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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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I am a US Citizen who has lived and been domiciled in the UK

Customer Question

I am a US Citizen who has lived and been domiciled in the UK since December 2005.

I have built up a significant Foreign Tax Credit because UK taxes are so much higher than US federal taxes. All of this credit is due to normal employment income.

I have an IRA that I am considering cashing out. I am less than 59.5 years old so I know I will have to pay the 10% withholding tax. However, will the income be treated as employment income because it was originally withheld from my US paychecks, and therefore be eligible for offset by the Foreign Tax Credit?

Many thanks
Submitted: 3 years ago.
Category: Tax
Expert:  USTaxAdvising replied 3 years ago.

USTaxAdvising :

Hello

USTaxAdvising :

The IRA income will be classified as "ordinary" income which is just like employment income, taxed at the same tax rates.

USTaxAdvising :

But it won't be eligible for offset by the Foreign tax credit.

USTaxAdvising :

The foreign tax credit is based off of your "foreign" income. The IRA income is U.S. sourced (not foreign) therefore it will not provide for a higher foreign income tax credit.

USTaxAdvising and 4 other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Ok thanks, XXXXX XXXXX key question is whether I can reduce my tax liability by using the Foreign Tax Credit, or can I only use it to offset foreign source income?
Expert:  USTaxAdvising replied 3 years ago.

Hello David,

 

Something happened to our chat.

 

but the key question is whether I can reduce my tax liability by using the Foreign Tax Credit, or can I only use it to offset foreign source income? - The foreign tax credit will only be provided on foreign income. You will not get a credit on the IRA income. Basically you are stuck with the 10% early withdrawal penalty on the IRA as well as federal taxes. But at least there will not be state taxes.

 

Best,

Customer: replied 3 years ago.
Thanks! I saw after I sent my last answer and believe I've now accepted the answer, so thank you!
Expert:  USTaxAdvising replied 3 years ago.

Hi David,

 

Glad I could help. I don't think the accept has gone through yet,


Have a great weekend. :)

Expert:  USTaxAdvising replied 3 years ago.

Oh yes it has - thanks!