US citizen Living abroad with US investments. Do I even declare them on my tax return?

[CalMaple]

American citizen currently living in France. I have mutual funds in the US that give out dividends. My understanding is that I should pay taxes on the dividends exclusively to France. Should I even declare them on my US tax return? If so, how do I avoid not being taxed on them by the IRS?

[pk]

@CalMaple ,  for your US return you do have to declare your world income ( even if the   US-France  Tax treaty precludes  US from taxing the income ).  I am not very familiar with the US-France Treaty , so let me come back to you once I have digested the  treaty and the explanatory notes thereon.

pk

[pk]

@CalMaple , what I find is this  -- there have been some changes made to  Dividend taxation  -- original article 10  ---- here is the latest-->

"  ARTICLE II
Article 10 (Dividends) of the Convention shall be deleted and replaced by the
following:
“Article 10
Dividends
1. Dividends paid by a company that is a resident of a Contracting State to
a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident and according to the
laws of that State, but if the beneficial owner of the dividends is a resident
of the other Contracting State, the tax so charged shall not exceed:
a) 5 percent of the gross amount of the dividends if the beneficial owner is
a company that owns:
(i) directly at least 10 percent of the voting stock of the company
paying the dividends, if such company is a resident of the United
States; or
(ii) directly or indirectly at least 10 percent of the capital of the
company paying the dividends, if such company is a resident of
France;
b) 15 percent of the gross amount of the dividends in all other cases. "

You can find the treaty and the explanatory notes here -->

France - Tax treaty documents | Internal Revenue Service (irs.gov)

 Is there more I can do for you ?

[CalMaple]

Hi pk,

Thanks for looking into this matter. From the language, it appears as if I would the choice of which country to pay taxes to but I presume that's not exactly the case. I assume that if paragraph 2 were to apply, it would be have been obvious to me and I would've been by taxed by the US already.

Let's assume then that I'll pay taxes to France. Do you know what I must put on my US taxes to ensure that I won't pay taxes to the US?

Thanks again for your help.

[pk · Accepted solution]

@CalMaple  even though the treat uses "may be", generally it would be interpreted as "will" for this case i.e.  US would tax that income also but at not more than at 15%., whereas France can tax it at its rate for this type of income ( dividend ).  There are at least  two things you have to do for this situation:

(a) First you complete the France Return ,  so you the amount of Foreign tax you pay.

(b) then assuming the French Tax allocable to this passive income is not greater than  safe harbor amount  ( US$300 per filer  i.e. US$600 for  joint filers ), you just claim that  and without using form 1116.

(c) If the amount of foreign tax imposed on this  is substantially more than the  safe-harbor amount then you have to use the form 1116.   In this case you have to do two things

     1.  you have  claim  "Resourced by Treaty "  status on form 1116  -- thus  the US dividend  income is sourced to France for the purposes of form 1116 only;

      2.  You have   to enter the  Total  and resourced income as foreign income and then enter the adjustment called out in the instructions  for form 1116  ( this is because US is limited  i to tax rate of 15%, by treaty ).

    This will result in  the correct  tax  computation  of Foreign Tax Credit for you.

Is there more I can do for you /

pkm