Declaring a foreign tax reduction - certain income re-sourced by treaty

[jimmyv2]

Hello!

I am an expat living in Sweden. I have investments in the US which typically generate capital gains which I report on my Swedish tax declaration and pay taxes on them in Sweden. When I prepare my US taxes, I take the foreign tax credit for the taxes I pay to Sweden for both my foreign wages using one form 1116 for d) General category income and for the taxes I pay to Sweden for my capital gains on a second form 1116 for f) Certain income re-sourced by treaty.

However, for 2022 I have capital losses instead of capital gains. When I look at the effect on my Swedish taxes, this capital loss does not technically reduce the taxes on my wages but it does reduce my overall tax burden in Sweden. I am trying to figure out how to declare this tax reduction due to the capital losses on my US tax return. Can I use the form 1116 for f) Certain income resourced by treaty and write a negative taxes paid, or should I just reduce the taxes paid on the form 1116 for d) General category income, or is there a more correct way of declaring the tax reduction?

Thanks so much for your help!

[pk]

@jimmyv2  not being very sure that fully understand the situation fully -- this is what I think  is the situation:

(a) You a US person ( citizen / GreenCard ) is currently in Sweden as a resident therein, earning active income  in Sweden. You also have passive income from US sources

(b)  You pay Swedish taxes on your wages  and also on your passive incomes .

(c) Thus for US tax purposes you have to "re-source" the passive US sourced incomes to be able to use foreign   tax credit. This means that you recognize the US sourced passive incomes on US return and then on form 1116 , also include same passive income as "resourced by treaty" ONLY for recognition of foreign tax paid to Sweden on the same income.

Assuming that the above describes the situation generally, the question is what happens when the passive income is Capital loss  ( e.g. stocks held for > 1 yr and sold at a loss )?

In such a case  1. for US purposes , the loss is recognized and the allowed portion is used to reduce  the AGI and hence the total tax on world income; 2. Similarly for Swedish purposes ( I am going on a limb here ) probably there is a loss recognition and ultimately  affecting the taxable income and hence lower tax  burden ( foreign tax ).

Thus , IMHO,  the fact you have lower foreign tax burden,, takes care of the situation -- form 1116 has no mechanism to handle negative tax burden.

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

[jimmyv2]

Hi @pk and thank you so much for your quick reply.

Your description of the situation in both point (a) and (b) are definitely correct. I want to give a little more information connected to point (c) just to make sure that your answer is fully applicable.

When I declare the income from my US investments in my US return I use a schedule B to declare my interest and ordinary dividends on the US investments, a schedule D to declare my capital gains and losses (both short term and long term) and a form 8949 to declare Sales and Other Dispositions of Capital Assets. 

I then typically take the interest, ordinary dividends and capital gains (both short term and long term) and fill that into my Swedish tax declaration which results in a tax in Sweden on this passive income. Since it is a flat rate tax system in Sweden on investment income I have been able to calculate how much I will need to pay in taxes on the passive income before I get my final tax statement, which I then enter into my US tax declaration on the form 1116 for f) Certain income re-sourced by treaty. There the gross income (1a) that I fill in is the sum of the taxable interest, tax-exempt interest, ordinary dividends, and capital gain that is shown in my 1040 which I assume is what you mean when you wrote that I "recognize the US sourced passive incomes on US return and then on form 1116 , also include same passive income as "resourced by treaty" ONLY for recognition of foreign tax paid to Sweden on the same income." I then fill in the taxes that I pay in Sweden individually for dividends, interest, and other foreign taxes paid or accrued (for my total of short and long term capital gains) in part II of the form.  

I also fill out a form 1116 for d) General category income where I fill in the gross income (1a) is my foreign wages and employer's pension contribution which matches the box for wages, salaries, tips, etc that I have in my 1040. In this form I fill in the taxes that I pay in Sweden on my wages under other foreign taxes paid or accrued in part II of the form.

Now for 2022 instead I have the situation where I have interest, dividends but then a capital loss instead of a capital gain (considering both short term and long term). For my Swedish tax purposes I am going to declare the passive income for the interest, dividends and then the full amount of the capital losses (not taking into account the US annual limit for capital losses). In Sweden the capital loss is first used to cancel out the interest and dividends at a one to one relation - the remaining capital loss is used with a reduction factor to reduce my overall tax burden. The Swedish taxes on my wages are still calculated the same as it would be if I did not have the capital gain or loss so it would seem incorrect to try to realize the reduction of taxes on the form 1116 for d) General category income and, like you said, it does not seem like the form 1116 is meant to handle a negative tax burden. 

So I hope you agree that the information that I have added supports your conclusion and that the best way to handle it is to simply remove the form 1116 for f) Certain income re-sourced by treaty for 2022. Do you agree?

[pk]

@jimmyv2 , having gone through your detailed reply, I still hold my position as to the best way to handle the "Capital asset sales loss" for form 1116.   The only thing I would like to make sure is that your total foreign tax between  active and passive income is all accounted for  ( allocated )  such that there is no double counting ( positive or negative).   Other than that cautionary note I think you are doing the correct way to recognize world income, foreign taxes etc.

Is there more I can do for you ?

[jimmyv2]

@pkThanks again for your quick reply!

For the active income, in my US declaration I am declaring the amount paid in foreign tax on wages which is calculated the same regardless of any passive income so this is definitely allocated.

For the passive income, if I choose to not declare anything in my US declaration, then the reduction of the tax burden due to the capital losses (kind of a negative tax) is not actually accounted for. This reduction is taken on the overall taxes that I pay which includes many different taxes which I do not include in my US tax declaration (property taxes, burial taxes, public-service taxes, etc). Is this ok to do like this or do I need to somehow take into account this negative tax on my passive income? If this needs to be taken into account, where should I do this?

[jimmyv2]

@pk Thanks again for your help. I wanted to see if you had gotten a chance to read my last question. I was a little unsure what you meant about no double counting (positive or negative) and wanted to make sure that I have not misinterpreted what you mean with negative double counting. I put together the fictitious examples below of how I have handled it in the past where there were investment gains and how I am planning on handling it when I have investment losses. Does it look like my total foreign tax between active and passive income is all allocated without double counting in the example below?

	Investment gains	Investment loss
Income from wages	50000	50000
Employer's pension contribution	10000	10000
Total active income	60000	60000
Taxes on wages	15000	15000
Working taxes reduction	-2000	-2000
Total tax on active income	13000	13000
Interest	1000	1000
Dividends	1000	1000
Capital gains	2000	-6000
Total passive income	4000	-4000
Total tax or tax reduction on passive income	1200	-840
Property tax	500	500
Burial tax	100	100
Public service tax	100	100
Tax reduction for mortgage interest	-300	-300
Total tax bill	14600	12560
Declared foreign tax paid on form 1116 f) Certain income re-sourced by treaty	13000	13000
Declared foreign tax paid on form 1116 d) General category income	1200	0

[pk]

@jimmyv2 , please give me a day to digest this fully ---

However, I am assuming that  when you say property taxes -- is this on property in the USA or in Sweden; what is burial tax; the mortgage interest for prop in Sweden/ tax home ?  So you are itemizing for US purposes--yes ?

Let me come back by tomorrow morning my time ( PDT-- GMT -8 ).

pk

[jimmyv2]

@pk Hello again, and thanks so much for taking the time to look into this in more detail!

The property tax that I mention is for a property in Sweden. In terms of my US declaration I do not itemize my deductions but take the standard deduction. I was just trying to give a complete view of the different taxes and fees that are assessed in Sweden to make sure that I did not miss anything that you would consider important to include. But in the past I have not used anything but the items that are specifically connected to my active or passive income when preparing my US declaration. I looked up the official english translation of some of the things that I had written in the table and am including some more information below.

"Taxes on wages": This is the combined amount of taxes that are shown in my final Swedish tax bill for municipal income tax and State employment tax on business income.

"Working taxes reduction": A tax reduction for earned income (employment tax credit) on earned income. The size of the employment tax deduction depends on how big the earnings are and whether I am over or under 65 at the start of the income year.

"Property tax": Actually translates to real estate fee which is a municipal property tax. The size of the property tax is calculated using the assessed value of the property but can never be higher than a ceiling amount.

"Burial tax": Actually translates to burial fee . This among other things, covers costs for care of burial grounds, cremation and burial. However, the fee is not linked to individual funerals.

"Public service tax": Actually translates to public service fee. The public service fee goes to the public service companies, i.e. Swedish Radio (SR), Swedish Television (SVT) and Swedish Educational Radio (UR).

Tax reduction for mortgage interest: It is possible to deduct 30% of interest costs, up to SEK 100,000.

[pk]

@jimmyv2 , thank you very much for the explanatory notes -- very helpful.

Coming back to your example :

1. Keeping the social taxes  ( you may be able to claim these if you itemize ) out of the consideration for the time being,  I agree with the investment gains column for foreign taxes as 14,200  ( composed of  general category 13,000 and Passive category of 1,200).

2. for the  investment loss situation I agree with the Foreign  taxes of 12,160  ( composed of general category of 13,000 less claw back of -840 from the passive losses that affected the general category ) ---- that is total of foreign taxes paid  by you as general category.  This is akin to  what happens to your US taxes -- active income + effect of passive gains/losses ( even though under US rules the losses are limited and can be carried over ).

Hope this settles your query.   Please rest assured that this is correct  procedure of handling a loss but I would still suggest keeping all documentation available  in that rare case that IRS wants documentary proof.

Is there more  that I can do for you ?

pk

[jimmyv2]

@pk Hello again - this is exactly the help that I needed! So the conclusion is that I will actually take into account the tax reduction that comes from the loss on my passive income from the taxes that I paid on my active income and report the total on the form 1116 for d) General category income. I saw that I had switched two rows in my table but I have now updated the table so that it is in agreement with the conclusion of our discussion. Hopefully this information will help other ex-pats who have experienced a loss on their investments. Thanks so much for your time and patience!

	Investment gains	Investment loss
Income from wages	50000	50000
Employer's pension contribution	10000	10000
Total active income	60000	60000
Taxes on wages	15000	15000
Working taxes reduction	-2000	-2000
Total tax on active income	13000	13000
Interest	1000	1000
Dividends	1000	1000
Capital gains	2000	-6000
Total passive income	4000	-4000
Total tax or tax reduction on passive income	1200	-840
Property tax	500	500
Burial tax	100	100
Public service tax	100	100
Tax reduction for mortgage interest	-300	-300
Total tax bill	14600	12560
Declared foreign tax paid on form 1116 d) General category income	13000	12160
Declared foreign tax paid on form 1116 f) Certain income re-sourced by treaty	1200	0 - Do not fill out this form
Dummy Check - Total foreign tax paid for passive and active income minus declared on 1116 f) and 1116 d)	0	0

[pk]

@jimmyv2 , thank you for allowing me to help you  and for increasing my knowledge of Swedish taxation.

Have a nice weekend

pk

[oleksv]

> I get my final tax statement, which I then enter into my US tax declaration on the form 1116 for f) Certain income re-sourced by treaty. 

Can you re-source by treaty dividends and capital gains income to be taxed only in Sweden? I understand that interest is only taxed in the country where you are a resident (Article 11. Point 1. of the tax US-Sweden tax treaty). But dividends look more complicated.

That would make my life easier as now I tell Swedish Tax authorities how much I've paid in the US for dividends/capital gains and they calculate the tax settlement.

[PGL1]

Please how can one practically do this in Turbotax?

I  am an expat living in Austria earning active income in Austria and passive income from US sources.

How can I "re-source" the passive US sourced incomes to be able to use foreign tax credit.

I want to fill out form 1116 f) Certain income re-sourced by treaty; Part II Dividends for the current tax year.  That means Utilize the full amount for the current tax year.  Can it be done in "Easy Step" mode "Deductions&Credits", "Foreign Taxes"?  If so how?

I could not even in "Forms" mode change the "Utilized" to 100%.  If it can be done then please how?

[oleksv]

Hi @PGL1 ,

As I understand, in 1116 f) "re-source by treaty", select Country, "Other Gross Income" you put the total income from dividends/interest that you gained from the US. (a few screens later) "Foreign Taxes Paid" > "Foreign Taxes on Other Income" you put the amount of taxes you paid in Austria (for me/us in Sweden it's a 30% flat-rate) for dividends/interest. I don't have an option to input "Dividends" and "Interest" paid taxes individually, it only says "Rent or Royalties" or "Other Income"

@jimmyv2 can you confirm you are doing it this way for your passive income from the US that you described above? 

One note is that "Other Gross Income" screen says "Do not enter any income already reported on Form 1099-INT, Form 1099-DIV, Form 2555, or Schedules K-1." which confused me. I checked the generated forms and interest/dividends were reported in 1040 (Schedule B) 🤔

I don't see any "Utilized" fields in 1116 either in the generated forms. I can see "Utilized" in the "Foreign Tax Credit Carryovers" of the "Computation Worksheet" but it's calculated automagically by TurboTax