Foreign Tax Credit Carry-Forward - Can it be used to offset future US-earned income?

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Toucan3
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Joined: Sun Jul 29, 2018 9:49 am

Foreign Tax Credit Carry-Forward - Can it be used to offset future US-earned income?

Post by Toucan3 » Thu Mar 28, 2019 12:55 pm

Hi All-

I´m a current US expat who currently uses the Foreign Earned Income Exclusion because I´m taxed in a very low tax country. That said, it is likely that in the coming weeks I will receive an offer from my company to transfer to a higher-tax country (40%+) and therefore I understand that if I accept I´d likely use the Foreign Tax Credit rather than the Foreign Earned Income Exclusion in the future.

Given the high tax-rate in the country, I´d expect that I´d have significant foreign tax credit carry-forwards in the US. I understand these can be carried-forward for 10 years. That said, it is not clear to me what type of income these carry-forwards can be used against. Specifically, if I decided to move back to the US in 5 years, would I be able to use these foreign tax credits to offset future US-earned income?

Also, what about if i had rental income or investment income in the US while I was living abroad? Could I use the foreign tax credit to offset that income?

Thanks for any advice you can provide. This would be a great opportunity for me (promotion) and my wife and I are both interested in moving to X country but we´d just like to make sure we´re making an informed decision with regards to the offer & specifically ensure we understand how the tax increase may affect our financial situation. Thanks again!

Skiandswim
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Re: Foreign Tax Credit Carry-Forward - Can it be used to offset future US-earned income?

Post by Skiandswim » Thu Mar 28, 2019 3:03 pm

I would strongly recommend getting expert advice from a tax expert in your new host country along with US tax accountant. Each country and situation is different. The "optimal" solution is sometimes not obvious (e.g. planning to avoid wealth taxes in addition to income tax)

As for your first question, a Deloitt report from 2016 provides some reasonable information (page 32 on credit carryover).
https://www2.deloitte.com/content/dam/D ... triate.pdf

"Use of credits
US taxpayers living abroad may incur substantially more foreign income taxes than can be used to offset US income taxes. To the extent that the excess can be used as a credit against the tax on other foreign income in the same basket, it will decrease US income taxes otherwise payable. The more income considered “sourced” foreign on a tax return, the higher the potential exists to use foreign tax credits or credit carryforwards.
For example, many US taxpayers who once lived abroad and have unused foreign tax credits are required to make business trips abroad after their return from a foreign assignment. Determination of the source of income from the performance of personal services is based on the place the services are performed.
Therefore, the salary earned while on business trips abroad is foreign source income and is available to use up the otherwise unusable excess credits attributable to previous years when the taxpayer lived abroad."

The switch from foreign income exclusion to foreign tax credit requires some thought.

TedSwippet
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Re: Foreign Tax Credit Carry-Forward - Can it be used to offset future US-earned income?

Post by TedSwippet » Thu Mar 28, 2019 4:48 pm

Toucan3 wrote:
Thu Mar 28, 2019 12:55 pm
... if I decided to move back to the US in 5 years, would I be able to use these foreign tax credits to offset future US-earned income?
According to this article from Greenback, apparently not directly:
If you live and pay tax in a highly taxed foreign country, you will most likely continue to accumulate Foreign Tax Credit carryovers. If you were to move back to the United States with a carryover credit, you could not use the credit against your US source income; it could only be applied to foreign income. This means the only way to use up carryover credit would be to move to a lower taxed country.
However, depending on where you go, all may not be entirely lost. For example, it can be possible if in the UK to use a UK pension to 'soak up' unused US foreign tax credits. In this way, you build up a US 'basis' in the UK pension, and if you will be living in the US when drawing this pension, that gives you a bit of a tax 'edge' (except for US tax on US citizens living in the UK in retirement, the US/UK treaty reserves pension taxing rights to country of residence). Of course, the IRS makes it extremely fiddly to get all the pieces in place to accomplish this.

Topic Author
Toucan3
Posts: 13
Joined: Sun Jul 29, 2018 9:49 am

Re: Foreign Tax Credit Carry-Forward - Can it be used to offset future US-earned income?

Post by Toucan3 » Fri Mar 29, 2019 3:09 pm

Thank you both for your replies.

From what I´ve researched up until now, it unfortunately doesn´t seem that the foreign tax credit carry-forward would help me much. I was really hoping it could be used to offset US-earned income but it looks like that is definitely not the case. I haven´t received the offer yet but when I do I´ll be sure to investigate much more thoroughly. The good thing is if I do accept, the company will likely provided tax prep & advisory services so I will definitely be consulting the experts then.

Thanks again!

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