US citizen paying foreign taxes on interest from US bank accounts

[SvilenM]

Hi,

My wife and I are both US citizens. We are preparing our taxes as married filing jointly using TurboTax. My wife moved back to our home country in Europe in the middle of 2019 and I stayed for work in California and am still here.
Both my wife and I have US bank accounts, some of them being joint. My wife paid taxes in our European home country on the interest earned from the US bank accounts (the same way US citizens are required to pay taxes on foreign bank accnts here in US). She doesn't have any other income both here and over there.
Of course, we also got 1099-INT from the bank to report on our US tax return. Doing so IRS will charge us tax on the interest. Now, obviously we don't want to be charged twice on the same interest - once in US and once in Europe.
What is the proper way to report the taxes paid in Europe on the same US bank interest and avoid that double taxation?

Also, one other related question. For the purposes of tax return for 2021, do we need to show the exact date she left US? TurboTax doesn't seem to accept dates prior to 01/01/2021.

Thanks in advance

[ErnieS0]

You can claim a foreign tax credit or deduction on income that is double taxed by the US and another country.

To claim the foreign tax credit:

1. Type foreign tax credit in Search in the upper right
2. Select Jump to foreign tax credit
3. Complete the screens to claim either the credit or deduction

For more help: 

Where do I enter the foreign tax credit (Form 1116) or deduction?

For your wife's residency, I am unsure what section of TurboTax you are working on.

If you are claiming the foreign earned income exclusion and using the physical presence test, you can use January to December 2021 since your wife was out of the US for the whole year.

[SvilenM]

Hi ErnieS0,

Thanks so much for replying.

"For your wife's residency, I am unsure what section of TurboTax you are working on."

I was referring to the very first few screens of starting a new return in TurboTax, where one enters personal information like name, DOB, SSN, employment status and state of residence. In the state of residence I can say "Foreign or US Possession", indicate that she lived in another state in 2021and also the state she lived before she moved. And then there is a field to enter the date the person became resident of the foreign country, but there you can only go as much back as 01/01/2021. If you try to enter an earlier date, TurboTax gets angry at you. She was a foreign country resident since middle of 2019. That's what made me think that  this date only matters for the tax purposes for 2021 since it's a return for 2021.

With all fairness, I should say that if you right mouse click in that date field, a message pops up saying:
"Date became a resident should be after Jan 1 for a part-year resident. If you were a resident the entire year, uncheck the part-year resident box"
However, there is no part-year resident box to uncheck on that screen or the following screens for that matter and I'm kind of lost here.

Thanks again

[JohnB5677]

This section of My Info is exclusively for the 2021 tax return.  If your wife lived in a foreign country since 2019 she would qualify for the foreign physical presence test when filing form 1116.

If you require additional guidance, please reach out.

[SvilenM]

Hi JohnB5677,

Thanks for replying.
I have actually reached out and talked to TurboTax specialists on the phone but wasn't able to get satisfying and convincing answers to both of the questions I raised here. That's why I posted in the forum.

Anyway, can you please elaborate a bit on that 1116 business? What are the consequences of qualifying for the foreign physical presence test? How to get to form 1116 in TurboTax?

Thanks

[ThomasM125]

Form 1116 is used to apply for a tax credit on foreign taxes paid. It will be populated based on your answer to questions in the Foreign Taxes section of TurboTax, which is in the Estimates and Other Taxes paid section in the Deductions and Credits area of TurboTax.

If your spouse lived in a foreign country for a total of 330 full days during a twelve month period she may qualify to exempt some or all of her foreign income from taxation.

You would use the Foreign Earned Income and Exclusion section in TurboTax to determine if she qualifies. It is in the Less Common Income section, in the Income and Expenses area of TurboTax.

@SvilenM

[SvilenM]

Thomas,

She didn't have foreign income. She only paid foreign taxes on interest from US bank accounts.

[DaveF1006]

To claim the foreign tax paid on the interest, go to;

1. Federal>wage and income>
2. Interest and Dividends>1099 INT
3. Edit your 1099 INT if it is listed then as you enter information, check the box that says my Form has more information listed than just Box 1.
4. List the Foreign Tax paid in Box 6.

[SvilenM]

DaveF1006,

Please, correct me if I'm wrong. 1099-INT is issued by my bank. Box 6  gives information on whether my bank institution paid foreign tax on the interest if that interest derived from foreign assets.
Here the situation is quite the opposite. My wife has US bank account with US assets but since she lived in a foreign country she paid taxes on the interest there. We will also have to pay taxes on interest here in US.
Is 1099-INT the right place to report this situation?

[DaveF1006]

Yes, if this is a US Bank account, the 1099 INT is the correct way to report this. Since foreign taxes were paid by you whether than the brokerage, you should still report the foreign taxes paid in Box 6 of the 1099 INT.

@SvilenM

[SvilenM]

@DaveF1006 

Does IRS care about what foreign country that tax on the US bank interest was paid in? In 1099-INT, the way you explain it, we can only show the amount of foreign tax but there is no way to indicate where it was paid.

Thanks

[ThomasM125]

It wouldn't matter what country the tax was paid to if you enter the tax on a form 1099-INT and the amount is under $300 ($600 for married filing joint), as you don't need to complete form 1116 in that instance to receive the foreign tax credit. Otherwise, you would need to complete the Foreign Taxes section under Estimates and Other Taxes Paid to report the country where the income was earned/taxed in order to populate form 1116 Foreign Tax Credit.

[ThomasM125]

It wouldn't matter what country the tax was paid to if you enter the tax on a form 1099-INT and the amount is under $300 ($600 for married filing joint), as you don't need to complete form 1116 in that instance to receive the foreign tax credit. Otherwise, you would need to complete the Foreign Taxes section under Estimates and Other Taxes Paid to report the country where the income was earned/taxed in order to populate form 1116 Foreign Tax Credit.