Question

Can I take the foreign tax credit on capital gains?

Forum|Forum|2 years ago
March 18, 2024
1 reply
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I am an American living in Australia. I sold stock in my US brokerage account and received a capital gain. I pay tax on these gains in Australia. Can I claim a Foreign Tax Credit on the taxes I paid to Australia on my US tax forms?

J

jtax

Employee

You can. But US capital gains rates are so low you might not see any benefit. Also if you are in the zero percent capital gains rate in the US you won't get anything back because you the foreign tax credit (FTC) does not give you a credit for your overseas taxes. Rather it gives you a credit (roughly) on the US tax on the foreign income. US taxes are so low that is almost always much less than the foreign taxes.

I would suggest you VERY carefully go through the foreign tax credit interview questions in TT. If the amounts are significant, you may well want to seek the advice of a CPA, enrolled agent, or tax attorney who deals with US citizens living overseas. It is a very complicated and specialized area of tax law.

See also page 9 ("Foreign Qualified Dividends and Capital Gains (Losses)" for complicated adjustments you might need to make depending upon the amount of gain.

https://www.irs.gov/pub/irs-pdf/i1116.pdf

Note, if you are an overseas resident then it is likely that your US stock sales are considered to be "foreign source" by the tax code section 865(a)(2), though there are some exceptions (e.g see 865(g), no "abode in the US", etc.). https://www.law.cornell.edu/uscode/text/26/865

(a)General rule

Except as otherwise provided in this section, income from the sale of personal property—

(1) by a United States resident shall be sourced in the United States, or

2) by a nonresident shall be sourced outside the United State

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C

cdcgAuthor

Thank you. This is a helpful answer. As a follow up, the link provided does seem to confirm that the capital gains from the sale of US stock can be treated as "foreign source income" for IRS tax purposes. I have a similar question regarding IRA/401k distributions. I took a distribution from my retirement account (not a Roth) in 2023 and the IRS treats this entire distribution as ordinary income. Could this also be seen by the IRS as "foreign source" and thus also subject to the FTC since Australia will also tax this distribution as ordinary income as well.?

J

jtax

Employee

That is a very good question. I am not sure. I have read I.R.C. 861(a)(3) - https://www.law.cornell.edu/uscode/text/26/861 - and Treas. Reg. 1.1861-4 - https://www.law.cornell.edu/cfr/text/26/1.861-4 - to mean that retirement income from personal services (jobs/self-employment) previously performed in the US are US sourced income. In particular 1.1861-4(4) expressly says the pensions/retirement pay are not included in a prior de-minimis exception, implying they do count.

You should check the US/Australia tax treaty. https://www.irs.gov/businesses/international-businesses/australia-tax-treaty-documents It may say that Pension/IRA distributions by a US Citizen who is a resident of Australia are taxed by Australia. Other country's treaties say that. I have seen IRS distributions in such situations treated as a separate Form 1116 category of income called "re-sourced by treaty" I am not certain this is correct, but I think it is. If the numbers involved are not small, I suggest you do your own research and consider asking a professional who works in this area all the time for advice. Googling "us australia tax advisors" will get you some leads. I have no idea if any are good.

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