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Allocating US tax paid on UK tax form

Allocating US tax paid on UK tax form

Old Aug 12th 2015, 11:01 am
  #16  
nun
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Default Re: Allocating US tax paid on UK tax form

Originally Posted by Janelle View Post
Thank you Nun, your assumptions are correct. My husband is retired from USMC, so only his military pension from the US, no SS yet for either of us.

I am going to file a UK SA and let HMRC work out the tax. Then I will file an amended 1040 and claim the tax credit.

Next year I will know to hold off on filing the US return until I know what the tax will be in UK.

What do you mean by the phrase "resources your income"?
As you husband's pension comes from the US Government (and I assume he is not a UK citizen), it is only taxable in the US. If you enter it on your SA the taxable amount should be entered as zero and you can quote Article 19.2 of the US/UK tax treaty as the reason. Once you get SS that will only be taxable in the UK.

"resource your income" is a term used by the IRS for a procedure to allow a US tax payer to take a foreign tax credit on US income or gains. For example, if you are a US citizen and a UK resident and taxed on an arising basis you will be taxed by both the US and the UK on your worldwide income. If you have income or gains in the US the UK will tax those and you will have to pay HMRC. But as a US citizen the IRS will also want to tax you. The IRS allows you to take a credit for tax you pay on foreign income and gains.....but your income and gains are in the US. So there is a treaty procedure called "resourcing" that allows you to virtually move the money to the UK and treat is as foreign so you can get the credit on your US tax. Look at form 1116 and you'll see a series of "baskets" as you have to categorize your income and gains.

Last edited by nun; Aug 12th 2015 at 11:08 am.
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Old Aug 13th 2015, 6:13 am
  #17  
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Default Re: Allocating US tax paid on UK tax form

Thank you again, everyone who contributed. I am starting to feel a lot better about understanding what I need to do - the mist is clearing - still lots of reading to do.

I can't tell you all how much I have appreciated having someone to ask. I hear horror stories about how much accountants charge to do UK/US taxes.
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Old Aug 14th 2015, 2:59 pm
  #18  
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Default Re: Allocating US tax paid on UK tax form

Hi Nun, care to elaborate on your statement about foreign dividends being more complicated and needing special treatment on UK tax return. We have Ordinary Dividend and Qualifying Dividends on our 1040.

An HMCR agent told me that LT and STCGs from mutual funds are taxed as interest in UK. After reading some of the incorrect things members have been told by HMCR agents, does anyone concur?

I must say after years of using TurboTax to do US taxes, I really don't know very much about the background technical workings of the US tax code.
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Old Aug 14th 2015, 6:24 pm
  #19  
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Default Re: Allocating US tax paid on UK tax form

Originally Posted by Janelle View Post
Hi Nun, care to elaborate on your statement about foreign dividends being more complicated and needing special treatment on UK tax return. We have Ordinary Dividend and Qualifying Dividends on our 1040.

An HMCR agent told me that LT and STCGs from mutual funds are taxed as interest in UK. After reading some of the incorrect things members have been told by HMCR agents, does anyone concur?

I must say after years of using TurboTax to do US taxes, I really don't know very much about the background technical workings of the US tax code.
For all this we are talking about US investment funds (ETFs, mutual funds etc) outside of retirement accounts

Your agent is correct if the US funds are non-reporting. In that case you lose your UK capital gains allowances and capital gains are taxed as income. So you pay HMRC tax and then do the usual resourcing and taking of tax credits to offset the US tax due. If the funds are on HMRC's reporting funds list (it's a good thing to make sure they are before you become liable to UK tax) then the capital gains and dividends are taxed as if they were UK funds. The UK has quite generous CGT allowances and if you are a basic rate tax payer you pay 0% on dividends.

Now under the treaty the US imposes a 15% withholding tax on all US sourced dividends so you have to include that when working out how to divide the tax between the US and the UK. There is a fully worked example on page 104 of the treaty technical explanation

http://www.treasury.gov/resource-cen...ts/teus-uk.pdf

However, if you are careful and can keep your income below the 15% US tax bracket and are a basic rate UK tax payer you don't really have to bother with the treaty as there will be 0% tax due on dividends in both the US and the UK.

Last edited by nun; Aug 14th 2015 at 6:39 pm.
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