Foreign income disclosure from sale of timber in in New Zealand

[lgal63]

My husband harvested and sold a block of trees in New Zealand in 2022. We live and work in the US. I know there is a US/NZ tax treaty in place. We have not yet filed taxes in NZ related to this sale as they are not yet due (this is our only income in NZ other than interest on a bank account which we are already including on our 2022 US tax return). The basic formula when we file in NZ will be gross income less costs related to planting, harvesting, etc. I'm not sure how to deal with this income on our US tax return. Is it a capital gain? Is it passive income? The tax rate there is higher than our tax rate here so I'm hoping we would be getting some sort of foreign tax credit similar to foreign taxes paid on foreign interest and dividends. Also, how do we deal with the timing discrepancy as it relates to filing? Do we wait until 2023 to report the NZ forestry income? Any guidance on this issue would be much appreciated.

[MarilynG1]

You have a few options for reporting the income.  You could enter it as Miscellaneous Income, then make a negative entry in the same place with the description 'exclusion of tax treaty income'.  However, you would need to mail in your return, with Form 8833 attached (TurboTax does not support Form 8833). 

Or, as you suggested, report it as an Investment Sale, with a Capital Gain/Loss, if you can determine your Cost Basis (and document that) other than $0. 

Or, wait until next year, report it as Foreign Income and take the Foreign Tax Credit. 

Here's info for Reporting Tax Treaty Income and Reporting a Timber Sale. 

@lgal63 

[lgal63]

Thanks for the quick reply. If I'm not mistaken, I believe Form 8833 is for US citizens living abroad. We live and work in the US. I think this would also be considered passive income not earned income like w-2 income. Maybe I'm wrong? Also, form 1099-S I believe is for sales of timber in the US. I've researched this a bit which is why I've ended up on the community board. 🙂 I'm hoping someone out there can steer me in the right direction!

[ThomasM125]

The sale of timber is considered capital gain income so you can report it in TurboTax as a sale of invesment. If there is a treaty excluding the income from taxation in the United States, you can enter that as follows:

1. Choose the Federal option on your left menu bar
2. Choose Wages & Income
3. Find Less Common Income in the list of income sources
4. Use the Show More option to expand the choices and choose Miscellaneous Income, 1099-A, 1099-C
5. Choose the Other Reportable Income option and find Other Taxable Income in that section
6. Enter a description for your treaty and the amount as a negative number

You need to include Form 8833 Treaty-Based Return Position Disclosure with your tax return. TurboTax does not support this form, so you will have to complete it separately and attach it to your tax return which you will have to file by mail.

If you exclude the income from taxation based on a treaty, you cannot also take a credit for foreign taxes paid on it. Otherwise, you can deduct the foreign taxes as an itemized deduction or take a credit for them to the extent of your US tax that is associated with the foreign income. 

You must report the income in the year you received the proceeds. To take a foreign tax credit or deduction, you can treat the accrued foreign taxes as though they were paid in the current year.