“Congratulations to lawyers Stuart Horwich & James Lieber for their work and success in achieving this result for Americans abroad.”
A Quick Synopsis
Because of the specific provisions of the France/U.S. tax treaty, U.S. citizens who are resident in France are eligible to use French income tax paid as a tax credit against the 3.8% Obamacare surtax. Depending on the terms of the tax treaty in their country of residence, it is possible that U.S. citizens residing in other countries may be able to use taxes in their country of residence as a tax credit against the 3.8% Obamacare surtax.
As described below, I expect that to be able to use foreign taxes paid as a credit against the 3.8% Net Investment Income Tax, the “Double Taxation” article in the relevant tax treaty must include a specific provision for “U.S. citizens residing in the country of residence”. (Canada comes to mind. But, I will have to some more research …)
Note that it is very possible that this decision will be appealed. The US government will be unhappy with this decision.
For more detail and analysis, keep reading. This post in organized into the following parts:
Part A – Introduction – Background
Part B – Before moving to another country, pay special attention to the tax treaty between the US and that country!
Part C – MATTHEW AND KATHERINE KAESS CHRISTENSEN V. UNITED STATES – Why does the US/France tax treaty work for them?
Part D – Not all tax treaties are the same! What kind of tax treaty provision create the eligibility to use foreign tax credits to offset the Obamacare surtax?
Part E – It’s great that I am entitled to a foreign tax credit. But, how is the tax credit to be calculated?
Part F – The Question: I live in country X. May I use foreign tax credits to offset the Obamacare surtax?
Part G – Dang! Can I get a refund? It appears that refunds ARE available to those who improperly were charged the Obamacare surtax!
Appendix – ARTICLE 24 Of the 1994 France/US Tax Treaty with the later protocols taken into account
IRS offers webinars to help small businesses and other employers answer their tax related questions. Taxpayers can visit IRS.gov anytime for a complete list of these webinars.
Below are the details about two of the agency’s upcoming webinars. These free one-hour webinars help taxpayers understand tax obligations for U.S. citizens working abroad and the Foreign Tax Credit:
An Overview of the Foreign Tax Credit
Date: October 17, 2019, 2 p.m. ET
Click here to register.
This webinar will cover:
- The effect of residency status on U.S. taxation.
Residency status under U.S. immigration law versus U.S. tax law.
- How to determine an individual’s residency status for U.S. tax purposes.
- Special tax rules that apply to dual-status aliens. Read More
What Is Form 1116 And Who Needs To File It?
When talking about US taxes and taxation of US citizens who live abroad, you may have heard of Foreign Tax Credit and the possibility to offset the US tax owing by using the taxes paid to another country. That way you can narrow the tax owing down to zero!
Most of the US international tax experts prefer claiming Foreign Tax Credit (Form 1116) on client’s U.S. tax return rather than preparing form 2555 (Foreign Earned Income Exclusion), since it is more beneficial. Read further to learn why FTC is a better way to save money on your US expat taxes.
Here are 5 quick facts about IRS Form 1116 and US tax returns:
- You claim Foreign Tax Credit on your US expat taxes by filing Form 1116
- You attach this form to a Form 1040, your individual US tax return
- The credit reduces your US tax liability on expat income dollar for dollar
- You cannot take Foreign Tax Credit against income which you have previously excluded by the Foreign Earned Income Exclusion
- And you can’t receive a refund of foreign taxes paid through your US tax return
As an expat, no matter where you live and work, your US and foreign income is subject to IRS taxes. The fact that the majority of countries around the world also require you to file and pay tax locally makes the matter even more complex. In order to avoid double taxation, the US allows you to take a Foreign Tax Credit based on the foreign taxes you pay to your resident country. The Foreign Tax Credit is subtracted directly from your US income tax. However, if you cannot claim the full credit amount, you are allowed a carryover. Carryovers do expire, though, so read on to find out how best to utilize this savings! Read More
American citizens and green card holders, including people who have the right to U.S. citizenship, are required to file a federal income tax return each year declaring their worldwide income, wherever in the world they live. They may also have to pay U.S. taxes.
It is not uncommon for e-filed returns or paper filed returns that claim a credit for US tax for CRA to request verification.
US tax paid per Canadian withholding slips are not requested because the slips are issued by a Canadian entity. They are looking to US tax claimed per US reporting slips such as W2s, 1099s, 1042s or from the US 1040/1040NR tax returns. US social security tax and medicare (ie., FICA) is creditable if it relates to US source wages or services performed in the US which is evident on the W2.
Foreign tax credits claimed in respect of US computed from the US tax return based on determination of what portion of the tax payable of the return relates to US source income that is creditable is usually supportable by submitting to CRA your schedules and copy of the federal (and state where applicable) return. Recently CRA has Read More