FORM 1116

[Sam Hopi]

Hi, my question is if I paid my rental income tax to England on 02/28/2024 , also I have a income in the U.S. and want to file form 1116;  I want to know in Part II of 1116 what box should I mark Paid or Accrued?

and what is date?

Thanks for your help!

[DianeW777]

It's important if you made a selection in the past.  If you chose 'Accrued' in the past you must continue to use that method.

• If you report on the cash basis, you can choose to take the credit for accrued taxes by checking the “Accrued” box in Part II on a timely filed original return. You can’t make this choice on an amended return. Once you choose to do this, you must credit foreign taxes in the year they accrue on all future returns.
  • Form 1116 Instructions
• The date is dependent on whether you are using the paid date or the accrued date.  Based on your statement, the payment is 2024, however they would have been accrued possibly earlier than that, so you must decide whether you are going to use accrued or paid. 

[pk]

@Sam Hopi  generally agreeing with my colleague @DianeW777 ,  and being cognizant of the tax year differences between  US   ( calendar year ) and UK  (April 1st to March 31st  of following  year ), 

 (a) you need to allocate the  gross rental income and taxes  paid to Calendar year

 (b) generally you should use the  "paid" and use the date as 12/31/XX --that is the easiest way  to be compliant and homologated for the US tax year.

I am not sure if this satisfies your query -- please consider providing more details so one  can provide an answer  more attuned to  your specific situation  ( facts and circumstances ).

Will await your answer and then will circle back .

pk

[Sam Hopi]

Hi, What does mean accrued method for this rental income, also I paid  2023 tax of England on 02/28/2024

for $485 So, I am confused , I can choose accrual or I can choose cash, your answer is :::If you report on the cash basis, you can choose to take the credit for accrued taxes by checking the “Accrued” box in Part II on a timely filed original return.

I did not get that.

my last tax return, box paid is marked by a tax preparer, now what should be?

Can I take accrual,  and what does mean , I mean how can I calculate the amount, is it possible give an example based on my situation?

Thanks 

[pk]

@Sam Hopi  just following up:

(a) accrued taxes would mean that  you either have the tax bill but have not paid yet  or  you have calculated  the  amounts   but not paid yet ( may be waiting for the final bill to show up or  a bill that is being contested and therefore likely to change).  It is like accounts payable -- you recognize that you have to pay but have not paid yet.  In tax situation it would generally mean that while you recognize  the  amount  but have not been paid ( could mean that this is an approximation or real  or allocated amount but always  it has not been paid and closed.  Using "accrued" amount  as a deduction,  it can result in having to file an amended.

Does this make sense  in your particular situation?

(b) below is my attempt at an example:

Let us assume that  

(a) you are doing a US return for the year 2022 i.e. the UK returns of  fiscal year 2021-2022 and 2022-2023 are germane.

(b)  your tax rate for the rental income ( average  ) is 11.80% for 2021/2022 ,  12.0% for 2022-2023 

(c) Also assume  that everything financially remains the same for the two fiscal years  except for the rent form Jan01 /Dec31 for calendar year 2021 is $1100 per month ,that for Jan01/Dec31 of 2022 is $1200 per month and lastly  Jan01 /Dec31 of 2023 is $1300 per month.

Thus for UK purposes 

1. Gross rental income for 2021/2022 is   9 months at $1100 =$9900 plus 3 months at $1200 =$3600 for a total of $13,500 -- tax at 11.8% =$1593

2.  Gross rental income for 2022/2023 is 9 months  at $1200 = $10,800 plus  3 months at $1300 = $3900 for a total of $14,700  and a tax at 12% of  $1764

Note that  for US tax purposes  when you file US return  ( if you do not ask for extension ) you do not have the final figures  from the UK  -- thus you would probably use  "accrued" and if the final/settled /paid amount to UK is different than the "accrued" you may have to file an amended return.  Many people use " extension " and file by 10/15 so that the foreign tax amounts is finalized and no amended return is required.

For US purposes ( tax  year 2022):

1. Gross Rental income is  12 months at $1200 = $14,400 and  foreign tax allocation = 1/4 of  UK 2021/2022 plus  3/4 of UK 2022/2023 taxes =  0.25 X $1593 + 0.75X$1764 = $398.25 + $1323 =$1721,25.

2. on form 1116  your Foreign income =  $14,400 and Foreign taxes paid on that income = $1721.25.

Does this make sense ?

Is there more I can do for you ?

pk

[Sam Hopi]

Thanks a lot really appreciated. 

For this parts: 

1. Gross rental income for 2021/2022 is   9 months at $1100 =$9900 plus 3 months at $1200 =$3600 for a total of $13,500 -- tax at 11.8% =$1593

2.  Gross rental income for 2022/2023 is 9 months  at $1200 = $10,800 plus  3 months at $1300 = $3900 for a total of $14,700  and a tax at 12% of  $1764

why  did you count 9 month? for both parts 1 -2

One expert  already mentioned most of people has cash method instead of accrued, per your explanation most of people in UK should take accrued method. So who can use cash method?

[pk]

@Sam Hopi , agree that most people do use "cash" method for everything -- both incomes and expenses.   The best way to maintain this is to  file only after your foreign taxes have been filed/ accepted ( i.e. settled) and thus there is  no need for an amended return to the IRS.

The nine months is because only nine months of the UK tax year falls in the current US tax year -- does that make sense ?

Is there more I can do for you on this ?

pk