I had this discussion with my CPA a while ago, we can't seem to agree.
An individual has domestic (US) and foreign earned income. Let's say 90% US and 10% foreign.
The foreign country, like US, taxes the worldwide income.
When calculating the foreign tax credit on form 1116, he uses only a 10% of the foreign tax paid, because he says that we can't consider in the calculation the taxes paid in the foreign country on the US income.
I can't seem to find in the 1116 instructions something that explicitly limit the foreign tax to only foreign earned income.
Who is right?
I assume that you are a US citizen living abroad, because only the US and Eritrea tax their citizens on worldwide income regardless of where they live. All the other countries tax based on residency or where the income is sourced.
Given that, it's possible, but doesn't seem likely, that you would have 90% US sourced earned income (unless you are using "earned" loosely and not meaning compensation income). In any event, if the income is taxed by the foreign country, it should, in general, be part of the foreign credit calculation. Complicating this, of course, will be the existence of a tax treaty between the two countries. Tax treaties can create whatever tax scheme the two participating countries agree to establish.
If you are uncertain, I would ask the CPA for references to the source regulations/treaty provisions/etc., that he is using to support his position.
Ira Smilovitz, EA
In article ,
The only other country that taxes worldwide income is Eritrea, and
somehow I doubt anyone we know has income there. Most other countries
use a version of territorial taxation, taxing all of the income of
residents, and the locally generated income of non-residents.
Does the taxpayer live in the US or abroad? If in the US, the foreign
country should only be taxing foreign source income, so you would
credit 100% of the tax which would have been paid on the 10% of the
income which is foreign sourced.
If the taxpayer lives outside the US, there are special rules for
non-residents and country-specifc rules due to tax treaties that I do
not understand, but you might start here:
John Levine, firstname.lastname@example.org, Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail.
Il giorno martedì 2 gennaio 2018 15:46:30 UTC-5, ira smilovitz ha scritto:
Thank you both for the answers.
- the country is Italy (and I am quite sure they tax the worldwide income)
- the individual (me) is a US resident for tax purposes and earns 100% of the earned income from an italian company (that's sufficient for Italy to tax 100% of it) performing job duties in US (that's sufficient for US to tax 100% of it).
What the CPA does is to look at the physical presence here and there each year, let's say 90% and 10%, and then says that the foreign earned income is the 10% of the total. Then, as I said, he uses only the 10% of the tax paid there for the calculation.
Form 1116 instructions say:
You can take a credit for income, war
profits, and excess profits taxes paid or
accrued during your tax year to any
foreign country or U.S. possession, or
any political subdivision (for example,
city, state, or province) of the country or
That to me does not seem to require to report only the foreign tax paid on the foreign income.
About the tax treaty: yes, there is one against double taxation, and form 1116 specify that if you received a refund in the foreign country for the tax paid (for example as effect of the tax treaty) you should amend the US tax return, etc, but in the case the individual did not used the tax treaty in the tax return of the foreign country, I think he should be able to use 100% of the foreign tax paid in the calculation of the credit.
You're wrong, but since you are apparently not an Italian citizen it
doesn't matter. We all agree that Italy taxes Italian source income.
I'd look at Pub 514.
I'm pretty sure your CPA is wrong, because Form 1116 is not about
physical presence, it's about foreign income taxes. I own stock in
foreign companies that deduct income tax from the dividends, and my
CPA lists it all on form 1116 even though I have never set foot in
some of those countries.
Without looking at the details, I agree with John Levine - Italy does not tax worldwide income for non-residents and your CPA is wrong. There is a US-Italy tax treaty and that would dictate exactly what is taxed by whom.
Ira Smilovitz, EA
Il giorno martedì 2 gennaio 2018 23:29:12 UTC-5, John Levine ha scritto:
If an italian citizen lives in a foreign country, but keeps even a tiny nexus in Italy (like a 50% ownership of a house, or direct relatives), he is taxed in Italy on his worldwide income, even if the income has been earned 100% in the foreign country. In that senses it "taxes the worldwide income".
For passive income he uses 100% of foreign taxes paid in the foreign country (like on dividends, interests of foreign bank accounts, etc) in the form 1116 calculations. Only for earned income he split it using the physical presence. My opinion is that the tax code gives you 2 options to get relief from double taxation: the foreign earned income exclusion and the foreign tax credit. If you fail the physical presence test of the FEIE, you should be allowed to use all the foreign taxes paid on the foreign tax credit calculation.
As stated by the previous respondent, you are wrong. Italian *residents* are taxed on their worldwide income, not Italian *citizens*. Generally, you are a resident of Italy if:
Your permanent home (i.e. family or principal residence) is in Italy;
You spend over 183 days in Italy during any calendar year (Note that many countries, e.g. Britain, limit visits by non-residents to 183 days in any one year or an average of 91 days per tax year over a four-year period);
You carry out paid professional activities or employment in Italy, except when secondary to business activities conducted in another country;
or Your centre of vital economic interest, e.g. investments or business, is in Italy.
Ira Smilovitz, EA