Following 2016 DC Court of Appeals ruling, IRS agrees that #Americansabroad in France were wrongly denied the right to use certain French taxes as Sec. 901 Foreign Tax Credits to offset U.S. taxes https://t.co/0mz6o81REz pic.twitter.com/2YPNF8xZQE
— U.S. Citizen Abroad (@USCitizenAbroad) June 18, 2019
The background to the case referenced in the above tweet is described here. The “bottom line” result was reported on at the New York Times and Bloomberg.
It its simplest terms the controversy was over whether certain French taxes should be interpreted to be income taxes (in which case they could be used as Foreign Tax Credits) or Social Security taxes (in which case the taxes could not be credited against U.S. income taxes). At a minimum, the case assumes that NOT ALL foreign taxes can be used as tax credits to offset U.S income taxes.
(Beyond that, the DC court of appeal decision provides guidance with respect to (1) Who decides how foreign taxes are to be treated under a tax treaty (hint not ONLY the IRS) and (2) what kind of evidence is relevant in determining the question (hint U.S. dictionaries are not to be used).)
There are many people in the world, who think that all of the foreign taxes paid by Americans abroad can be used as credits against U.S. tax owing.
As part of a “conversation” with the “Powers To Be” in DC, I think it’s important to demonstrate that there are many foreign taxes that are simply not “creditable” against U.S. taxes.
Could you please provide examples from your country of residence? What are specific examples of “taxes” paid in your country of residence that are not eligible to be used as “foreign tax credits” under Section 901 of the Internal Revenue Code.
Most US tax professionals treat the Australian Medicare Levy (and the former “Temporary Budget Repair Levy”) as not creditable against US taxes.
Quick summary of these taxes: the Medicare levy is 2% of taxable income (reduced for low income taxpayers). In addition there is a Medicare levy surcharge of up to 1.5% for those without private health cover. The Medicare levy essentially increases the top marginal tax rate (payable on taxable incomes in excess of A$180,000) from 45% to 47%. The Temporary Budget Repair Levy was an additional 2% payable on taxable income in excess of A$180,000, raising the marginal tax rate to 49%. This expired 30 June 2017, but the opposition included reinstatement of the Temporary Budget Repair Levy in its policies at the recent election.
Australia treats these taxes as income taxes. The Medicare Levy is legislated in Part VIIB of the Income Tax Assessment Act 1936 and the Medicare Levy Act 1986. For Australian residents with foreign source income, the Foreign Income Tax Offset (FITO – Australia’s equivalent to FTC) can offset both the Medicare Levy and the Medicare Levy Surcharge (not sure about the Temporary Budget Repair Levy as that is no longer current law). See the ATO website at https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Foreign-income-of-Australian-residents/Applying-a-foreign-income-tax-offset-against-Medicare-levy-and-Medicare-levy-surcharge/ – this page references an ATO Interpretive Decision (https://www.ato.gov.au/law/view/document?docid=AID/AID201175/00001) that clearly treats the Medicare Levy as an income tax subject to Australia’s double tax agreement with PNG and says that this interpretation would apply to other double tax agreements.
In response to your Q: I’m a Swiss dual national living in Switzerland and paid in CHF. we have mandatory contributions into our pension funds – these are not recognised by the IRS and hence not deductible so has to be included as taxable income on US taxes (and you can;t contribute to a 401k nor can you open any other retirement accounts in us. Also, I receive non taxable per diem amounts such as mobility allowance (train etc) and this also is not recognised by the IRS as non taxable as it is here in CH so must be included. The list of difficulties and hardships go on. I’m hopeful for Congressman Holding’s proposed ‘Tax Fairness for Americans Abroad’ bill but if that does not pass this year I will opt for renunciation. cheers,
Property taxes, HST/GST/PST (various ‘goods and services’ / sales taxes).
Value Added Tax, applied on almost all goods and services here in the UK. Currently 20%.
Consumption taxes are a hot topic for OECD, in the BEPS context.
https://www.oecd-ilibrary.org/docserver/9789264218789-9-en.pdf?expires=1561020636&id=id&accname=guest&checksum=62CCDC8B7D2BF5FE8CE7F0C29AF2AEA6
Section 6.3
In our opinion, it is unlikely that any serious, substantial, and significant changes will occur in the move towards RBT like the rest of the world.
The us empire viewed US persons as tax subjects/revenue streams for life, and with the exception of more rhetoric, someday talk, more meetings, twitter blasts, and homelander/escapee back& forth, unfortunately given the history of the us empire of imperialism, nothing will really change except more restrictions/penalities/forms/taxes to those who try to escape or have escaped the us.
Value Added Tax (tax on consumption) on the purchase of all goods and services is usually around 20% throughout Europe.
The US has Sales Taxes (taxes on consumption) at the individual State levels, usually only around 6-7%.
@SaraE actually I think the US just simply doesn’t care. Most of us who live abroad don’t earn enough to make it worth the government’s while to care whether we file tax returns (or pay tax) or not.
Back to the subject in hand, I’m not certain whether UK council tax can be offset against US taxes?
“whether UK council tax can be offset against US taxes?”
I think the answer is no, because it’s not an income tax and therefore is not covered by the DTA.
As I understand it, the French plaintiffs won their case because the higher court ruled that the taxes concerned were indeed covered by the DTA rather than the totalisation treaty.
US social security pensions received outside the US.
If I understand correctly, US residents get the pension tax-free up to a certain amount; but UK residents get taxed by HMRC at their top rate.
The result is that a US resident can receive both the US and the UK social security pensions, paying tax only on their UK pension; but a UK resident who receives both pensions will be fully taxed on both.
Moreover, regardless of whether the individual with both pensions resides, their US SS pension is likely to be reduced by the Windfall Elimination Provision, although the purpose of the WEP is to penalize US SS recipients who have additional pensions for which they haven’t paid US SS taxes. Recipients of the UK State pension have paid taxes (National Insurance), but their SS pension may get WEPped all the same. (The rules are complicated.)
A Canadian woman is currently challenging the WEP reduction of her US SS pension due to her Canadian pension. See https://www.theindianalawyer.com/articles/49752-breaching-the-agreement
@Alec
https://www.americansabroad.org/sdfcu-account/
Please note that I have not tried to open an account. I am not a member of Americans Abroad.
The Americans Abroad society has arranged the ability of its members to open a bank account with a credit union in the US. This is with the State Department Federal Credit Union (SDFCU).
The linked page does mention IRA accounts which are a type of retirement account.
All one has to do is join Americans Abroad and apply.
If I recall correctly, members of an outfit called American Consumer Council are eligible to join SDFCU. Much cheaper than joining American Citizens Abroad.
Hmmm … join ACA and then deposit your savings in a SDFCU account. What a deal for the ACA (more membership fees) AND the IRS (easy homeland access for tax/interest/penalty collection). I suppose if there’s no local alternative available then it’s any port in a storm, even if it’s far away and accessable only online. Maybe these SDFCU comments should be transferred to the “Your Experiences: Banking; Entering the US” thread.