topic Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reduction treaty with the U.S.? in Deductions & credits

Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reduction treaty with the U.S.?

noodad — Mon, 15 Mar 2021 06:21:23 GMT

Since I have one stock I own which is traded in Germany, it pays dividends to me from which a total of 26.375% are withheld for German taxes.

I entered the amounts from the 1099-DIV that the broker issued to me, including that 26.375% that was withheld (which appears in Box 7). So, TurboTax put that amount in for my foreign tax credit.

However, if I understand https://www.irs.gov/individuals/international-taxpayers/foreign-taxes-that-qualify-for-the-foreign-tax-credit#taxmustbethelegal correctly, especially this example:

Example 1: You received a $1,000 payment of interest from a Country A investment.
Country A’s withholding tax rate on interest income is 30% ($300), but you are eligible for a reduced treaty withholding rate of 15% ($150) if you provide a reduced withholding statement/certificate to the withholding agent. Your qualified foreign tax is limited to $150 based on your eligibility for the reduced treaty rate, even if $300 is actually withheld because you failed to provide the required withholding statement/certificate.

Doesn't that imply that I would only be eligible for a credit on 15%, not the full 26.375%? Germany has a tax treaty with the U.S. which sets the refundable amount at 15%. I could submit such a withholding certificate, but the IRS charges around $85 I think for the privilege, which would more than wipe out that 11.375% that I might recover from the German government, so I don't plan to do that

I also noticed that TurboTax doesn't seem to allow me to input a value from Box 8 on 1099-DIV, which I think may be related. Box 8 on my form tells which country withheld the tax. I think if TurboTax understood it was Germany, they might know about the 15% treaty level and they might adjust the amount of my credit

Re: Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reduction treaty with the U.S.?

investng engineer — Mon, 15 Mar 2021 08:41:42 GMT

I don't think you can claim the full 26.375%. IRS Pub 514 says:

Foreign tax refund.

You cannot take a foreign tax credit for income taxes paid to a foreign country if it is reasonably certain the amount would be refunded, credited, rebated, abated, or forgiven if you made a claim.

To maximize refund, I believe you also have to file a Germany tax return. In the future, it might be possible to adjust withhold settings so that you are not overwithheld.

Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or tax advice.

Re: Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reducti...

ReneeM7122 — Wed, 17 Mar 2021 21:51:01 GMT

If you earned income in a country that has a tax treaty with the US, then you can claim a foreign tax credit if you paid tax in that country. Here is a TurboTax article that explains the details.

Re: Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reduction treaty with the U.S.?

noodad — Thu, 18 Mar 2021 06:24:21 GMT

Thanks, @investng engineer - this has been my understanding as well. And unfortunately, I haven't found any way to reduce that withholding

Sounds like from what you both are saying, though, that it is indeed a defect in TurboTax. TurboTax Online wants to claim that full 26.375% even though I appear to be legally entitled to only 15%

Re: Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reduction treaty with the U.S.?

oystersauce — Thu, 24 Feb 2022 00:33:00 GMT

I am going through this now as I have in the past just filled in the value in box 7 of my 1099-DIV as the foreign taxes paid in Turbotax. I am just now learning that I may have done this foreign tax credit wrong.

I am currently trying to get a refund from Switzerland to reclaim part of the tax it took from my dividends, amounting to 20% of the dividends. If or when I do get the refund, I will have to amend my previous tax returns as well as for all the years I used Turbotax to do the foreign tax credit. Has Turbotax ever admitted that this was a mistake in their software?

Re: Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reduction treaty with the U.S.?

noodad — Sat, 26 Feb 2022 02:37:35 GMT

I suppose if they were to admit it was a defect, then they’d probably fix this one, so I guess there’s your answer.

I haven’t tried this yet the current filing season’s TurboTax version though

Re: Can I claim foreign tax credit for taxes paid to a country that has a double-taxation reduction treaty with the U.S.?

noodad — Tue, 30 May 2023 00:09:02 GMT

It appears this behavior persists in TurboTax for tax year 2022. If I enter the tax paid on the 1099-DIV in TurboTax as it is shown on the 1099-DIV I received from the brokerage, TurboTax uses the entire amount as the foreign tax credit amount. The result is the same even if I choose Germany as the source country of the income.