Foreign tax issue, ? FTC

Forum|Forum|3 years ago
July 3, 2023
6 replies
39 views

Hello,

I realize FTC is credit for foreign taxes paid for which you are subjected to US tax on the same income.
How would one deal with this scenario (see below), I am sure many have come dealt with before.

Hypothetical Scenario: A US resident in Year 2012 purchases 100$ worth shares of Mutual bond fund A (@ 1$ per share). The person later relocates to Germany and is a German tax resident starting 2022. In July 2022, that person sells the share lot when the price is down for 90$ (@9 $ a share). For US tax purposes he would register a loss of 10$ (90-100= -10).

If Germany insists on converting both these transactions to Euro using rates at purchase and sale (lets assume at purchase rate was 1 US$ = 0.75 Euro in 2012, and 1 US$ = 1 Euro in 2022), then this transaction results in a 90-75=15 Euro gain.

In above scenario, by US dollar there is a loss of 10$ registered, whereas Euro conversion leads to a Gain.
My question is can anything be done with the taxes paid in Germany for this gain? Is there any other recourse, or ideas how one would handle it. Has anyone experienced this before? I would think one would come across this scenario if one held US federal tax exempt Mutual funds also. I would appreciate any feedback, Thanks.

pk_

Level 15

@skaufmann , assuming that you are a US parson ( citizen/ GreenCard ) from 2012 till date i.e. US laws were and are applicable to you for the duration:

(a) Germany , while you were/are a resident, can indeed tax ypou on the disposal of such assets and execute such based on its laws, irrespective of US tax laws. ( if I remeber correctly Germany taxes you on world income while being a resident of Germany ). Thus Germany will indeed com pute the gain based on Euro of the day ( both for acquisition and disposal)

(b) For US tax purposes, US$ being operative currency all transactions are ij US$ of the day ( or average of the year ).

(c) Since both jurisdictions are taxing the same income you are eligible for foreign tax credit ( and thereby ameliorating the double taxation bite ) using form 1116. Note however that while the US will recognize the total foreign taxes paid, the amount allowable in the current year is based on a ratio of Foreign income to world income ( and thus is never 100% ). You can also take the foreign tax as a deduction ( but here you have to contend with the SALT limitations ).

Does this make sense ? Is there more I can do for you ?

skaufmannAuthor

Level 2

@pk12_2

Thanks for your reply.

Yes I am a US person since 2012.

So you are saying that even if in US 1099-B, it is a loss, I can claim a FTC?

Also what is included in Foreign income? (the FTC I am claiming is all for US sourced mutual fund dividends and Capital gains). I don't have earned income in DE.

Thanks

pk_

Level 15

@skaufmann , yes if your tax home is foreign , you are paying foreign taxes on income that US is also taxing and the actual source of income is US, you can ( only for purposes of form 1116 ), resource the US sourced income "by treaty" -- you use the correct category on form 1116 for this purpose .

Does that help ?