Income Re-Sourced by Treaty: Is Form 8833 Required?

[mbcohen139]

Yes, you got it right.  Just for clarification, I should file 2 form 1116, one for passive income, one for IRA distribution according to the tax treaty (carries to line 30 p. 2).  The one for the IRA would show the distributions "re-sourced" as foreign-sourced income (first taxed in country of residence), the two would automatically be summarized on the larger one.  I tried this on turbotax and it did indeed work.  Thank you once again.  There aren't many people that understand this form in the detail that you have.

[mbcohen139]

My only concern is that even after re-sourcing the US based IRA distribution as per the treaty and putting it on Form 1116, it does not completely eliminate the incremental tax incurred on the distribution, thereby there remains a double taxation effect to a small degree, around 20%.  Is there a way of further increasing the foreign source ratio in order to fully recover incremental tax?  Perhaps it is not necessary to allocate deductions in Part I for this class of income? Any ideas?  many thanks

[pk]

@mbcohen139 , form 1116 always limits the foreign tax credit , especially if your world income is much more than  Foreign income ( Resourced or otherwise ).

I don't understand  your comment about  " other deductions" ---- not knowing the country where your tax home is ,  normally  "Resourced  by treaty"  income is not adjusted .   Also the most  foreign tax credit you will get is the US tax   on the income ( US effectively cancels US taxation on the income ).  

Does this make sense ?

pk

[mbcohen139]

By deductions, I am referring to the standard or itemized deductions that are allocated to foreign sourced income on page 1 of form 1116 effectively lowering the foreign source ratio. I was thinking that for the resourced due to treaty 1116, no allocation would be made thereby increasing the foreign source ratio. Again, the problem is even after re-sourcing the income, the allowable foreign tax credit after applying the radio is less than the incremental foreign tax imposed on the IRA distrubution. Therefore, since the full credit can't be used, there is double taxation to an extent, albeit less since most of the credit is able to be used. Again my dilemma, how to completely use the credit so that amount of foreign tax paid on the distribution is credited on the 1040. Thank you so much for your time. 

[pk]

@mbcohen139 , that is true , it is allocating the deductions to the foreign income and thereby  reducing the  credit -- yes.  But thems the breaks.

Is there more that I can do for you /

[yurigul]

I have somewhat similar problem with the correct treatment of a us-source income under tax treaties. I am a US citizen, who lives in Germany (hence my tax home is Germany). I receive a company pension, which is a US-source income. The US-German tax treaty contains Article 23 (Relief from Double Taxation), which is excluded from the saving clause of the treaty. So I can use the benefits provided by this Article. However the language of this Article is quite heavy and difficult to understand for me. For this reason I cannot understand, if I have the right under this treaty to re-source my company pension and treat it as a German source income. If this is allowed, I can fill out the relevant 1116 and get FTC for my US tax. Could somebody clarify this situation please? 

[pk]

@yurigul , In general and as a US  person ( Citizen/ GreenCard ) , you can always  use the "resourced by treaty"  for amelioration of double taxation effect.

  Under  Deductions and Credits tab, you choose  " I will choose what I work on" and find  from the list of deductions/credits " Foreign Tax Credit", select this.  This will open the  "step-by-step" questions etc. for filling out the worksheet for form 1116.  Select  " Resourced b y Treaty", enter your  US pension gross income ( before taxes  by either US or Germany .    This will then allow the computation of the  foreign tax credit for US purposes.

Note that  your FTC is limited to the lesser of  actual taxes paid to Germany ( in your case ) or that imposed  by the USA on the same   & doubly taxed income.

Is there more I can do for you ?

pk