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Discussion:Is this foreign source income? Can TP take foreign tax credit?

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Discussion Forum Index --> Advanced Tax Questions --> Is this foreign source income? Can TP take foreign tax credit?


Discussion Forum Index --> Tax Questions --> Is this foreign source income? Can TP take foreign tax credit?

Lalva (talk|edits) said:

5 April 2014
I have been searching about this, and reading Pub 514, form 1116 instructions and I haven't found the answer.

TP (US citizen) worked in the UK for a few years and came back 2 years ago. Out of the blue, in 2013, he received some income related to restricted stock options from his foreign employer. The amount of income in a form that he received, is about $18,000 and income taxes withheld for $6,500. He only received $1,720 net cash. The RSUs were granted when he was still an UK employee, so that's why, at vesting he is liable for taxation in the UK on those.

I know that he has to include the $18,000 in line 7. My question: is there a reason why he cannot take the foreign tax credit in form 1116?

Is this foreign source income? I would think so, but he received it in a year when he was not a resident in that foreign country.

I appreciate your help.

Ckenefick (talk|edits) said:

5 April 2014
Why wouldn't it be sourced like any other form of compensation?

And, if all of it does get sourced to the UK, wouldn't you possibly be able to exclude it under either the Bona Fide Residency test or the Physical Presence Test, if either of these two tests had been passed when it was earned?

Lalva (talk|edits) said:

5 April 2014
He was resident of the US for 2012 and 2013, so no exclusion. His income in 2013 (other than this) is all US source.

Ckenefick (talk|edits) said:

6 April 2014
He was resident of the US for 2012 and 2013, so no exclusion.

But he wasn't when he earned it.

Ckenefick (talk|edits) said:

6 April 2014
Yeah, I think you're right...just a 1-year look-back under -3 of 911.

So, sounds like we're stuck with the credit. The issue you'll have is that you're presumably not filing a return in the UK. In other words, were you to file a return in the UK, the UK liability would presumably be lower. In fact, you might get some UK tax back.

How in the world does $18k get to $1,720?

Joanmcq (talk|edits) said:

6 April 2014
Likely because it was a same day sale type of arrangement. UK taxes aren't like ours. The income tax would be the amount on the income. Most UK residents don't have to file, since tax is withheld at the source.

Ckenefick (talk|edits) said:

6 April 2014
Did the guy end up with stock...or at least a chunk of it? Is that was Lalva is suggesting?

Lalva (talk|edits) said:

6 April 2014
Yes, he received stock so he was taxed for the $18K FMV. I have no clue of why he only got $1,720.

Lalva (talk|edits) said:

6 April 2014
So, can he take the foreign tax credit? My concern is that this could be considered not foreign source because when he received the income (FMV of stock) he was US resident.

But, on the other hand you could argue that this is foreign source income and he can take the foreign tax credit since the stock was granted while he was working abroad, and that's why he had to pay taxes in UK.

Ckenefick (talk|edits) said:

6 April 2014
This is just compensation and should be sourced like any other compensation. Compensation is sourced to the place you do the work (i.e. provide the services). The issue with the FTC is that we really don't know what his foreign tax obligation is unless we file a tax return in the UK. Do you think the U.S. really wants to grant a $6,500 tax credit if the guy's UK tax is really $0?

Yes, he received stock so he was taxed for the $18K FMV.

We all know he rec'd it, the question was: Did he end up with it? Did he immediately sell as Joan is stating or did he keep it? Or did he sell some and keep some?

Death&Taxes (talk|edits) said:

6 April 2014
Is it possible to amend an open return where the Foreign Income Exclusion was claimed to now claim the FTC, which being from England probably exceeded the US tax and would be carried forward for a possible situation like this?

Lalva (talk|edits) said:

6 April 2014
Good questions Ckenefick. I don't know the answers :-/

I doubt that he is going to file a return in UK, so maybe to be safe then he should not take the credit, and then if he ends up filing a UK return, we can amend his US one.

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