Are Spain Income Taxes Paid on Retirement Withdrawals

[bltarbet]

My wife and I lived in Spain for more than 183 days in 2019 and were considered tax residents there. We paid income tax on distributions from a 403(b) account. Where do I apply for exclusion of that income or credit for the tax amount? The distributions were reported on 1099-R, not INT or DIV, and that option doesn't come up on Form 2555. Or, how do I claim a credit for the taxes that we paid Spain on that income? Thanks!

[DavidS127]

If you are a U.S. citizen or resident alien, the rules for filing income tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

But, if you had income from foreign sources and were either a bona fide resident of a foreign country or were physically present there for most of the year, you probably qualify to exclude some or all of your foreign income from taxation by the U.S.  Even if you don't meet those tests for foreign income exclusion, you get a credit for foreign taxes paid on our income.

See the IRS website at this link for more information, and other links to the foreign income exclusi....

In TurboTax, navigate to Income>>Other Income>>Foreign Income and Exclusion and start that section to exclude your foreign income.  Another way to "get there" is to click the "magnifying glass Search" icon on the top row, enter "foreign income" in the search window and press return or enter, and then click on the "Jump to foreign income" link.

[jtax]

The foreign earned income exclusion does not apply to Pension/IRA income income. The income needs to be "earned" not investment income. (see https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-what-is-fore...

[See also I.R.C. 911(a)(1) "foreign earned income" excluded; 911(b)(1)(B) does not include amounts received from pensions. https://www.law.cornell.edu/uscode/text/26/911]

However, the foreign tax credit would apply. Because US taxes are so low compared to other countries, this will usually wipe out US taxes on the same income. But not always.

See this for how to enter the foreign tax credit. https://ttlc.intuit.com/community/entering-importing/help/where-do-i-enter-the-foreign-tax-credit-fo...

[bltarbet]

Thanks for your replies. In the meantime I've learned that since posting that the credit will only reduce the amount of US tax to $0. It will not increase a refund, which is why the TT forms were not effecting my return. 

[jtax]

Yes. There are refundable and non-refundable tax credits. The FTC is non-refundable.  See https://www.investopedia.com/terms/n/nonrefundabletaxcredit.asp and https://money.usnews.com/money/personal-finance/taxes/articles/what-is-a-refundable-tax-credit

That is why when trying to understand this stuff one should always look at the 1040 tax liability lines and not the TT refund box. (E.g. 1040 line 16 and line 13 and 18, delving into Schedules and forms as need to figure out what is happening.)

I think the FTC is non-refundable because the amount of it is limited to 

the US tax times [foreign income / worldwide income]

That formula can never result in a credit larger than US tax. (i.e. if all income were foreign the limit would be 100% of US tax).

I.R.C. 904(a) reads:

(a) Limitation

The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States (but not in excess of the taxpayer’s entire taxable income) bears to his entire taxable income for the same taxable year.

https://www.law.cornell.edu/uscode/text/26/904