Can I claim foreign tax credit for taxes paid to a...
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noodad
Level 3

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

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-t... 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

 

3 Replies
investng engineer
Level 2

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

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.

ReneeM7122
Level 4

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

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.

noodad
Level 3

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

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%

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