How does the USA pay taxes paid abroad?

Фото: Depositphotos

23 January 2017 of the United States Internal Revenue Service (IRS) will begin accept declarations for 2016. ForumDaily helps readers prepare for tax season - we publish the official elucidation IRS on tax credits.

The offset for taxes paid abroad is intended to alleviate the tax burden that would otherwise arise from taxing income received abroad, both from the US and from the state in which the income was received.

Getting the right to credit

To qualify for a credit, you must fulfill the 4 conditions:

1. Tax is a legal and de facto foreign tax liability.
2. You are taxed.
3. You have paid the tax or it is assessed.
4. This tax must be an income tax (or a tax that replaces income tax).

In general, only income taxes paid or accrued in a foreign country or in US ownership (also called a US-administered territory), or taxes paid or accrued in a foreign state or a US-administered territory instead of income tax, are eligible for a credit test. taxes paid abroad.

Foreign taxes non-qualifying:

• Taxes for which you get a refund.
• Taxes that are used to pay subsidies to you or your relatives.
• Taxes that are not legally binding, since you could have avoided having to pay taxes abroad.
• Taxes paid or accrued in any country, if the income in connection with which a tax liability arises was received during the period (period of sanctions) during which:
  • The US Secretary of State designated this state as having repeatedly supported acts of international terrorism;
  • The United States has broken or does not maintain diplomatic relations with this state, or
  • The United States does not recognize the country's government unless this government has the right to purchase defense goods or services in accordance with the Weapons Export Control Act.
  • Note: These taxes can be claimed as itemized deductions.
• Taxes withheld abroad on dividends on foreign shares that do not meet the requirements for the minimum tenure.
• Withholding taxes on capital gains and income from foreign property that do not meet the minimum tenure requirements.

Note: These taxes can be claimed as itemized deductions, even if you claim foreign tax credits for the taxes that entitle you to them.

Choice of offset or deduction from tax

You can deduct the amount of any eligible foreign income tax paid or accrued during the year abroad as a deduction or deduction. In the latter case, you must specify the itemized deductions in Table "A" of the 1040 Form (Form 1040, Schedule A) (PDF). In case you decide to use the tax credit abroad, then, as a rule, you must fill out the Form 1116 (Form 1116) and attach it to your 1040 Form (Form 1040) or Form 1040NR (Form 1040NR). You must declare the full amount of foreign taxes paid or accrued during the year, either as a set-off or as an item-by-item deduction. This selection is made every year.

In the event that you are accounting on a cash basis, you are allowed to claim a credit for tax paid abroad only in the year when you paid a qualifying foreign tax, unless you chose to credit tax paid in a year. when foreign taxes are accrued. After you make such a choice, you can no longer return to the current year’s declaration method for these taxes paid in subsequent years.

Income earned abroad and housing benefits abroad

You are not allowed to use any offset or deduction in respect of taxes paid or accrued on income that you exclude from earned money on a benefit for income earned abroad, or for a discount on housing abroad. In this situation, double taxation will not occur, since such income is not subject to income tax in the United States.

Calculating credit when using Form 1116

If you file an 1116 Form for calculating a credit, the credit will be the lower amount of the tax charged and paid or charged abroad, or the amount of US tax on your income received abroad. Restrictions are calculated separately for passive income, income received under a double taxation treaty, income received from countries to which sanctions were applied, and all other income.

Transfer of unused portion of a credit to a future period

If you are unable to receive a credit for the full amount of qualifying foreign income tax paid or accrued in a given year, you may be allowed to carry forward the unused portion to a prior and/or future period credit. Unused foreign tax can be carried back for 1 year and then carried forward for 10 years. For more information on this subject (including taxes paid or accrued in years prior to 2007), see Publication No. 514, Foreign Tax Credit for Individuals (Publication 514, Foreign Tax Credit for Individuals).

Фото: Depositphotos

Making a request without filling in the Form 1116

If you wish, you can issue a request for a credit for qualifying taxes paid abroad without filling out the 1116 Form, provided that you meet all the requirements listed below:

• All your income received abroad is passive income, for example, interest or dividends;
• You have information on your foreign income and taxes on the form of the eligible recipient, for example, on Form 1099-INT (Form 1099-INT), Form 1099-DIV (Form 1099-DIV), or “K-1” table received from partnership, C Corporation, a property complex or trust fund, and
• The total amount of your eligible taxes paid abroad does not exceed the limits specified in the Instructions for the 1040 Form (Form 1040 Instructions) regarding the status you use when filing a declaration or in the Instructions to the Form 1040-NR (Form 1040NR Instructions) (if you are submitting Form 1040-NR).

If you request a credit directly on the 1040 Form or the 1040-NR Form without submitting the 1116 Form, you will not be able to transfer the unused portion of foreign income tax from the current year to the next or previous year.

Such a choice is not possible with respect to inherited property or trust funds.

Amendment to the tax return to apply for a tax credit

If you are requesting an itemized deduction for eligible foreign taxes for a given year, you are allowed to request a credit for taxes paid abroad, which will result in a refund for the specified year. To do this, you need to submit a declaration on Form 1040X, as amended, within 10 years from the date of filing of the initial declaration. The ten-year period also applies to the correction of calculations of your previously declared foreign tax credit.

In the event that foreign income taxes that you declare as offset, returned to you or their amount is otherwise otherwise reduced, you must submit a declaration as amended on the Form 1040X (Form 1040X) with an indication of a reduced credit for taxes paid abroad. There is no statute of limitations on this requirement.

Additional Information

For more information on offsetting taxes paid abroad (including on whether a specific tax meets the requirements for a credit), see the Instructions for Form 1116 (Form 1116 Instructions), “Foreign Tax Credit” and Publication No. 514 “Offsets for taxes paid abroad for individuals” (Publication 514, Foreign Tax Credit for Individuals). For more information for foreign taxpayers, see also the document “US citizens and foreigners with permanent residence permits residing abroad"On the website IRS.gov.

See also:

Should you file a tax return?

Do I have to pay tax on income received abroad

Acceptance of tax returns will begin on 23 January 2017 of the year

Another hobby or business: how does this affect the amount of tax?

Who must file a declaration in the USA

As a non-resident to open a business in the US: what taxes you need to pay

Five ideas for female business from Russian immigrant women

How to open a successful small business in the United States. "Russian" stories

Do you want more important and interesting news about life in the USA and immigration to America? — support us donate! Also subscribe to our page Facebook. Select the “Priority in display” option and read us first. Also, don't forget to subscribe to our РєР ° РЅР ° Р »РІ Telegram  and Instagram- there is a lot of interesting things there. And join thousands of readers ForumDaily New York — there you will find a lot of interesting and positive information about life in the metropolis.