How to report foreign taxes paid on US income

[RV5]

I am a US citizen who lives in India. India also taxes its residents on their worldwide income, and has a dual tax avoidance treaty with the US. The treaty defines different types of income, but has no notion of a *primary* country to pay taxes to for any kind of income. And the tax year in India goes from April to March.

(Let us focus on non wage income in this question, where there is no concept of withholding in either country.)

So the way in which things end up working is that for all incomes accruing in Jan - March, one pays Indian taxes on them, and gets a credit on them from the US tax return, simply because the US tax return hasn't been filed for this period when one is filing the Indian tax return (likely in June - July).

OTOH, for incomes accruing in April to Dec, one pays US taxes and gets a credit on them for the Indian tax return.

My question therefore is - how do I report Indian taxes paid on the Jan-March portion of the 1099-DIV income from the US? I tried modifying the "Foreign taxes paid" box of the 1099-DIV that I had imported, but:

- is that even allowed? there was some value already there because the ETF investment had invested in and paid foreign taxes on foreign securities, i had to change it to incorporate the foreign taxes I paid.

- when i added the Indian taxes paid, Turbotax asks me for the portion of the dividend that was from foreign countries, and to specify which countries it was from.

How do I resolve this?

[pk]

@RV5 ,  I am not sure I fully understand your issues. However,  from your post what I see is as follows :

(a) you, a US citizen  and  residing in India have earnings in both USA and in India.

(b) your specific issue  is how to ameliorate the effects  of double taxation on US 1099-DIV with foreign taxes paid component.

1. Now , whereas India , like USA taxes its residents of world income,  for the first two years  of an expat's stay in India  you are treated as Resident, Not-ordinarily Resident and taxed only on India sourced/connected  income. Thereafter  one is  treated as a Resident and taxed on world income.

2. a resident  can raise assertions/conditions  of India-US ( foreign country ) tax treaty  -- DTAA

3. for both USA and India taxes , incomes are allocated to defined taxable year and therefore I do not understand  the quarterly allocation of the withholding and/or income that you ref'd  to in your post  --  generally dividends and interest are  booked on a yearly basis  ( even though  based on dividend   paid /"ex" dates  one can indeed book these  by quarter ).

4. Agree  that a careful allocation  ( especially if large amounts are involved  ) is required  for  "foreign incomes  because you have    (i) incomes that are domestic to US but foreign to India; (ii) incomes that are foreign to US but  domestic to India and (iii)  incomes that are foreign to both US and India.

5. You also have   incomes that may be eligible for Foreign Earned Income exclusion on your US return.

By the  way when did you first arrive in India, are you still abroad,  are you being employed / self-employed locally, married ( and if so to a US person or to NRA for US purposes), how did you file for 2018 both in US and in India.

Hope to hear from you soon

[RV5]

Hi @pk ,

Thanks for your reply. To first answer your questions,

- I have been in India for 10+ years, after spending 15+ years in the US. I am employed with an US headquartered MNC in India,. My spouse is a US citizen. I have been using Turbotax for the last 23 years to file my US taxes. I use Turbotax download and not the online version because with my foreign income, the tax return is complicated and I find the download version a bit more flexible. For my Indian income, I use a local (Indian) CPA.

>> you, a US citizen and residing in India have earnings in both USA and in India.

Correct.

>> your specific issue is how to ameliorate the effects of double taxation on US 1099-DIV with foreign taxes paid component.

Correct.

The points 1 and 2 you make are also correct.

About point 3, let me illustrate through an example. Note that I file US taxes in April and Indian taxes in July. Note also that the Indian tax year goes from April to March, and the US tax year goes from January to December.

If an income accrued in Dec 2019, then it falls in the US tax year 2019, and the Indian tax year 2019-20. For this income, I would first pay US taxes in (April 2020), and then use them to offset any Indian tax due (in July 2020).

If an income accrues in Jan 2020, then it falls in US tax year 2020, and the Indian tax year 2019-20. For this income, I would first pay Indian taxes (in July 2020), and then use them to offset any US tax due (in April 2021).

Right now, I am trying to find the solution for the second case. I have some US dividends paid out in March 2019, for which I have already paid Indian taxes. I need to get credit for that in the US tax return.

Now, Turbotax already supports foreign taxes paid. But the assumption TT makes, as far as I can tell, is that foreign taxes have been paid on foreign income (such as when a US based ETF invests in foreign stocks, gets dividends from those stocks, and pays foreign taxes). I am looking for how to enter foreign taxes paid on *US* income.

Points 4 and 5 in your response are also correct. I use both FEIE, and foreign tax credit (for taxes paid on income amounts over what can be excluded). 

Thanks a ton for your help so far. I hope my response enables you to address my query. 

[Nary]

Hi, 

I have the same issue as you and I am wondering how to report the rupee income (that is already taxed in India) on my US return. Did you find out how to use TT for this?

[KarenJ2 · Accepted solution]

@pk

I would delete the 1099-DIV and manually enter the income and taxes.  You can then adjust the foreign tax.  If the IRS ever should question this, which is highly unlikely, you have the back up to explain the increase in foreign tax. 

I also understand  that you can restrict the import to a subset of items in 1099-div, however I can not confirm this as I cannot import a 1099-Div to confirm.

[RV5]

Thank you @KarenJ2 . I did exactly the same. I ended up modeling the US dividend income as Indian dividend income. Then Indian taxes deducted on it were handled naturally by TT.

@Nary I have been using TT for 10+ years to handle my US taxes with Indian income. There is a very strict order in which you need to enter your foreign income if you are using TurboTax web. I have never been able to make it work, so I use the TT download, where I have a lot more freedom to go back and forth and change entries.

What I end up doing is going thru the TT interview first, then going thru all the forms (esp the Form 1118's) and making corrections. Typically they are obvious, but one does need to understand how the IRS expects taxpayers to distribute income across different categories. 

Another note - do not expect TT to flag all wrong entries as errors either. You really have to know what the different fields mean to spot errors.

[Nary]

Many thanks @KarenJ2  and @RV5 for your answers; they are very helpful.