foreign tax credit

[JP1121]

Hello,

I have a green card, and I am going to retire and receive social security retirement.

Then I plan to move back to Japan. 

In this situation, I have to pay Tax on social security retirement payment to Japan as well as US.

I studied that I can use foreign tax credit for US tax. I can see "Foreign Tax" under "Estimates and other taxes paid" section in the TurboTax.

I'd like to know how to fill out.

Thanks.

[JP1121]

It looks it needs to file Form 1116 and TurboTax doesn't support it.

[pk]

@JP1121 

(a) TurboTax does support form 1116 --- you just have to use the correct version.  While I do not know  much about the "free" version, I suspect it does not support advanced features like foreign tax credit.

(b) Per US-Japan Tax Treaty, US Social Security  received by a resident of Japan, is taxable ONLY by Japan.  So when you file your US return, you recognize the  SSA payment per SSA-1099  ( note--- there is no Medicare  deduction, if you inform Social Security that you are  permanently living abroad, assuming that is your decision ).  Then under other income , "other" category you enter a negative  amount equal to US taxable portion of  Social Security benefit, with a memo --- Per US-Japan  tax treaty article 17, para 1.

See here -- 

ARTICLE 17
1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration, including social security payments, beneficially owned by a resident of a Contracting State shall be taxable only in that Contracting State.

Technical Explanation of the current 2003 treaty ----

Paragraph 1 also provides for exclusive residence-country taxation of social security
benefits. Like the prior Convention, but unlike the U.S. Model, the Convention provides that
social security payments made by one of the Contracting States to a resident of the other
Contracting State will be taxable only in the other Contracting State. This provision applies to
social security beneficiaries, whether they have contributed to the system as private-sector or
government employees. The provision is intended to include United States Tier 1 Railroad
Retirement benefits.

I have highlighted the areas of import.

Is there more I can do for you ?

[JP1121]

Thanks! I really appreciate it. I will use it.

1 follow-up question.

Your idea is to offset the SA income by adding the same amount of the negative income. Right?

For example, annual SA payment is $40K. Assuming the tax in Japan is $10K and the tax in USA is $15K. 

Isn't IRS collecting the balance = $5K.

I thought this is the reason of I need to use the foreign tax credit = $10K so that IRA can collect the balance.

Please advise.

I am a novice on tax, and I really appreciate your advice!

Have a good weekend.

[pk]

@JP1121 , let me back up 

Let me try an example:

Say your total Social Security payment shown on SSA-1099 is  US$20,000.

You enter this amount into TurboTax  under Social Security income.

Turbo computes your taxable portion of this income is say  US$ 15,000.  This amount is included in your AGI.

Now when you need to exclude this taxable income  ( because this can only be taxed by your tax-home country, Japan ), you enter  under other income  ( I think it is line 8 z  of Schedule-1  ) as the portion of SSA income  that is taxable i.e. US$15,000.  This will result in US not taxing your Social Security Income.

What you are achieving here is to exclude the taxable portion of the SSA income

Does this make sense ?

Is there more I can do for you ?

[JP1121]

Thanks!

Yes. It makes sense.

I think it is easier not to report the $20K Social Security income.

IRS will let me know how to report it if they find it.

[pk]

@JP1121 , while that is your choice ( i.e. not recognize an income), I would strongly suggest otherwise.  This is because   (a) IRS does get a copy of 1099-SSA showing the income and therefore  the AUR ( Automatic Under-Reporting system will flag this and probably result in a CP-2000 notice to you;  (b) your signature / filing of the return is under perjury jurat -- you are confirming  that you have reported all income ( world wide income ).

Is there more I can do for you ?

[JP1121]

Thanks! 

Sorry for more questions.

Going back to my original question, I'd like to know how to fill it in TurboTax.

I used Premier for 2024 tax return.

Federal Tax> Wage & Income>??

Which item should I choose to report the negative income?

You said "Then under other income , "other" category you enter a negative  amount equal to US taxable portion of  Social Security benefit, with a memo --- Per US-Japan  tax treaty article 17, para 1."

Also, I'd like to know where I can see the taxable amount on the social security income only in TurboTax assuming I have other incomes.

If I add a negative income to offset the 20K income, why isn't it $20K?

I appreciate your help!

[pk]

@JP1121 

(a)  "  If I add a negative income to offset the 20K income, why isn't it $20K?  "

Note that when you report your total Social Security income ( Box 5  of SSA-1099), TurboTax goes through a computation using 1/2 of your SSA income plus all your other world income to compute the taxable portion of the  SSA income --- form 1040  line 6a shows the total SSA income and the taxable portions is shown on line 6(b) of the same form.  Line 6(b) is anywhere from 0 % to 84% of  line 6(a).

(b)  In order to exclude  US tax on your SSA income, you need to use the taxable portion of SSA and render it to zero,  Thus you achieve the result of zero taxation on SSA by the US.

(c) Here I would also like to point out  ---

            1. Per TT instructions  for entering SSA income, the screen suggests   that perhaps you not report  US SSA income if a US person resides in certain countries ---here is the screen:

Social Security benefits are not taxed by the U.S. if you live in a country below.

• Canada
• Egypt
• Germany
• Ireland
• Israel
• Italy (and you are an Italian citizen)
• Romania
• United Kingdom

Personally , I disagree with "not reporting" the SSA income -- no matter the situation.  This is because , till you recognize the income and  comment on why you are excluding the income from US taxes  ( and absent human intervention) the AUR system will see a mismatch  and issue  CP2000 ( and the follow-on discussions ). And then there is the perjury jurat.  Therefore I think the cleanest / correct way ( a bit more involved ) is to recognize the income and show cause as to why excluded from US taxable income and therefore no taxed by the USA.

IMHO

Is there more I can do for you ?

[JP1121]

Thanks!

Because I am talking about Japan and I agree with you that I want to report it and remove the tax because I don't need to pay.

I want to know how to do it with TurboTax without knowing the details (without knowing how it is reported in the 1040 or other forms).

I think that is why most people use TurboTax. It needs only typing in the numbers and TurboTax takes care of the rest.

Do you know how to do it? If so, please advise!