International Double Taxation

[inquisitive]

Does anyone know how taxation works for an American citizen residing in the United States, who earns foreign income, which is taxed by that country, and for which there are no tax treaties between the US and said country?

I haven't found much on google but there seems to be mention of a generic foreign tax exclusion that anyone can claim to avoid double taxation. Is this right or is it actually possible to have to pay tax twice on the same income?

 

[kaneohe]

Foreign Earned Income Exclusion - Requirements

If you are an American citizen and are talking about earned income like wages, I don't see anything in that link that says there must be a tax treaty. But I don't see how you can earn foreign wages and be residing in the US.

are you talking about non-earned income like dividends? There is the foreign tax credit
http://www.irs.gov/Individuals/Inte...gn-Tax-Credit---Special-Issues...........also don't see anything about a tax treaty needed except that if a tax treaty exists, you might get even more credit.

 

[inquisitive]

Thanks, this page you linked explains it:

Foreign Tax Credit

Was meaning interest income. It still looks pretty complicated in terms of taking a credit vs. deduction and the implication on income, will have to research it more to understand.

 

[theOAP]

As others have mentioned, you can only use FEIE if you have been resident in a foreign country for 330 days in the last year.

Anyone (with some reservations), resident in either the US or abroad, can use Form 1116, Foreign Tax Credits.

Claiming the interest income as a deduction (Itemised deductions) will only reduce your AGI. You may only use deductions if the amount is $300 or less. Using Form 1116, and its placement in the sequence of calculations on a 1040, will result in a 1 to 1 reduction in your US tax bill. Big difference.

If the income is interest only, you would use a 'Passive' Form 1116. If AMT is involved in your return, you would have to do 2 Form 1116's, one for regular tax, and one using the special AMT rules for 1116.

The standard disclaimer: IMHO, and I may be wrong.

 

[Senator]

You live in the USA. You earn money from some foreign country. How is that any different than money I make right here in the USA?

I understand you pay taxes to that country, but the income is sent here. You should be able to write off the tax as a business expenses, just as I write off my business expenses.

Your tax 'beef' should be with the foreign country, not the US.

 

[Totoro]

You live in the USA. You earn money from some foreign country. How is that any different than money I make right here in the USA?

I understand you pay taxes to that country, but the income is sent here. You should be able to write off the tax as a business expenses, just as I write off my business expenses.

Your tax 'beef' should be with the foreign country, not the US.

The general rule is typically that one pays tax in the country where the work is being done. So, if you work in country A, all salary related taxes of country A apply. Also their labor laws (for what it's worth).

Now, the US has a rather unique rule that you get taxed on all your income worldwide.

Also, there are a ton of exceptions, for example if you don't reside and/or work exclusively in that country, or if you work in another country but employed by a company based in your country etc .. it gets complicated very quickly.

That's why to avoid double taxation most countries have a tax treaty with each other working out most different possible situations.

Having no tax treaty simply means nothing is arranged. In other words, you'll have to look at both tax systems and see if anything is possible. But very likely, you will be taxed double. Your 'beef' is with both countries. In an ideal situation you might even avoid paying taxes alltogether (but don't count on it, paying twice is the norm).

Typically a situation where advice from an expensive tax consultant is worth it.

 

[kaneohe]

Another link that might be useful to get you started:
Foreign Tax Credit - How to Figure the Credit

If you qualify (foreign tax <=$300 for individual or <=$600 if married filing jointly), the easiest way is to claim a credit for that amount . No extra forms are needed. Just claim the credit on the appropriate line (credit section) on p.2 of the 1040. If your foreign taxes exceed that limit, you will have to file form 1116 which may limit how much credit you get. Any unused credit can be carried over for 10 yrs .

As the link mentions, usually claiming a credit is more beneficial since it generally is on a 1:1 basis with the foreign tax if small, or somewhat less than 1:1 if larger.
If, for some reason , you go the deduction route, the tax reduces your taxable income (if you itemize) but you only get a fraction of that back in tax reduction based on your marginal tax rate.

If your situation is not simple, AMT, high income , etc. ......much more to read in instructions to form 1116 and pub 514

 

[nun]

If it's interest income it looks like a fairly simple 1116 foreign tax credit claim in the passive bucket.