My cousin had a short summer job as an intern in the UK. He made some money and paid taxes to the UK Government. When he filed his taxes, he attempted to claim tax credit for the income tax paid to the UK. We thought this would work according to the IRS documentation, but he recently got a letter from the IRS that he owe money. Can he claim the taxes he paid in the UK as a foriegn tax credit to reduce his taxes? Thanks.
Paul
The short answer is that, yes, the UK taxes paid are creditable against any US tax on the same income. However, there are limits on the credit that may be claimed and, except for a few simple situations, you must file Form
1116 to calculate the amount of credit. If you merely claimed a credit for the amount of UK taxes paid, you likely claimed too much. In effect, you get a credit equal to the US tax on the double taxed income or the foreign tax, whichever is lower, If UK rates applied to your cousin's income are higher than his US tax rate he cannot take the full amount as credit. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans
Yes, assuming he declared the income on his US tax return and he completes IRS Form 1116 and posts the result from that form to IRS Form 1040 Line 47. He may not just post the amount paid to Line 47 without completing Form 1116 even if the amount was $300 or less.
First of all, you need to take a good look at the IRS notice. Determine if it is referring to the foreign tax credit. Call the number on the notice. Find out what you need to do in order to apply the foreign tax credit. ___________________________________
-----> real address on hobokeni or hobokenx
One thing most people forget is that "withheld from the pay cheque" does not mean "paid". Generally, you have to file a tax return to find out how much you "paid" as opposed to having the money taken off the cheque. As for your problem, the first thing to do is to get the UK Tax Return. (Contrary to what most people think, UK residents do have a tax return to the filed!) Once you have that, you can determine what is the tax payable on that income. The credit allowed on the that tax is the Foreign Tax Credit. Do you mean that you claimed a Schedule A Deduction on the taxes paid on earned income in a foreign country? Schedule A allows for Property Taxes and Sales Taxes only, not Foreign Taxes. This is generally better referred to a specialist in the handling of UK-US Income Taxes.
Well, this is essentially what he did. He filled out Form
1116. The UK taxes were higher than the US, so he we use that to offset the US tax, reducing it to nothing. He was not expecting a refund, just that he paid nothing. Unfortunately, the IRS have sent him a notice that he owe the full amount (without the foreign deduction). Either the form 1116 was filled out incorrect or there are some other requirements we are missing. The documentation is not clear. I guess he can send back an appeal listing the publication and page number on why he should not pay the tax? Paul
Of course Sch A allows a deduction for foreign taxes paid.
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