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Foreign income and Form 1116

In 2006, my nephew (a US citizen) worked for a few months in the UK as an intern. He received an "Inland Revenue" form from the UK listing his income as 4211.54 pounds and tax of

356.91 pounds. All in all, it works out to an income of $7762 and $658 tax. He is being claimed as a dependent. Judging from the IRS pub, he is not eligible for the foreign exclusion because he was only there for less than 3 months. He figured that he can claim a foreign tax credit using form 1116. He filed out the income as J "General Limitation Income". Since his US tax would have worked out to be $261, the $658 tax credit should have cancel it out. He should pay no tax and get no refund. Now the IRS is sending a letter indicating that he has done the taxes incorrectly. The questions is:
  1. Can my nephew apply the UK taxes he paid to the UK to reduce his taxes in th US?
  2. Why does the IRS said that he did the taxes incorrectly?

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Reply to
Virginia Siu
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He can only claim the foreign tax credit to offset the US tax on the income earned in the UK. If he had income from US sources, he must pay the US tax on that income. In no case can the foreign tax credit be larger than the US tax on the same income. So, he probably cannot claim the entire UK tax on his return. He must use Form 1116 to calculate the amount of credit allowable. That is why IRS has refigured the tax. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

Answer to 2: Taxes withheld are not taxes paid. A pay stub or tax slip does not show the taxes paid, only withheld. Did he file a UK tax return? What did the UK tax return say he had to pay? The likelihood is that your nephew is not obligated to pay UK taxes so he is not entitled to claim a Foreign Tax Credit for taxes.

Reply to
parrisbraeside

He can only claim the foreign tax credit to offset the US tax on the income earned in the UK. If he had income from US sources, he must pay the US tax on that income. In no case can the foreign tax credit be larger than the US tax on the same income. So, he probably cannot claim the entire UK tax on his return. He must use Form 1116 to calculate the amount of credit allowable. That is why IRS has refigured the tax. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

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