We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?
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New Member

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

 
8 Replies
Level 6

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

Yes, if you did not pay tax on this income in Germany, then this would be excluded from the income that was taxed by your foreign country of residence.  Here is more clarification:

Line 1a - Gross income from sources within (foreign) country - even if this income is not taxed in the foreign country.  Don't include any earned income excluded on Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

Line 3d - Enter your gross foreign source income from the category you checked above Part I of this Form 1116. Include any foreign earned income you have excluded on Form 2555 or Form 2555-EZ but don't include any other exempt income.

Line 3e - Enter in each column your gross income from all sources and all categories, both U.S. and foreign. Include any foreign earned income you have excluded on Form 2555 or Form 2555-EZ but don't include any other exempt income.

Remember, this form is used to receive a credit for any foreign taxes paid.  Therefore, you will report all worldwide income on your US tax return and use Form 1116 to report any taxes paid on your income to Germany.  The tax credit you receive prevents double taxation. 

Click this IRS link for more information as additional rules apply to nonresident aliens:  https://www.irs.gov/pub/irs-pdf/i1116.pdf.

Level 7

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

Social security is taxable in Germany (partially) and US social security is treated like German social security
Level 6

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

Thank you @bine22 for your contribution to this answer.
New Member

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

Thank you very much, Caro, and bine22 had also previously helped me, so thanks again.  
I am still confused however, because of a correction that the IRS made to our return a couple of years ago.
I had entered on line 16b of Form 1040 the taxable part of my pension from a US state and on line 20b the calculated taxable part of my husband's US social security benefit.  Together with a German pension, which was taxed here in Germany, this made up the total income on line 22, which was also entered on Form 1116, line 2e, as the gross income from all sources.
The IRS later sent a check and explained that I had made an error and directed me to Publication 915, where I read  "U.S. citizens who are residents of the following countries are exempt from U.S. tax on their benefits. Canada. Egypt. Germany. Ireland. Israel. Italy. (You must also be a citizen of Italy for the exemption to apply.) Romania. United Kingdom. The SSA will not withhold U.S. tax."
The difference between their calculation of our adjusted gross income, line 37, and ours was exactly the amount that I had entered on line 20b, which confirmed to me that the whole of the US Social Security income was not taxable by the US.
However, the IRS made no adjustment to my calculation of the foreign tax credit, which had included most of the US Social Security benefit in the gross income from all sources on line 2e, therefore my question.     

I hope I've been clearer.  Thanks again.
New Member

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

PS Following this correction, I tried using Turbo tax.  The program automatically filled in a taxable social security amount on line 20b and, as advised, I subtracted this amount from the foreign income and included an explanation as to why I did this, i.e., that the Social Security benefit should not be taxed, and this return was accepted.  However, I recently realized that Turbo tax had included this automatically calculated amount from line 20b along with the total foreign income in Form 1116, that is, most of the social security benefit was again included in the gross income from all sources on line 2e.

PPS Neither of us is an IRS-defined nonresident alien.

With apologies for wordiness.
Level 7

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

Turbotax doesn't support treaty exemptions, so you always have to work around it. Field 20b should be Zero. You can do that in the desktop version by overwriting the value.
New Member

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

Oh, thank you very much.  So would that mean that Turbo tax would then exclude all the social security benefit from the gross income on line 2e of Form 1116?  And that we (and the IRS) should also have done that in the return that they corrected?  Just to help me understand the disparities that are confusing me.
New Member

We're living in Germany so US Social Security wages are nontaxable (treaty article19.2). Should they be excluded when calculating the gross income for Form 1116?

Dear TurboTax Cara and bine 22, My original question remains, and I'm sorry if I'm being dense, and I'm sure you're overburdened with questions, but just in case I thought I'd clarify the problem.   I'm still unsure whether the US Social Security income should be included in what Cara described for line 3d  " ... your gross income from all sources and all categories, both U.S. and foreign" when it hasn't been taxed in the US. And thanks again for the information you've given.
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