Foreign Sourced Income And Foreign Tax Credit

Normally, you would file a non-resident tax return in your non-resident location and pay tax as a non-resident without any credits there. After that, you would file a resident tax return in your resident location and take a foreign tax credit on this return for the tax paid to the foreign country on the double-tax income. The process and taxation may be different if there is a tax treaty between the two countries.

Maria U. Ku, CPA Oakland, CA

Nothing wrong with the answer other than it overlooks the situation where a US citizen is a resident of the foreign country. That person would file a resident tax return for that country and could avail himself of any foreign tax credits offered to its residents to avoid double taxation. The US would not allow a foreign tax credit on that income as the US credit is only available for foreign taxes paid. In this instance, foreign taxes paid would be reduced by the foreign tax credit on the foreign tax return. Naturally, if a tax treaty existed between the US and that foreign country, it would determine how double taxation is avoided.

It's more complicated than that,if the US citizen has US-sourced income.

A 1040NR is filled out (but not necessarily filed) to calculate the tax due on the taxpayer's US-sourced income as if he/she were not a US person.

That tax is allowable against the resident country's tax on their "foreign tax credit" calculations.

The net foreign tax is then allowed against the US tax on US "foreign tax credit" forms, such as form 1116.

-- Arthur Rubin, AFSP, CRTP Brea, CA

Well Arthur, you lost me. A US citizen who has a filing requirement has to file a 1040. The 1040 would include both US and foreign source income. Why would the US citizen have to complete a 1040NR to calculate US tax on US source income when it is calculated on the 1040?

I can't find any mention of what you are saying about Form 1040NR in Publication 54. I guess I am consulting the wrong publication?

I'm convinced that Arthur Rubin is wrong as I explained in the FBAR/8938 thread.

Ira Smilovitz, EA