Foreign tax credit while US expat

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Topic Author
assyadh
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Joined: Tue Sep 18, 2018 12:44 pm

Foreign tax credit while US expat

Post by assyadh » Sun Apr 14, 2019 7:21 pm

Hi everyone,

Quick tax question here.

Let's say I live overseas as a US Citizen, and I receive dividends from a US based brokerage account (VTI etc).

My country of residence would impose a dividend taxation of 30%.

Can this be used as a foreign tax credit? (I would not have foreign earned income, so the foreign tax credit option is better for me).

Iirc the rules for a foreign tax credit is that the source of the income must be foreign. In this case it is not, but the tax is still accrued in a foreign country.

Any ideas?

Thanks :beer

Gufomel
Posts: 334
Joined: Sat Feb 14, 2015 9:52 pm

Re: Foreign tax credit while US expat

Post by Gufomel » Sun Apr 14, 2019 7:30 pm

Does your country of residence not allow a foreign tax credit for the US tax on your US source income?

Topic Author
assyadh
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Joined: Tue Sep 18, 2018 12:44 pm

Re: Foreign tax credit while US expat

Post by assyadh » Mon Apr 15, 2019 1:13 am

It does, but it's unclear to me how the process would work.

The impact should be low as we are talking 0% vs 30% in my country of residence.

Gufomel
Posts: 334
Joined: Sat Feb 14, 2015 9:52 pm

Re: Foreign tax credit while US expat

Post by Gufomel » Mon Apr 15, 2019 7:28 am

You typically end up paying the higher of the two tax rates when your income is subject to tax in two countries. A foreign tax credit is intended to prevent double taxation, not help you pay only the tax rate that you would have in your home country.

If you owed 30% on your dividend in your country of residence, and 15% US tax on your US dividend, then typically your country of residence would allow a foreign tax credit for your US tax. You would end up paying 15% US tax plus 15% tax (30% - 15% FTC) in your country of residence, for a total of 30%. But since your US tax in this case is 0%, you pay 30% in your country of residence with no FTC, but same end result of 30% worldwide tax.

If you are on an expat assignment with your employer, you may be under a tax equalization policy in which they might cover the additional tax liability that you would not have paid on your personal income had you remained in the US. But every employer has different policies for expat assignments, so it depends on your policy.

Topic Author
assyadh
Posts: 88
Joined: Tue Sep 18, 2018 12:44 pm

Re: Foreign tax credit while US expat

Post by assyadh » Mon Apr 15, 2019 12:42 pm

Gufomel wrote:
Mon Apr 15, 2019 7:28 am
You typically end up paying the higher of the two tax rates when your income is subject to tax in two countries. A foreign tax credit is intended to prevent double taxation, not help you pay only the tax rate that you would have in your home country.

If you owed 30% on your dividend in your country of residence, and 15% US tax on your US dividend, then typically your country of residence would allow a foreign tax credit for your US tax. You would end up paying 15% US tax plus 15% tax (30% - 15% FTC) in your country of residence, for a total of 30%. But since your US tax in this case is 0%, you pay 30% in your country of residence with no FTC, but same end result of 30% worldwide tax.

If you are on an expat assignment with your employer, you may be under a tax equalization policy in which they might cover the additional tax liability that you would not have paid on your personal income had you remained in the US. But every employer has different policies for expat assignments, so it depends on your policy.
That's what I thought as well. The thing that confuses me is that the foreign tax credit should be applied towards taxes on foreign source income.

The brokerage account wouldn't be foreign, neither the assets. it would be US based

ivk5
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Joined: Thu Sep 22, 2016 9:05 am

Re: Foreign tax credit while US expat

Post by ivk5 » Mon Apr 15, 2019 12:56 pm

assyadh wrote:
Mon Apr 15, 2019 12:42 pm
Gufomel wrote:
Mon Apr 15, 2019 7:28 am
You typically end up paying the higher of the two tax rates when your income is subject to tax in two countries. A foreign tax credit is intended to prevent double taxation, not help you pay only the tax rate that you would have in your home country.

If you owed 30% on your dividend in your country of residence, and 15% US tax on your US dividend, then typically your country of residence would allow a foreign tax credit for your US tax. You would end up paying 15% US tax plus 15% tax (30% - 15% FTC) in your country of residence, for a total of 30%. But since your US tax in this case is 0%, you pay 30% in your country of residence with no FTC, but same end result of 30% worldwide tax.

If you are on an expat assignment with your employer, you may be under a tax equalization policy in which they might cover the additional tax liability that you would not have paid on your personal income had you remained in the US. But every employer has different policies for expat assignments, so it depends on your policy.
That's what I thought as well. The thing that confuses me is that the foreign tax credit should be applied towards taxes on foreign source income.

The brokerage account wouldn't be foreign, neither the assets. it would be US based
You might want to reread what Gufomel wrote- not sure you got it.

My understanding, consistent with what Gufomel wrote, is you will not get a US credit for tax paid in your country of residence for VTI.

Gufomel
Posts: 334
Joined: Sat Feb 14, 2015 9:52 pm

Re: Foreign tax credit while US expat

Post by Gufomel » Mon Apr 15, 2019 3:56 pm

assyadh wrote:
Mon Apr 15, 2019 12:42 pm
Gufomel wrote:
Mon Apr 15, 2019 7:28 am
You typically end up paying the higher of the two tax rates when your income is subject to tax in two countries. A foreign tax credit is intended to prevent double taxation, not help you pay only the tax rate that you would have in your home country.

If you owed 30% on your dividend in your country of residence, and 15% US tax on your US dividend, then typically your country of residence would allow a foreign tax credit for your US tax. You would end up paying 15% US tax plus 15% tax (30% - 15% FTC) in your country of residence, for a total of 30%. But since your US tax in this case is 0%, you pay 30% in your country of residence with no FTC, but same end result of 30% worldwide tax.

If you are on an expat assignment with your employer, you may be under a tax equalization policy in which they might cover the additional tax liability that you would not have paid on your personal income had you remained in the US. But every employer has different policies for expat assignments, so it depends on your policy.
That's what I thought as well. The thing that confuses me is that the foreign tax credit should be applied towards taxes on foreign source income.

The brokerage account wouldn't be foreign, neither the assets. it would be US based
Sourcing of income is based on the type of income (employment income, dividends, etc).

Dividends are sourced based on the country of incorporation of the company issuing the dividend, not the location of the brokerage account. For VTI, this would be essentially 100% US source income. You can not claim a foreign tax credit on your US tax return non-US taxes paid on US source income.

Topic Author
assyadh
Posts: 88
Joined: Tue Sep 18, 2018 12:44 pm

Re: Foreign tax credit while US expat

Post by assyadh » Mon Apr 15, 2019 4:33 pm

Gufomel wrote:
Mon Apr 15, 2019 3:56 pm
assyadh wrote:
Mon Apr 15, 2019 12:42 pm
Gufomel wrote:
Mon Apr 15, 2019 7:28 am
You typically end up paying the higher of the two tax rates when your income is subject to tax in two countries. A foreign tax credit is intended to prevent double taxation, not help you pay only the tax rate that you would have in your home country.

If you owed 30% on your dividend in your country of residence, and 15% US tax on your US dividend, then typically your country of residence would allow a foreign tax credit for your US tax. You would end up paying 15% US tax plus 15% tax (30% - 15% FTC) in your country of residence, for a total of 30%. But since your US tax in this case is 0%, you pay 30% in your country of residence with no FTC, but same end result of 30% worldwide tax.

If you are on an expat assignment with your employer, you may be under a tax equalization policy in which they might cover the additional tax liability that you would not have paid on your personal income had you remained in the US. But every employer has different policies for expat assignments, so it depends on your policy.
That's what I thought as well. The thing that confuses me is that the foreign tax credit should be applied towards taxes on foreign source income.

The brokerage account wouldn't be foreign, neither the assets. it would be US based
Sourcing of income is based on the type of income (employment income, dividends, etc).

Dividends are sourced based on the country of incorporation of the company issuing the dividend, not the location of the brokerage account. For VTI, this would be essentially 100% US source income. You can not claim a foreign tax credit on your US tax return non-US taxes paid on US source income.

Thanks Gufomel, that was indeed my thought. Have to be careful to avoid double taxation then.

crre
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Re: Foreign tax credit while US expat

Post by crre » Fri Apr 19, 2019 6:51 am

Have to be careful to avoid double taxation then.

i'm also a u.s. expat. doesn't your country of residence have a tax treaty with the u.s.? if so, you shouldn't be doubly taxed, it's just that in the case of u.s. source income, your country of residence will give you a credit for u.s. taxes paid instead of the other way around. although as gufomel mentioned, you will typically end up paying the higher rate -- part to the country that gets the first bite, and then another part to the country that gets the second bite, if that country's rate is higher.

find a local accountant familiar with tax treaty issues (preferably one that is licensed in both countries, although this is not always easy to find).

Gufomel
Posts: 334
Joined: Sat Feb 14, 2015 9:52 pm

Re: Foreign tax credit while US expat

Post by Gufomel » Fri Apr 19, 2019 7:04 am

crre wrote:
Fri Apr 19, 2019 6:51 am
Have to be careful to avoid double taxation then.

i'm also a u.s. expat. doesn't your country of residence have a tax treaty with the u.s.? if so, you shouldn't be doubly taxed, it's just that in the case of u.s. source income, your country of residence will give you a credit for u.s. taxes paid instead of the other way around. although as gufomel mentioned, you will typically end up paying the higher rate -- part to the country that gets the first bite, and then another part to the country that gets the second bite, if that country's rate is higher.

find a local accountant familiar with tax treaty issues (preferably one that is licensed in both countries, although this is not always easy to find).
If I understood the OP correctly, they owe 0% in the US on their dividends. So there is no credit to be claimed in their country of residence.

There’s no double taxation going on here. Just higher taxation than they would have experienced if they had remained living in the US.

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