Splitting foreign income and capital gains from financial years different from calendar years

[nitingupta]

Hi,

For passive foreign income and long term capital gains in a country where the financial year (April-March) is different from the calendar year (Jan-Dec), how will the foreign income and tax credits for foreign taxes already filed be split for US taxes for a resident alien?

For example, if 2024 US tax returns are filed, will Jan-March of 2023-2024 and April-December of 2024-2025 be used from the past two foreign tax returns?

[nitingupta]

Secondly, how would foreign long term capital gains be treated if the sale was done in Dec. 2024 but the taxes were filed in 2025?

[vithalanin]

You would need to calculate the income from January to December of the tax year and the corresponding taxes paid or accrued for them. The income is reported for the year and not based on the foreign countries reporting fiscal year system. So interest income for the period from 1/01/2024 to 12/31/24 and not from 4/1/23 to 3/31/24. The taxes can be paid in the same calendar year or can be accrued and paid in the following year for this income
So to answer your next follow up question, you would report the sale of stock in the year sold. So if it sold in December,2024, then the reporting is done in 2024 tax return and taxes paid for it in January 2025, are reported as accrued taxes on your 2024 tax return.

[nitingupta]

Thanks!

Per your response, it sounds like 25% of the income from Apr. 1, 2023- Mar. 31, 2024 i.e. Jan-Mar 2024 and 75% of the income from Apr. 1, 2024 - Mar. 31, 2025, i.e. Apr-Dec 2024 would go in 2024 US returns. Correct?

It is very hard to separate the interest received if it is not monthly.

Secondly, long term capital gains are on the sale of rental property, not stock.

Could the above formula be applied, i.e. applying 75% of gains in 2024 and 25% in 2025 US tax returns?

[pk · Accepted solution]

@nitingupta  agreeing with my colleague @vithalanin  for his excellent response to your  post and would just like to add:

(a) generally passive incomes like  rent , interest, dividend  should be allocated as and when received.  Thus if it quarterly credited to your account , then yes you can use quarterly allocation.   I do recognize that while Indian tax year runs from  April 1st of one year to March 31st of the next year, most rental agreements  / raises etc. are based on  calendar year and so must be allocated /recognized correctly for US tax purposes.  Ditto for Interest earnings ---recognize / allocate as credited.  Dividends  should be based on ex-dividend dates.

(b) Sale / alienation of capital assets  like  residential property  must be based on when actual sale occurs not allocated.

(c) For Foreign Tax Credit, while TDS is often used  but that may lead to having to file an amended return when the Indian IT is settled/finalized ,. esp. given the current  dual method of residential gain taxation  (  Basis indexation with 20% or no-indexation with 12.5% ) leading to correct figure only after IT is filed and accepted.

Namaste ji

Does this make sense ?

Is there more one of us can do for you ?

pk

[nitingupta · Accepted solution]

Thank you so much @pk and @vithalanin !

Could all the foreign passive income, i.e. foreign interest, rent, pension and long term capital gains be filed electronically using Turbo Tax Premier software for 2024 US taxes?

There are no 1099s. So where should this information be entered? 

My understanding is I will have to file the following forms:

Form 1040 

Schedule B - Reporting interest from foreign accounts

Form 8949 - Sales & other dispositions of capital assets

Form 1116 - Claim Foreign Tax Credit for taxes paid abroad 

Form 8938 -  Statement of Foreign financial assets (FATCA)

FinCEN Form 114 FBAR - Report foreign accounts > USD 10,000

Any other form that I missed?

[pk]

@nitingupta  , Namaste Guptaji

All the items mentioned in your post are supported by TurboTax.

The only exception is FBAR --- FinCen.gov form 114.  This last one does not go with your federal return, filed ONLY on-line at  -->

FinCEN Form 114

  Is there more one of us can do for you ?

pk

[nitingupta]

Thanks so much @pk ji.

I entered all the foreign passive income + foreign capital gains in Turbo Tax within 1099 OID, Foreign Accounts after converting into USD at 2024 average exchange rate published by IRS.

But the numbers do not appear in the Income Summary - it still shows 0.

Is there a different section in which the information should be entered?

[pk]

@nitingupta  on going back and reading this thread , I want to make sure that:

1. You entered all foreign and domestic earned interest as if you have received a 1099-INT. TurboTax will allow you to enter  foreign  earned interest   ( tell TurboTax that you do not have a 1099-INT, but want to declare earned interest ), just with the name of the institution providing the interest, address  and the amount in US$. ( Make a note of the US$ amount because you will have to report this as part of other Foreign source passive income for form 1116).

2. Foreign dividends  are also reported similarly ( with no fed ID ) under the dividends.

3. Rental income , foreign or domestic are reported on Schedule-E --- Tell TurboTax that this is foreign residential property.  Note the final income figure from Schedule-E --- this is foreign source  that will have to be added  as part of the foreign source  income  for 1116

4. Pension is reported  under "pension" -- kind of format for 1099-R --- you will need the distribution amount, taxable amount, distribution code  is generally 7  -- but look at the form and instructions for form 1099-R ---See here --->  About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,...

5. For sale of Capital assets --- you use  8949, Schedule-D etc. and /or  4797

Note that in all these cases, the above is ONLY valid for US tax purposes.   You foreign country IT filings ( India in your case ? ) are distinct and follow local rules.

Also when you are in form 1116, you have to enter the total foreign source income ( it is based on the  US "income for those categories " , because that is the usually the doubly taxed income) and the taxes paid  to the foreign taxing authorit(y/ies)

Does this make sense ?   Is there more I can do for you ?  If you are uncomfortable putting info here on the public board, you can always PM me   ( just NO PII -- Personally Identifiable Information )

Namaste Guptaji

pk