Retirement income taxed as income in the Netherlands

[carlos3]

My wife and I just learned that starting in June 2016, our tax home has been in the Netherlands. Not only does this mean that we need to pay Dutch taxes retroactively, we also need to submit 1040X revised returns starting in 2016. (Fortunately, we have kept our TurboTax software for all these years.) We have both been retired since before 2016, and our only income is from 403b and 408 plans, plus social security. According to the Dutch-US treaty to prevent double-taxation, money listed on my 1099-R forms is taxed in the Netherlands as ordinary income, but this may not be the case with money listed on our SSA-1099s. My understanding is that I need to add a Form 1116 to each 1040X (i.e., for 2016, 2017, & 2018), that lists the money from the 1099-Rs as “Certain income re-sourced by treaty”. In Part II of the “Foreign Tax Credit Computation Worksheet” I then enter the amount of Dutch taxes in the “Other” [r(1)] column for “Country A” [the Netherlands] with the date 12/31/2016. (It seems to make no difference whether “Paid” or “Accrued” is checked, when calculating our Federal Refund.) At this point, TurboTax 2016 does not indicate that we are due a Federal Refund for the 2016 tax year. However, listed at the bottom of the worksheet is a “Carryover to 2017”, an “AMT Carryover to 2017”, and zero “Utilized”. So here is my question: How can we reduce our US taxes for 2016 in light of Dutch taxes that we are required to pay on our 2016 retirement income?

[KarenJ2]

Was the tax zero on your original 2016 1040?  If so you would not receive a refund, but only a carryforward of the foreign tax credit.

Did you enter your your 1099-R forms in the foreign tax credit section for Income Resourced by Treaty?  I went in and entered income and foreign tax there and it transferred to the tax return.

Foreign Tax Credit-Special Issues

Foreign Tax Credit Information

Please provide more information if this is not helpful.  Thank you.

[carlos3]

Thank you for your response, KarenJ2. The original 2016 1040 has us paying $9,261 in taxes, so that's not the problem. I did not enter the income on the Form 1116, however. This leads me to a few more questions:

1) Are we supposed NOT to enter the re-sourced income on the 1040, but to enter it on the 1116 instead? Or should this income be entered in both places?

2) Where on Form 1116 do I enter the re-sourced income?
a) I believe that within TurboTax I am supposed to enter such information within the "Foreign Tax Credit Computation Worksheet", right?
b) Assuming that I should enter the re-sourced income in the worksheet, do I enter it as "g Ordinary Income"?

3) Finally, since I am (obviously) behind on paying my Dutch taxes, I should probably check that these taxes have "Accrued", right? On the other hand, I shall have paid them before submitting our 1040X. In that case, shouldn't I check that they are paid? Instructions for the Form 1116 state that once I choose one of these options, that I must check the same option on 1116s in all future years. Could you help me understand the relative advantages or disadvantages of selecting the "Accrued" vs. the "Paid" option?

Again, many thanks for your help!

[carlos3]

No response yet, so (in hopes of verification from someone in the TurboTax community) let me provide what I believe to be correct answers to my own questions:

1) Part 1 of Form 1116 is where income and expenses listed on 1040 are identified as taxed in the taxpayer's foreign tax home. Thus they are entered here in addition to having been entered on the 1040.

2) If working directly with forms in TurboTax, the foreign-taxed income is entered under "g. 1. Gross income". For my pension income, I entered "403b plan distributions" under 1.a.; and for income from renting our US home, I entered "rental real estate" under 1.b. I have listed "Netherlands" in Column A, with the amounts of these two types of income below in rows 1.a. and 1.b. I do not believe that the IRS considers our US Social Security payments as income re-sourced to the Netherlands. As soon as these income amounts are entered, TurboTax immediately registers a Federal Refund.

3) According to the IRS (www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-choosing-to-take-credit-or-deduct...) the choice of paid vs. accrued in Part II of Form 1116 depends on “your method of accounting.” The idea here is that you cannot get credit twice: once for the tax year itself and once for a later year when you actually paid the foreign taxes. For example, let’s consider your 2019 foreign tax credit for the 2019 tax year, which you paid in 2020. You may not claim the credit for both years. (Pretty obvious, right?) Checking “Paid” on Form 1116 tells the IRS that you are claiming the foreign tax credit in the year you actually paid those taxes. (This is why TurboTax 2016 allows no later date than 12/31/2016, and TurboTax 2019 allows 12/31/2019 as its latest date.) Thus in my case, if I check “Paid” then I need to use a Form 1116 for 2019, whereas if I check “Accrued” then I should (as is my intention) use the Form 1116 generated by TurboTax 2016. One further bit of information that others may find useful is that according to the IRS, “Once you make that choice, you must follow it in all later years and take a credit for foreign taxes in the year they accrue.”

[carlos3]

The only error in my February 17th posting is that the Netherlands does not tax real estate beyond its borders. (Moreover, it is correct that the Netherlands does not tax retired persons' social security benefits, although the IRS does tax part of them.) Other than that, you can find a more detailed explanation regarding Dutch taxes on its residents' retirement income at https://ttlc.intuit.com/community/tax-credits-deductions/discussion/re-on-form-1116-are-both-403b-pl....