Form 1116

[AndrKis]

How to report taxes paid abroad on US passive income in Turbotax Deluxe in Form 1116?  It looks to me that it's almost impossible!  I tried to report taxes in form 1116 that I paid in Portugal on my US pension and SS using Turbotax  many times without any success!  Thank you!

[Anonymous_]

I'm going to page Champ @pk for you as he is knowledgeable in this area and should be able to answer your question. Check back here later.

[pk · Accepted solution]

@AndrKis ,  assuming that you are an US person ( citizen / GreenCard),  and a resident of {Portugal,  your  post retirement incomes :

(a)  Private  pension and / or annuity are taxable in both countries

(b)  Social Security or Public pension may also be taxable  in both countries.

(c) ditto for dividends.

Article 20 of the US-Portugal tax treaty generally deal  with this.   However there is also the  usual  double taxation relief clause.

 Since US taxes you on your world income, you have these passive incomes  ( Interest , Dividend, Pension / 401(k) or similar and SSA ) that are taxed by both US and Portugal.

If you prefer to use Foreign Tax credit for purposes of reducing the double taxation "pain",  you need to resource these incomes  to Portugal.  See article 25 of the treaty :

"     2. In the case of an individual who is a citizen of the United States and a resident of Portugal,
income that may be taxed by the United States solely by reason of citizenship shall be deemed to
arise in Portugal to the extent necessary to avoid double taxation, provided that the tax paid to
the United States will not be less than the tax that would be paid under the Articles of this
Convention if the individual were not a citizen of the United States   ".

Thus under  Deductions and  Credits  tab, select  " I will choose...", then  "Foreign Tax Credit".  This will then  open the  form 1116  interview --- here you have to select the  income category as " resourced by treaty"  and in  reason/ comments  declare  Article 25 of  US-Portugal tax treaty.   

Your foreign  source income  now becomes  the sum of all  your US sourced  incomes  that Portugal has also taxed ( Interest, Dividend, Social Security, US private pensions,  401(k) or similar -- i.e. those reported on 1099-R, 1099-Div, 1099-Int, SSA-1099 ,  etc.    For the entry Foreign Taxes Paid, you have to look at your taxes paid in Portugal and allocate them accordingly.

Note that  if  all your incomes  that are being doubly taxed, form 1116 should  result in a tax credit that is the lesser of  US tax on this income or actual foreign taxes  paid.

Does this make sense ?   Do you need more help on this ?

pk