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

[Inugasuki]

I will file Form 1116 for Income Re-sourced by Treaty Category.  I am a greencard-holder living in another country.  My U.S. source income (e.g., interest and dividends) is taxed there, and I plan to take foreign tax credit against my U.S. income tax.

Is Form 8833,  Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), required?  Form 1116 instructions are not clear.  It says "you may be required."  https://www.irs.gov/pub/irs-pdf/i1116.pdf

Additionally, is my understanding correct that TT doesn't support Form 8833?

[ThomasM125]

You would only need to file Form 8833 if you were using a treaty to get special treatment of income. For instance, if you were trying to exclude foreign income from tax due to a treaty then you need to file form 8833 to apply for that exclusion. It is not clear from your question if you are trying to do something like that. The foreign tax credit applies to income taxed by a foreign country. It seems like that is what you have, so I'm not sure why you need a treaty to take the credit. TurboTax does not support that form . You can learn more about the foreign tax credit here: Foreign tax credit

[Inugasuki]

Thank you!

I am reducing my U.S. tax liability by claiming the FTC.  The treaty allows me to re-source my U.S. source income as foreign source income; without this re-sourcing under the treaty I cannot claim any FTC since claiming FTC requires foreign source income.

I understand Form 8833 is not supported by TT.  Would TT warn me if one is required?

[RalphH1]

Although the TurboTax program does provide “heads up” info on some unsupported forms (and even some “On-Demand Guidance” info about treaties), it cannot tell you about an 8833 requirement. Treaties are just a different animal than the basic reporting forms (with each being different, although common themes do run through them), and sorting out the possible tax positions for the form would not be practical for most users.

Resourcing income from your resident country to your non-resident country is unusual (as the TurboTax program will tell you on the “Income Category Type” screen). If you're sure about what you're doing with that, I’m in complete agreement with Thomas above, who noted that you don’t need to file the 8833 just to take a credit on tax paid to another country. But I also agree with his statement regarding more clarity being needed about all of this, and a lot of that clarity will come from the treaty itself.

@Inugasuki, our employee experts have to be a little restrained when straying out into unsupported and messy areas like tax treaties. But (unless you’re already sure about everything except the 8833 question) if you let us know what country it is (and other relevant specifics), hopefully someone can provide info which will help!

[Inugasuki]

Thank you!

I am not just taking the credit for tax paid in another country.  I need the treaty to change the otherwise applicable income sourcing rules.  Without the treaty, I don't have any foreign source income, and I cannot take the credit.  Under the treaty, an item of gross income derived by a resident of the United States that may be taxed in the other Contracting State shall be deemed to be income from sources in the other Contracting State.  With this treaty's re-sourcing rule, I now have foreign source income against which I can take the credit.

[RalphH1]

What country are we talking about, and can you list specific articles in the treaty which are relevant to what you’re doing? Also, are you a U.S. citizen, and non-citizen / non-resident of the other country? (And what are the circumstances surrounding your stay there?) I’d love to dig a little deeper into this, and may be able to help a little (but also may end up telling you that I don’t have a credible opinion!).

Of course, sometimes someone wanders by (here in the Community) with the same exact tax thing going on, and solves it. (Admittedly a long shot with this, but…) Thanks @Inugasuki!

[muralx]

Where you able to solve it? Facing a similar problem.

[pk]

@muralx , @Inugasuki , while generally agreeing with comments by my colleagues  @RalphH1  & @ThomasM125  for the type of cases  that you are considering viz:  

(a)  A US person ( citizen / GreenCard), with a foreign tax home;

(b) Having US sourced  passive income such as  Interest / Dividend / Barter Gain/loss ( capital or otherwise) /  supplemental incomes reported  on schedule -E;

(c) US and that foreign country having a tax treaty including the  " double taxation" clause

(d)  certain incomes are taxed by both US and that other country and actually taxed  by both countries under  in its own laws 

does require these US sourced incomes to be  "resourced by treaty"   -- {article Number  shown on the return/ form 1116).  The use of form 8833 in such cases in not required because  we are talking about individuals and not entities ( where disclosure of the underlying treaty assertions  etc. are  shown on form 8833).

 Note that  form 1116  , while recognizing the full amount of foreign income taxes paid/levied ,  limits the current year credit to the lower of  US tax liability on the income  and  an based on the ratio of foreign source income to world income.

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

pk

[muralx]

Thanks, I think in some of the answers it was mentioned that there was no need to use the resourced-by treaty, and that de-railed the original question about the additional form that you have now answered.

So, resourced by treaty is needed in order to mark the US sourced income as foreign, and we specify in that same 1116 form the taxes paid in the foreign country for that income. (Credit will be limited to the amount that US would tax).

Form 8833 is not needed in these cases for individuals.

Thansk

[mbcohen139]

For the specific tax treaty income (IRA distribution in my case), can this income be separated onto a different Form 1116 since it is a different category, and then carried to line 30 of Part IV and effectively added to the standard credits calculated (passive in my case)? If so, is it possible to do this on TurboTax?  If not, would this have to be overridden and forced onto the 1040 ? Basically, how can I continue to use TurboTax if I am entitled to this additional credit? Thank you in advance.

[pk]

@mbcohen139 ,  assuming the  items/conditions I mentioned above,  ( specifically  your US sourced  Pensions/ annuity income being taxed by both your foreign tax home country and the US), yes  you should use  form 1116 , category "resourced by treaty" to get the foreign tax credit.

If I am reading your post wrong, please give me more details of your situation and I will be happy to help.

[mbcohen139]

Yes, that seems logical. How do I  generate multiple form 1116s on TurboTax for different classes of income and for foreign income re-sourcing? I can't seem to add a form , it combines them all into one whereas one is supposed to separate by income class.  Thank you. 

[pk]

@mbcohen139  if you are using the desktop version ( Windows & downloaded / CD ) then  you can  easily go into  (a)  Deductions and Credit and  choose  Foreign Tax Credit -- should  open a box showing  the first 1116 , you can then add another and choose the correct category.   OR  (b) go to forms mode,   ( top right ribbon area, showing the forms mode ) and then when all the forms are shown on the left pane,  there is a heading saying search / add a form --  in the text box there   enter form 1116 and then add.  If you run into trouble let me know  -- I will give you the exact screens  ( I am doing this from memory ).

 I hope  you recognize that  all your US sourced  income that are being resourced by treaty  come under one heading / one form 1116 -- you do not separate  pension / interest/ dividend etc. into different forms.   

Also note that  you are exempt from  the requirement  of filing a form 8833 because you are resourcing only based on "double Taxation" clause of a tax treaty.

Is there more I can do for you ?

[mbcohen139]

Thank you for that very detailed explanation. To clarify, I am foreign resident American. I have regular unearned income and this year I have an IRA distribution. I guess all of this is covered by the tax treaty, but specifically, the IRA distribution is supposed to be taxed first in my resident country, and then in the US, but I'm entitled to a tax credit in the US to avoid double taxation. Thus, ideally I need to find a way to put the foreign tax paid on this distribution on the 1116 in full without it being reduced/limited by the foreign source income ratio. Doesn't seem possible on the form unless I'm missing something. If this is not possible, I assume that instead I must run the IRA distribution through the form, subject it to the foreign source ratio and then take the allowable credit. I believe if this is the way I do it, then I can "re-source" the IRA distribution as foreign sourced even though it was from an American-based IRA, thereby increasing the ratio and the allowable credit. I did a simulation and I would recover most of the incremental foreign tax on the IRA dist'n, but not all of it, which leads me to believe that perhaps I did something wrong since in theory I'm entitled to a full credit for tax on the dist'n. If done like this, I plan to put the unearned income on one form 1116 ("passive based") and then the IRA distribution on another (re-sourced per treaty to foreign as above). This sounds right to you? Also, you are saying that in any case, I do not need to file a Form 8833, correct? Many thanks for your awesome help.

[pk]

@mbcohen139  while generally agreeing with your post , I do want to make sure  of the following:

(a) You a US Person ( Citizen / GreenCard )   having a tax home abroad in a  Treaty Country  ( i.e.  US and that country has a Tax Treaty in effect )  with a "double-taxation" clause

(b) the tax home country  taxes  your world income as a resident of that country ( i.e.   your US sourced income )

(c) US also taxes  you under its rules

  (d)  choose US for  claiming/ mitigating double taxation burden

In such a case ,  you use  form 1116  by resourcing your  doubly taxed  income as " resourced by treaty ", recognize the foreign taxes  paid/ levied  on this income. 

Use of form 1116 results  in recognition  of   the total foreign taxes paid as a credit for US tax purposes.  However it limits the allowable  amount for the current tax year by  lesser of   (a) actual foreign tax burden   and  (b) allocated  US tax burden on the same   resourced income  ( this allocation is done by  using ratio of  this  foreign source income to world income. ).  The  unallowed / unused   foreign tax credit  can be carried back  or forward.

  An exception to  the  requirement to file form 8833  ( income resourced by treaty ) is allowed for this resourcing for purposes of ONLY double taxation clause.

Does this make more sense  ?  Or am I still in the weeds ?

pk