"Dummy" 1099-R vs Form 1116 to report retirement/social security income and taxes paid by a foreign government

[juham2013]

This is really a legal question and unless there are tax attorneys out there I may be barking up the wrong tree.  Thinking of visiting my local IRS office on this, to make sure I am doing this correctly.

I know there is a way to report foreign "social security income" by using  "dummy 1099R" form,  but in that interview process you will be presented with a box that requires plugging the income received and the Federal Taxes withheld.   That is not what you should do as the taxes were not withheld by the U.S. but a foreign government.  However, TT seems to be OK with using a "dummy" if you report the income this way.   That does not mean that you have done it correctly though.

Using Form 1116 seems to be the only way for reporting this sort of income.  However,  this way does not allow all of the foreign taxes already paid to count towards reduction of the overall Federal taxes paid.  Depending on the amount you paid in foreign taxes, a lot of those taxes will be disallowed, carrying forward 10 years, I believe (or, they carry back one year).   If you use the "dummy 1099R" method a much larger (perhaps the whole amount) portion of foreign taxes paid will be allowed as a credit and thus, you pay much less in Federal taxes.  But, again, I have serious concerns over use of "dummy" vs Form 1116.

Cheers,

JJ

[jtax]

Form 1116 is not used to report income. (I.e. to include US taxable income so that tax will be calculated based on it.)

Rather it is used to indicate what part of US taxable income reported elsewhere is from a foreign source. If foreign-sourced income is taxed by a foreign government, some of that tax may be allowed as a credit against US tax. That is the foreign tax credit (FTC) and is what the 1116 process will compute. It is limited to the the total US tax times [foreign source income by type / world-wide income]. That is the tax code 904 limitation and sometimes produces counter-intuitive results. https://www.law.cornell.edu/uscode/text/26/904

[The FTC does not give back foreign taxes. Rather it reduces US tax on the same income. Usually US tax is so low that you wind up paying significant foreign tax. But you don't also pay US tax on the same income. Usually.]

So you have to find a way to get the foreign social security income into your TT/US tax income. A "dummy" 1099-R seems like a reasonable way to do this. 

But as you suggest you cannot include foreign income tax withheld on the 1099-R because it is not paid to the IRS. You do that in the FTC/1116 part of TT. Remember to convert to USD.

Also check to see if there is a tax treaty between the US and the country involved. Sometimes social security might be treated specially.  https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z

Also a lot can depend upon your country of resident (US vs. foreign) as the tax treaties may change the source (foreign or domestic) of income based upon residency.

[juham2013]

Hello jtax!

I appreciate the thoughtful response.

Below, see what SusanY1 replied to another post of mine:

"JJ, you DO put the pension on 1040 and then again enter it on the 1116.  Let us know as you work through those sections if you need help.  Because foreign income can be any kind of income, there isn't a clear way to "link" it to the 1116 except when it is on dividends.  

Therefore, you do enter it wherever it normally goes (either 1099-R area or Miscellaneous for you) which will put it on 1040.  Then again on the 1116 to tell the program the income amount that is tied to your credit (and when you enter it this second time it won't go on the 1040 a second time)"

JJ

[jtax]

@juham2013 I have responded in the other thread. I think that advice is proper. Get the income on the 1040 via a "dummy" 1099-R or otherwise and then make sure it shows up on an 1116 as foreign-source income, which will calculate how much foreign tax is allowed as a credit against US tax. Maybe nothing (if the pension isn't doesn't create tax liability).

It is also possible the foreign social security has exceptions that I am not aware of.

Note also that there are social security totalization treaties that often give you credit in one country social security system for work performed in the other country. That reduces having to deal with two agencies and may get one higher benefits.