Still unclear about FTC "paid vs accrued" option

[skaufmann]

I have read many posts on the above topic but am still a little unclear. I am making a hypothetical scenario to clarify my situation and ask  what option I should chose. It would be great to if someone can help out.

US citizen, resident of EU country (same tax year dates 1/1 to 12/31) earns lets say 5000$ salary and has 5000$ tax withheld at work in 2023. 

The person has US-source investments and received interest and dividends, lets say 10000$, on which EU country taxes 25% tax. This tax (2500$) is paid in 2024 and EU country tax is finalized in 2024 before filing US tax return.

For filing US taxes for the year 2023, for the section on form 1116 (FTC) what options should that person choose? Paid vs Accrued?   Taxes on wages are paid in 2023, whereas taxes on investment income is paid in 2024. 

If "paid" is used,  then the taxes paid in 2024 (for investment income of 2023) will need to be reported in the next years US tax return (in which case double taxes will be paid to both EU country and US). OR can 'paid' still be used?

IF 'accrued" is used, it would help for 2023 taxes (as EU tax liability for 2023 is known), however, IF the exact EU tax liability is not known in future years (as the EU country is known for sometime taking years to finalize the tax), it would result in estimation and amendments in future years.

Also what would happen if taxes on investment income are prepaid in EU country starting next year (something like Estimated taxes of IRS). I realize then "Paid" method would work, but then one would be stuck on "accrued" method for this years choice.

Since the choice 'paid vs accrued" is not revocable, I would like to make sure before I choose. I appreciate your time and expertise.

[Mike9241]

The foreign taxes on your wages accrue in 2023. it just so happens you pay also them in 2023 

as for the FTC of your investments they accrue in 2023 but are paid in 2024

so I would select accrued.  this would also allow you to take credit for any taxes on your wages for 2023 that are not paid until 2024. A complication is that wages are of the general category whereas investment income is of the passive category. Take too much would likely be required amended returns. Too little amended returns at your discretion. The foreign tax credit is complex. certain credits may be limited to less than what you paid or accrued. 

you'll need to read the 1116 instructions each year 

https://www.irs.gov/pub/irs-pdf/i1116.pdf 

also IRS PUB 514

https://www.irs.gov/pub/irs-pdf/p514.pdf 

[pk]

@skaufmann , is this a duplicate posting -- remember answering questions about "resourced  by treaty" passive US sourced income to Portugal.   Is this a different issue  or doubts  about the earlier issue ?

I do agree with comments/answers  by my colleague @Mike9241 .

Note that  for US purposes , while you may have  taxes withheld ( "paid" category " ), one may still end up  owing and therefore paying at the  time of filing  ( in 2024 ) --- kind of accrued but still recognized a paid in 2023.   Thus to me  "accrued" vs. "paid " is not always clear ---- therefore  documents often use   taxes "paid " or  " levied"  for individuals.   For entities , especially when they do not use cash method, accrued is certainly applicable.

Does this make sense ?

pk

[skaufmann]

Thank you @Mike9241 and  @pk  for your replies. Yes, @pk this is the same issue as last year, but I ended up not owing any foreign tax, hence did not file 1116. 

So in your opinion, (with my example above), for 2023 (i.e taxes on wages withheld in 2023 whereas taxes on investment paid to Germany in 2024), I should use "Paid" and only include paid portion (on wages) in the 2023 tax filing, AND claim FTC for taxes paid in 2024 (for investment gain in 2023 calendar year) in my 2024 IRS tax return which I would file in 2025. Is this how it works when someone selects "PAID" method of accounting. This would also mean that I am paying both Germany and US the taxes on investments in 2024 (only to seek refund back from USA in 2025...very cumbersome approach)

Of course I understand that I can choose "accrued" and this way I can claim both paid and accrued amounts at the same filing, BUT It is an Irrevocable choice and I would be stuck with the choice. That would also mean that if I don't know the exact amount of foreign taxes, I would have to estimate and the Amend the return when the amount doesn't match.

What do experts like you suggest to the clients, like if you were my CPA and doing taxes for me 🙂

Thanks once again.

[Mike9241]

In reality we would do computations and get info about what to expect in future years. That's because the way FTC works. the current year is always used before any carryovers. I've seen many taxpayers with significant FTC carryovers that expire or the taxpayer dies with unused amounts.  In other words which method is better is a guess, so the decision has to rest with you.  I would say this, if there was a way to prepay some of the foreign taxes on the investment income, I would recommend using the "paid" method and then if I figured I could use more that the foreign taxes on my wages I would prepay some.   

[pk]

@skaufmann ,  @Mike9241 , I have been following this thread for a while and having a hard time with this discussion about "accrued"  Vs. "paid".  

1. Generally the accrued situation  occurs for a Cash basis tax payer  takes place he must allocate  the taxes  because  the tax calendar  ( like UK,  and most of the old commonwealth countries )  is NOT calendar year ( like US ).  This allocation is ref'd as Accrued.

Therefore when refer to Germany , it is not applicable to Cash basis persons.

2.  The reason  that  once  one  method is chosen  it must be used for all future return thus becomes self-evident -- countries do not  generally change tax calendar.

Thus my questions -- what am I missing here ?

[skaufmann]

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