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Yes, they must report the income on their 1040. Report the income on line 16 just as if it were a US pension. Then you must fill out form 1116 Foreign Tax Credit and they will get a credit for all the taxes paid overseas.Let me know if you need more clarification.
1. Should I fill out one copy of 1116 for each parent although they are filing jointly ?
2. What should be the category of income in Form 1116 ?
3. What exchange rate should be used ? Can i use the year end exchange rate published by US Treasury for FBAR ?
4. Can I combine the tax paid on foreign pension along with tax paid on foreign interest on the same Form 1116 ?
5. Should 1099R be filled (although not received) OR just enter the total amount on Line 16 without substantiating with 1099R ?
1. Just one is fine2. Retirement3. Here is the IRS website to get the exchange rate. http://www.irs.gov/businesses/small/article/0,,id=130524,00.html4. No separate types of income should use different 1116.5. No you can just enter into line 16.
On #2: Income categories to choose from in the form: Passive, General, Section 901(j), re-sourced by treaty, Lump-sum. I have to pick one. Which one do I pick for pension ? and which one for foreign interest ?
General for pension and passive for interest.
I am still working on the return and may need more clarification on this topic. Bear with me until April 17th before I accept the answer. Thank you.
Hello. My specialty is focusing on YOUR Financial needs. Financial Planner/Business Owner for 20 years. CPA,PFS,QFP,GMMA.
What clarification do you still need?