Question

On Form 1116 are both 403b plan distributions and income from a US rental classified as "Passive category income"?

Forum|Forum|6 years ago
February 17, 2020
1 reply
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My wife and I are retired and living in the Netherlands, which is our tax home now. Our income is from 403b and 408 plan distributions, US Social Security, plus income from renting our home in the US. My questions have (mostly) to do with the "category of income" that I should list on Form 1116 for each of these types of income:

1) I believe that the 403b and 408 plan distributions and the income from renting our home in the US should both be listed on the same Form 1116 as "Passive category income." Is this correct?

2) Is it correct that the US always taxes US Social Security, and that it should NOT be listed on Form 1116? (If a credit is needed here, am I correct in assuming that I need to consult a tax specialist in the Netherlands about having their taxes on US Social Security reduced?)

3) When I list the income amount from the rental, should I merely list "rental income" from Schedule E? Or do I need to specify rental expenses in the section of Form 1116's Part I related to "Deductions and losses"?

Many thanks for any help you can provide.

D

DianeC958

1) Yes, it is correct that these types of income are passive.

2) No the US does not always tax Social Security. At the most Social Security 85% of you Social Security may be taxable depending on your other income. If you are Married Filing Joint and your combined income is more than $44,000 then 85% of your Social Security is taxable.

If you combined income is less than $32,000 then none of your Social Security is taxable. Between $32,000 and $44,000 50% of your Social Security is taxable.

Link to Benefits Planner from the Social Security Web Site

3) For you rental income/loss you just report the loss or income after the deductions are taken for the rental.

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C

carlos3Author

Thanks for responding, DianeC958. With respect, you are not responding to my questions within the context of Form 1116. At issue with this form is whether various types of a US citizen's income are first taxed by another country before the US has (according to its anti-double-taxation treaty with that country) the right to tax the income to the extent that the foreign taxes are less than what the IRS would levy. For example, if country A's taxes on the amount in the income category are more than the IRS's taxes would have been, the citizen would pay the IRS zero taxes on that income. But if the IRS's taxes were greater than country A's taxes, then the citizen would owe the IRS the difference. So in filling in Form 1116 it is critical that one knows which country is the one to tax a US citizen first. To avoid double-taxation, the US taxpayer needs to notify "the country that taxes second" that s/he is eligible for a "Foreign Income Tax Credit" for the taxes they are paying to "the country that taxes first". When completing a 1040, Form 1116 is where one communicates to the IRS that you have already paid part (or all) of the taxes that you would have paid the IRS if the US were "the country that taxes first." The hitch in all this is that these taxes are specific to income types (e.g., passive, general, re-sourced).

Deciding on a category generally depends on the income source. That is, if your income was from wages earned in country A while you were a resident in country A, then country A is (as I said, generally) "the country that taxes first." This income would be classified as "General category income" on Form 1116. Hitch number 2 is that some types of income are "Re-sourced by treaty." This means that a deal has been made between the US and country A that a specific type (passive, general, or some other sort) of income is taxed first in your country of residence even though its source is in the US. My questions have thus foremost to do with whether or not distributions from 403b & 408 plans, income from a US rental property, and Social Security payments should be reported on Form 1116 at all. The form is only for reporting income that the US "taxes second," right? If the US is "the country that taxes first" on a type of income, than that income would not be reported on the form.

So getting back to your answers: Of course, distributions from 403b & 408 plans, rental income, and Social Security benefits are all passive income. But since each has its source in the US, knowing whether or not these are classified as such on Form 1116 involves knowing whether any or all of them are re-sourced to the US citizen's country of residence. Maybe TurboTax does not have the resources to research every anti-double-taxation treaty that the US has negotiated with foreign countries. If so, this too would be useful to know.

I realize that TurboTax experts like you are flooded with questions at this time of year. However, might you please revisit this question?

D

DianeC958

The United States taxes world wide income. So you report all of your income from the United States and foreign countries on your United States Income Tax. Any foreign income you have earned and paid tax to a foreign country on that income is then reported on form 1116 and you receive a credit for the tax paid to the foreign country for any income tax you would owe to the United States.

Since your 403, 408, rental income and Social Security income are from the United States none of this income belongs on form 1116 since it is all United States Income.

If you are considered a resident of the Netherlands they also tax worldwide income and may have a similar form to give you a credit for income tax you pay to the United States on the income.

For the United States it does not matter who taxes the income first or second it is a matter of you receive a credit for taxes you pay to another country against what you owe to the United States for that same income.

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