Foreign capital gains - US source income and tax rate

[VickiN]

I have foreign capital gains to report. I have paid foreign taxes on these gains and want to claim a tax credit on form 1116. I have read the instructions for form 1116 and Pub 514 in an effort to figure out the adjustment  to the foreign source income that I need to report on Form 1116, line 1a. I have 2 questions:

1) the worksheet in Pub 514 refers to "US Source income". Is this the same as "foreign sourced income"? The gains are not from a US source.

2) I am confused about this statement:

>>"if the foreign sourced income was taxed at the 15% rate"

Does 15% refer to the rate the gains would be taxed in the US? Would this be something that I can see on the "Qualified Dividends and Capital Gain Tax Worksheet"?  

Thanks in advance for your assistance.

[pk]

@VickiN , the requirement to adjust the foreign income  is generally not applicable to most. This is used to adjust the foreign source income in cases when the treaty between US and the foreign country limits  the tax rate applicable --- thus if a country says that Capital gain is taxed  in that country at 10% and the USA cannot  tax this foreign sourced income at more than 10%  then you have to adjust the income such that  effective US tax rate for this foreign sourced income comes down to 10% or lower.  IRS has  information on this as to how to adjust.

Therefore the questions to you :

1. are you US citizen/Resident/Resident for tax purposes

2. What is the capital gain for  -- realestate, stocks/bonds  or what

3. Which country are we talking about , did you receive a preferential treatment on this  income because of residency/citizenship

4. etc. etc

[VickiN]

Hi PK,

Answers to your questions and some additional info that might be helpful:

1) US Citizen as is my husband (filing jointly)

2) Capital gain is for sale of mutual funds and stock

3) Country where assets were sold = Denmark. Denmark taxes capital gains at 42%. These taxes will be paid directly to the Danish tax authorities

4) The expected capital gain income is $85,000 (before Danish taxes). Not sure what capital gains tax rates would apply for this amount

5) We no other capital gains to report

6) I have a $9,000 foreign tax credit carryover from 2018

Let me know if you need any additional information.

Vicki

[pk]

@VickiN , reading through your answers and assuming that the capital gains on stocks/bonds/mutuals  are items that are not traded  in the US markets ( i.e. these are foreign sourced ) :

(a) you will still have to recognize these gains/losses  under US tax laws

(b) you then report the gross  foreign  income  and corresponding taxes paid to Denmark  on form 1116 under passive category -- TurboTax  should then compute  the  tax rate  and if your actual tax rate on these passive  incomes by the foreign  taxing authorit (y/ies) exceed HTKO  ( High Tax Kick Out ) trigger point then it should open a new form 1116   for general category,  effectively zero out the taxes on the original  passive income 1116.   This should all occur through TurboTax  , without your having t do this by hand   ( I have not tried to see if this  occurs automatically or need  individual action --- but this is what should happen ).   It should then recognize  and reconcile  unused foreign tax credit available from past years.   Please see page 15 ( I think ) of the instructions for form 1116 at  www.irs.gov.  I also don't know what the rules for Danish  capital gain taxation  ( indexing of basis, deductions allowed etc. but can obviously look up , to the extent it is  published in English.  It may not affect  because  TubroTax would be using   final tax paid to  gross foreign capital gain for the foreign  country as the tax rate fr HTKO determination and transfer to general category.

If you run into any issues, please let me know and I can simulate the situation on my copy of desktop  TurboTax ( Home  and Business ) and guide  you.

As always , it may be advisable to seek help of a tax professional, if you do not feel comfortable  doing this  by yourself.

Another thing to remember you may have to file both FBAR  ( www.FINCEN.gov form 114 on-line ) and FATCA ( form 8938 with your return), depending on actual facts and circumstances. 

[VickiN]

Hi pk,

Sorry for the delay getting back to this.

Here's what I have entered into Turbotax 2019 so far:

Re. a) - I entered the foreign capital gains at the step where you enter a 1099-B (I don't have this and won't get one from Denmark so I did my best to fill it in)

Re.b)- I started filling in 1116, here's what I put in:

Income type = passive
Country = DK
Total income (capital gains from 1099-B) = $50,000
Foreign taxes = paid all taxes in 2019

After entering these items a window opened for HTKO. There was a blank field. It looks like I'm supposed to fill this in. I got stuck here because I don't know what to enter. As noted above, the Danish tax rate for capital gains in 42%.

Please advise and thanks again for all your help.

[pk]

@VickiN , first sorry for delayed response; second normally at this point I would have suggested discussion through PM but because  of usefulness for a few, I will leave this here ( there may not be many but just in case );

1. I don't exactly where you are in the return preparation  and cannot comment on the blank box that you see.  Part of the problem may be because I was not observant enough as I scrolled through the screens  ( because I knew where I was trying to get to.

2. I created a simulation with wages of US$120,000, Capital gain of US$50,000  ( total sales $100,000 with a basis of $50,000, Long term capital gain );   Then I went to deductions and credits  and declared a foreign taxes of $21,000.  This after a few screens opened up entries for the form 1116 ( Copy 1).  Once I declared the foreign source income, passive  of $50,000 and confirmed the taxes paid of $21,000, it told me that this is HTKO situation; after a few more screens  the 1116 entry was complete ,; went to the forms mode to see that all it had done was to prepare ONE 1116 under passive category, entered the $21,000 and then under HTKO created a negative $21000. 

3. Given the above and no help anywhere else, I went back to Deduction and credits and asked to declare another foreign taxes paid --- this time instead of the country DK I entered HTKO  ( I think somewhere in the help screens I saw that this must be done).  This now opened up another 1116, select general category and enter the $21,000 taxes  and the $50,000 foreign income.  This solved all the issues and the form 1040 via schedule-3 issued the proper credit for the  year.

Thus it is clearly not quite self-evident what to do -- you have read  the help screens  and look at the forms  ( and have an idea what to expect) to get the results .

See if you can make this work for you.    If you need more specific help perhaps you should consider PM  ( because we may be getting into personally identifiable  information and this is public area.

Stay safe 

[VickiN]

Hi pk,

Thanks for the detailed reply. Things have gotten more complicated at my end and I will be looking for a tax professional to assist me. I appreciate all your help.

One final question: you mentioned "considering PM" in your reply. What/who is PM?

Thanks again.

[pk]

@VickiN  PM is private message  -- the envelope ikon at the top.   Let me know if I can help you any further

pk