely scenario right?

Also, is this basically try with respect to AU and US taxes: the
amount of taxes I pay is going to be the highest of the two countries,
as one will offset the other -- and since it is AU, I carry over?
 
K

Katie

Ok, all of this is understood. So, basically only the rare case where
my US income tax liability is less than zero when I have taxes on
foreign earned income would I not have any use in the carry-over. If I
earned 300000 AU and paid $100000 au in Tax year 1 but because I had a
huge loss of of, say 3000000 AU and thus had no US tax liability, even
with my worldwide income. Then I would carry over the $100000 AU
foreign tax credit. And then, if I was in the US the following year
and had no non-US income I would be out of luck with the carryover. Do
I have this unlikely scenario right?

Also, is this basically try with respect to AU and US taxes: the
amount of taxes I pay is going to be the highest of the two countries,
as one will offset the other -- and since it is AU, I carry over?

Your US tax liability would never be "less than zero." To the extent
that your foreign (Australian) tax liability exceeds your US tax
liability in a year when you have elected to use the foreign tax
credit (rather than deduct the foreign taxes), you have an FTC to
carry back 1 year and forward 10. You can utilize the credit only in
a year when you have foreign source income. I don't see how this is
an "unlikely" scenario.

I don't understand your last paragraph ... maybe if I read "true" for
"try," yes, it is true for Australian taxes but it is also true for
most other foreign taxes as well -- not just Australian taxes.

Katie in San Diego
 
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B

brew.one

although no one else has picked up on this (and maybe I'm all wet), I
strongly
advise that you get help from an EA or other tax professional in
regard to
your accounting method. In a previous post, you told us you were
"choosing"
not to use m-t-m in 2007--now you indicate that you will use m-t-m to
claim a
large loss against ordinary income. Changes in accounting methods must
be
applied for in advance and approved by the IRS.
 

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