Question

Foreign tax credit - living abroad in country with higher taxes than USA

Forum|Forum|1 year ago
August 29, 2024
2 replies
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I have an overall question regarding the carryback/carry-forward foreign tax credit that results from living abroad in a country with higher taxes than the USA.

For example, suppose the amount of foreign tax you pay abroad is $5,000 more than US taxes every year you live abroad (assume I live in the same location abroad for 5 years). You file for the FTC, receive the credit and carry it forward each year. If you never live in the US or in a country with lower taxes than the US, is there any way to recover this additional tax ($25,000 over 5 years) that was paid abroad? Is there a way to request/receive a refund for any of this amount, or does it just disappear once the credits expire in 10 years?

I understand you can carry back the FTC credit to a previous year, but if you are always paying more taxes abroad, there will never be any foreign tax to offset in the previous year, correct?

Not A Product Question

M

Mike9241

it just disappear once the credits expire in 10 years? Yes under current tax law

I understand you can carry back the FTC credit to a previous year, but if you are always paying more taxes abroad, there will never be any foreign tax to offset in the previous year, correct? Correct

P

pk12_2

Employee

@j_master_flash , agreeing with my colleague @Mike9241 , that in the situation that you describe and for wages/ self-employment there is really no meaningful recourse.

If active income there is always the option of Earned Income Exclusion but again that just eliminates US taxation but also US taxes on the unexcluded income is at a higher bracket.

If passive income, then there is always High Tax Kick Out ( HTKO ) allowing the income to be treated as general.

Generally the Tax Treaty allows for mitigation of effects of double taxation by reducing and/or eliminating US tax burden -- that is all the US can do .

Please tell more about (a) what type of income; (b) source country of the income and (c) your tax home country.

I will come back if ( and when ) you provide the details -- it may not solve your fundamental issue but .....

pk

J

j_master_flashAuthor

It's active income from a US-based employer, and my tax resident country is Indonesia. My US federal tax burden is quite a bit lower than what is deducted/paid for income tax in Indonesia.

P

pk12_2

Employee

@j_master_flash

If active income ( i.e. wages or self-employment ), then the most benefit you will get is for US not to tax you on the income. So you a choice of Foreign Earned Income Exclusion OR use Foreign Tax as a deduction ( limited by SALT limitations of US$10,000 ) OR Foreign Tax Credit which again is limited ( i.e. allowable portion ) by the lower of allocated US taxes on the foreign income OR actual amount paid ).

Thus we are back to your original question -- how to get the FTC used up if you continue to have Foreign Income and Foreign Tax Paid each year. It is lost . There is no curative path as long as the situation persists.

Sorry for the "No Good" News.

pk