Foreign Tax Credit

I would first determine my current U.S. tax liability (on worldwide income). Not too many people qualify as "traders" instead of "investors" and are able to use mark-to-market (and claim net losses greater than $3,000). And it sounds like your income would be to high to claim a current loss on rental property.

I think your "someone" is right. The purpose of the foreign tax credit is to offset the US tax on foreign source income -- not the US tax on US source income. There is now a one-year carryback and 10- year carryforward of unused foreign tax credits; however, under IRC Sec 904, the credit claimed in any taxable year cannot exceed the proportion of the US tax liability for that year that arises from foreign source income.

Katie in San Diego

You don't have to go abroad to have "foreign earned income" once you are back in the States. You have to earn the income while abroad, and have it taxed when you are living in the States. I am not a practicing CPA, but I could make a strong case for including part of the distributions from your tax deferred plans. You earned the money while overseas, and you are taxed on it when you take distributions later in the US. You will have to do some allocating - how much was deferred while here in the States vs. how much was deferred while living overseas - and you may only be able to claim the principal that you deposited into the tax deferred plan.

In your situation, I would look to see whether you can take any distributions from your tax deferred plans within the next 10 years. You may feel that taking early distributions is not necessary, but if you can do so with zero tax.....then it may make a lot of sense.

If you received restricted stock or stock options while abroad, you may be in luck. If you exercise your options while in the USA, that gain may qualify as foreign source income. Same thing applies to the income from having your restricted shares lapse while in the USA.

Best wishes.

Ok, all of this is understood. So, basically only the rare case where my US income tax liability is less than zero when I have taxes on foreign earned income would I not have any use in the carry-over. If I earned 300000 AU and paid $100000 au in Tax year 1 but because I had a huge loss of of, say 3000000 AU and thus had no US tax liability, even with my worldwide income. Then I would carry over the $100000 AU foreign tax credit. And then, if I was in the US the following year and had no non-US income I would be out of luck with the carryover. Do I have this unlikely scenario right?

Also, is this basically try with respect to AU and US taxes: the amount of taxes I pay is going to be the highest of the two countries, as one will offset the other -- and since it is AU, I carry over?

Your US tax liability would never be "less than zero." To the extent that your foreign (Australian) tax liability exceeds your US tax liability in a year when you have elected to use the foreign tax credit (rather than deduct the foreign taxes), you have an FTC to carry back 1 year and forward 10. You can utilize the credit only in a year when you have foreign source income. I don't see how this is an "unlikely" scenario.

I don't understand your last paragraph ... maybe if I read "true" for "try," yes, it is true for Australian taxes but it is also true for most other foreign taxes as well -- not just Australian taxes.

Katie in San Diego

although no one else has picked up on this (and maybe I'm all wet), I strongly advise that you get help from an EA or other tax professional in regard to your accounting method. In a previous post, you told us you were "choosing" not to use m-t-m in 2007--now you indicate that you will use m-t-m to claim a large loss against ordinary income. Changes in accounting methods must be applied for in advance and approved by the IRS.