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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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My name is ***** *****. My issue is that I am a US citizen

Customer Question

Customer: Hi my name is ***** *****. My issue is that I am a US citizen and am selling my house in the UK and expect to pay $100,000 in capital gains tax to the uk tax authorities. I have the $500,000 allowance on sale of main residential home and also unused carry over losses that will make my us capital gains tax zero $0. How can I use this enormous foreign tax credit since in future years I will have little if any foreign capital gains. Should I take a deduction? Any advice would be welcome. Regards ***** *****
JA: Thanks. Can you give me any more details about your issue?
Customer: Iam a us citizen but have been living in the uk for some 20 years. I bought the property in 1993 and have a large capital gain which will result in $100,000 uk capital gains tax. However, with allowances and capital losses carried over I will not have to pay any capital gains tax in the US. So what do I do with the foreign tax credit since I will not have foreign capital gains in the future. Let me know any specific questions you have. Thanks
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Customer: Yes, Just let me know when you are ready. ***** *****
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Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

If you cannot claim a credit for the full amount of qualified foreign income taxes you paid or accrued in the year, you are allowed a carryback and/or carryover of the unused foreign income tax. You can carry back for one year and then carry forward for 10 years the unused foreign tax.

If you are subject to U.S. tax on foreign source income - you may be able to take a foreign tax credit.

If you feel that foreign tax credit will not provide any benefits for you - you may instead of claiming a foreign tax credit - you may be able to take an itemized deduction for those taxes.

You must choose either the foreign tax credit or itemized deduction for all foreign taxes paid or accrued during the year. This is an annual choice.

To choose the deduction, you must itemize deductions on Form 1040, Schedule A

Customer: replied 11 months ago.
I know all this. My problem is that you have to have the income in the same basket as the tax credit. Since the tax credit is from foreign capital gains I have to have more foreign capital gains to use up the credit. However, since I am coming back from the uk the chance of having large foreign capital gains is essentially zero. Also the allowed foreign credit is the fraction of foreign income to total income which means that you will only get a small credit unless you make all your investments foreign ones. The chances of using the foreign credit in the 11 years allowed is essentially zero. The problem with deductions is that they are limited and you will only get back a small portion of the tax paid. Comments please.My next question is that when you live in the UK you are subject to the US-UK tax treaty. This states that Social Security payments from the US are treated as though they are payments from the UK. So you do not have to pay any US tax on SS payments but you have to pay UK tax. So can I consider US Social Security payments as foreign payments for the foreign tax credit calculation?
Expert:  Lev replied 11 months ago.

My problem is that you have to have the income in the same basket as the tax credit. Since the tax credit is from foreign capital gains I have to have more foreign capital gains to use up the credit. However, since I am coming back from the uk the chance of having large foreign capital gains is essentially zero.

Lev: - there is no guarantee that you will use a foreign tax credit till full extend - that is possible but not always.

If you do not want to deduct foreign taxes - you carry a risk that the credit will be lost.

Also the allowed foreign credit is the fraction of foreign income to total income which means that you will only get a small credit unless you make all your investments foreign ones. The chances of using the foreign credit in the 11 years allowed is essentially zero. The problem with deductions is that they are limited and you will only get back a small portion of the tax paid.

Lev: if you view a foreign tax credit as a refund for taxed you paid in a foreign country - that is not correct interpretation.

A foreign tax credit is a credit toward the US income tax when the same income is taxed in the US and abroad.

That credit is designed to reduce US tax liability on the SAME income - but that liability may not be below zero.
If you have other US taxable income that is not subject to foreign taxes - a foreign tax credit woudl not be used against that tax liability.

Expert:  Lev replied 11 months ago.

My next question is that when you live in the UK you are subject to the US-UK tax treaty.

Lev: - you are not automatically "subject to the US-UK tax treaty" - however - under some circumstances you might be eligible to claim some treaty benefits which override general tax laws of either country.

This states that Social Security payments from the US are treated as though they are payments from the UK.

Lev: that is correct for UK residents - but for US residents the treaty clause is just opposite.

However the treaty doesn't change the source of income - it only changes how that income is taxed.

So you do not have to pay any US tax on SS payments but you have to pay UK tax. So can I consider US Social Security payments as foreign payments for the foreign tax credit calculation?

Lev: You can consider US Social Security payments as foreign payments for UK tax purposes if you are a resident of UK.

However - in this case - you are a nonresident in the US - and woudl not be eligible for a foreign tax credit (which is only allowed for resident aliens and US citizens).
So - your logic would not be relevant here.

Sorry if you expected differently.

Customer: replied 11 months ago.
I am a resident of UK not US I am trying to reduce my US tax In a few months I will return to US Then I will become a resident of US
Expert:  Lev replied 11 months ago.

If you are UK resident - and correspondingly a nonresident alien in the US - you mat NOT claim a foreign tax credit on your US tax return.
In this case you will be ONLY allowed to claim a foreign tax credit on your resident UK tax return.

Customer: replied 11 months ago.
I am a US citizen who is unfortunately paying taxes to both UK and US
Expert:  Lev replied 11 months ago.

If you are treated as a nonresident of the US based on the tax treaty - you may NOT claim a foreign tax credit on your US tax return.
If you do not want to be treated as a nonresident - you would not claim that tax treaty provision - so that is your choice.

Customer: replied 11 months ago.
For tax purposes the US treats me as a resident whether I like it or not even though I spend more time in the UK than the US. So I am subject to the tax treaty and can claim a foreign tax credit.
Expert:  Lev replied 11 months ago.

So if you are a resident of the US - and you choose not to claim Article 4 provisions regarding residency determination - you may still claim some treaty benefits - AND as an US person - and MAY claim a foreign tax credit.

But in this case your US social security benefits may NOT be treated as income from foreign sources for US tax purposes.

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