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I have over $300K of foreign tax credits available for me to…

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I have over $300K of...
I have over $300K of foreign tax credits available for me to use while I was an XPAT outside the U.S. I am now back in the U.S. and only spend a few days working overseas. I am looking for tax strategies where I could possible use up these credits. For example, could if I generated investment income outside the U.S. could these tax credits be used to offset those gains?
Submitted: 4 months ago.Category: Tax
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1/13/2018
Tax Professional: Charles Markham, EA, MST, USTCP replied 4 months ago
Charles Markham
Charles Markham, EA, MST, USTCP
Category: Tax
Satisfied Customers: 775
Experience: IRS Enrolled Agent, US Tax Court Practitioner
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Hello, first off, you mentioned that you now spend only a few days working overseas. I think that means you realize something that many tax accountants don't realize that even now whenever you are outside the U S on the job you can prorate your wages and consider this foreign income and then put this income on a Form 1116 and "soak up" this foreign tax credit.

So, with this much at stake and a number of years to collect it, it might behoove you to find a job with a bit more foreign exposure although I have one MD client who has all these foreign tax credits and takes a working vacation now where she goes to foreign conferences and we soak up her credits.

Now in answer to your question, sure, if you can find foreign stocks that generate dividends where there is little or no foreign withholding but they are clearly foreign income then you can offset those.

Finally if you bought a piece of foreign property and it appreciated but once again, you would need to be in a place where they don't tax capital gains, but a lot of foreign countries don't.

Another thought, getting back to compensation, if while you were abroad, you were vesting in stock options, or some other plan, and the final vesting takes place here in the US you can trace the foreign portion of that vesting to its foreign origins and call it foreign income.

Hope all that helps.

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Tax Professional: Charles Markham, EA, MST, USTCP replied 4 months ago

Sorry one final thought...foreign tax credits can get carried one year back...one years were you an expat? The rules for foreign taxes go very far back.

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Tax Professional: Charles Markham, EA, MST, USTCP replied 4 months ago

I'm sorry, I fat fingered my last sentence, I meant to type.."What years were you an expat?" (The rules for foreign taxes allow one to go back many years)

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Customer reply replied 4 months ago
Thanks. Not really feasible for me to find another job. I was overseas 2008-2012 with foreign taxes paid until 2015. A few follow-up questions:
- I do spend a lot more time traveling outside the U.S. and taking vacation days (1 month per year). As a lot of professionals do we are always working at the same time several hours a day on emails, calls, presentation material etc.. What is the trigger point where you can claim these days towards foreign earned income?
- What types of foreign income can I offset against foreign tax credit credits generated by regular wages? For example, could I offset foreign passive income? I could always invest in mutual funds with a large percentage of foreign stock and high dividend payout but not sure this type of income would cross over.
- What documentation to you need to retain aa evidence of the foreign income? E.g. flight tickets etc.Thanks
Customer reply replied 4 months ago
Forgot to mentioned I was aware of the pro-ration rule and already apply this rule against bonuses. The problem is that my credits will start expiring in a few years and need to see if there is a better strategy to absorb them or they will start expiring.
Tax Professional: Charles Markham, EA, MST, USTCP replied 4 months ago

One of the reasons I asked about the years involved is that excess foreign credits are supposed to be carried back one year (that is, to 2007) BEFORE they are carried forward.

Thus, if you had foreign wages (using the same I happen to be out of the country logic in 2007) you might consider filing an amended return--you might still be in the statute of limitations. There is a special rule regarding foreign tax credits for filing amended returns.

The problem with foreign mutual funds is that they will generate tax credits and you're going to have the same problem, you almost need to find specific foreign stocks.

The way to move the foreign tax credits between the various classes of income is via something called "High Tax Kick Out" "HTKO" which can be done when you were taxed more than 20% which I am thinking you were.

In answer to your vacation vs. working question, the work has to be somehow linked to the fact that you are abroad. So the problem with checking emails is that by its very nature can eb done anywhere. ditto on the phone etc. If you could find things to do that only could be done abroad (meeting with certain people, doing certain research etc.) then you would have

grounds for calling it foreign business.

I'm sorry there's no silver bullet here. Finding some sort of active business investment like the foreign equivalent of an S corporation or a partnership that generates income would be in the same bucket as the wages (business income), buy rental property?, and that would eat up these credits.

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