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Tax rebate from a foreign government - taxable income in the US?

Tax rebate from a foreign government - taxable income in the US?

Old Jan 16th 2014, 3:44 pm
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Default Tax rebate from a foreign government - taxable income in the US?

Hi all

We've FINALLY just got notification that the Swiss authorities have processed our tax return from when we lived there, for 2011 (decent upright Swissies get their pay gross and then pay their own taxes; dodgy foreign types have their income tax withheld at source at a 'conservative' rate and then rebated back, to avoid them skipping the country owing money). We'll be getting back about $8k, which is a nice, sort of unexpected bonus savings scheme.

Does anyone know how/ if this money will be considered as taxable income by the US for 2014? I know tax filing for this year is a while off, but if it's going to be taxed, then I'll adjust the withholding for the rest of the year to make sure we're all squared away; I'd rather do that than get a bill for several thousands come next April.

This is a straightforward overpayment of income tax, like when you pay too much tax to the federal government through withholding, and they give it back. Common sense suggests that it shouldn't therefore be taxable, but you never know. I have a nagging feeling that even if the money isn't taxable, it's going to involve declaring complicated foreign credit stuff..?

Grateful for any clues on this, so I can make sure I've got the money squirrelled away if necessary.
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Old Jan 16th 2014, 3:48 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Yes. As is a tax rebate from the US Federal, state or local government, if I remember correctly!
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Old Jan 16th 2014, 4:00 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by Pulaski View Post
Yes. As is a tax rebate from the US Federal, state or local government, if I remember correctly!
That's my recollection of how it worked. I've never been able to figure out why this is, though, for example:

In the tax year 2006, you paid $1,000 in tax that you shouldn't have paid, so you get it back after filing your tax return.

You must record this as income in your 2007 tax return.

Huh? Why?

Let's say the overpayment was due to an error (e.g., incorrect number of deductions listed on your "W-whatever it is" form).

If the error hadn't been made, surely that $1,000 would have been received as income in 2006 ... in which case you would not have had to pay tax on it in 2007.

Whenever tax and social security issues come up, I feel like a complete dunce.
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Old Jan 16th 2014, 4:00 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by Pulaski View Post
Yes. As is a tax rebate from the US Federal, state or local government, if I remember correctly!
Federal rebates are not taxable. but those from states are. I don't know the answer to the OP's question, but my guess would be that it would be US taxable at both state and federal level.
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Old Jan 16th 2014, 4:02 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by nun View Post
Federal rebates are not taxable. but those from states are. I don't know the answer to the OP's question, but my guess would be that it would be US taxable at both state and federal level.
Doesn't TurboTax ask you to enter any tax refunds you received, including Federal?

It's 6 years since I used it so maybe I am just mis-remembering it.

My bad: https://turbotax.intuit.com/tax-tool.../INF15613.html (see bottom of page).

I was mis-remembering it.

Last edited by dunroving; Jan 16th 2014 at 4:04 pm.
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Old Jan 16th 2014, 4:13 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by nun View Post
Federal rebates are not taxable. but those from states are.
I thought state rebates were only taxable if you'd itemised, because you'd then received a tax benefit on the previously stated amount? I think... I've only done one tax return so far, and we didn't itemise, and we owed the state but the feds owed us so it all came out fine in the wash so I didn't pay THAT much attention, but I think I read that somewhere.

Originally Posted by nun View Post
I don't know the answer to the OP's question, but my guess would be that it would be US taxable at both state and federal level.
Bother taxes. It's not the paying of the money, it's the pointless layers of complication. 2014 was supposed to be our first year of easy taxes where I didn't need to pay someone to do them for me - just regular income that's already been withheld, standard deduction, some bank accounts and stocks that I've held and not sold, no 8938, no FBAR, etc. Now I've got this stupid refund to mess it up. I wonder if I can still do it in Turbotax, and just put the amount in the 'received a federal tax refund' box - that would seem logical and analogous, surely? - and then just accept what it spits out the other end.
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Old Jan 16th 2014, 4:16 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by dunroving View Post
Doesn't TurboTax ask you to enter any tax refunds you received, including Federal?

It's 6 years since I used it so maybe I am just mis-remembering it.

My bad: https://turbotax.intuit.com/tax-tool.../INF15613.html (see bottom of page).

I was mis-remembering it.
Oh goody, so my 'federal tax refund' shouldn't be taxable. As long as they don't specifically ask me WHICH federation it came from
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Old Jan 16th 2014, 4:59 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by kodokan View Post
I thought state rebates were only taxable if you'd itemised, because you'd then received a tax benefit on the previously stated amount?
That is the reason. Using the same logic, I'd assume that a tax refund from a foreign government wouldn't be taxable as long as you previously didn't use it as a foreign tax credit, used tax credits from the foreign government for that year but the amount needed did not include the refund, weren't a resident of the US for that tax year, or you filed a 1040 NR for that year.

Therefore I suspect it'd only be taxable if you previously used it as a tax credit to offset US taxes owed but check with a CPA.

Last edited by Michael; Jan 16th 2014 at 5:03 pm.
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Old Jan 16th 2014, 5:10 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by Michael View Post
...or you filed a 1040 NR for that year...
Score! We filed NR in 2011, as we arrived late and weren't here anywhere near long enough to meet substantial presence. The Swiss rebate relates to the part of 2011 before we moved here. No offsets, no credits, etc.

So probably not taxable then, like a US federal refund. I'll do a bit more digging - 2013 taxes are complicated so we'll get them done by someone official; I can probably throw this in a a 'by the way' question during a conversation - but it's looking promising
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Old Jan 16th 2014, 5:18 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by kodokan View Post
Score! We filed NR in 2011, as we arrived late and weren't here anywhere near long enough to meet substantial presence. The Swiss rebate relates to the part of 2011 before we moved here. No offsets, no credits, etc.

So probably not taxable then, like a US federal refund. I'll do a bit more digging - 2013 taxes are complicated so we'll get them done by someone official; I can probably throw this in a a 'by the way' question during a conversation - but it's looking promising
Then in my opinion, it is not income for 2014 and therefore not taxable.
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Old Jan 17th 2014, 2:46 am
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Not taxable, as long as you didn't get any US credit for having paid it. (imo )

HOWEVER... if the Swiss government pays you interest on the refunded taxes, then that interest is taxable. (Also watch out if that $8K puts you over the $10K FBAR limit for the year... you have to do the FBAR if at any time during the year your foreign accounts are above $10K, even if you bring the money back to the US before the end of the year.)
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Old Jan 17th 2014, 4:24 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by Jscl View Post
HOWEVER... if the Swiss government pays you interest on the refunded taxes, then that interest is taxable.
Excellent point, I hadn't thought of that. I think they do pay interest.

Any know how I'd then report that for taxes - like interest on a bank account, say? Or is there a catch all 'other income' box in Turbo Tax it could go in?

Wretched Swiss government. We pushed and pushed to get this refund in 2013, when we already had complicated tax. Now they're messing up 2014 for me, when I'm hoping to go it alone.
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Old Jan 17th 2014, 5:09 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

You convert to $ and put it on Schedule B with any other interest you have, it doesn't matter that you don't have a 1099-INT (which you won't).

I haven't used TurboTax but put it in the Interest section on there, not the "Other Income." The "Other Income" section is for when you win the lottery .
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Old Jan 17th 2014, 5:23 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Originally Posted by kodokan View Post
Excellent point, I hadn't thought of that. I think they do pay interest.

Any know how I'd then report that for taxes - like interest on a bank account, say? Or is there a catch all 'other income' box in Turbo Tax it could go in?

Wretched Swiss government. We pushed and pushed to get this refund in 2013, when we already had complicated tax. Now they're messing up 2014 for me, when I'm hoping to go it alone.
You report it on Schedule B. Usually Turbo Tax prompts for information from a 1099-INT but it may also ask for other interest income. If it doesn't, then you can just manually edit the form in Turbo Tax adding a line such as Canton Zurich or Swiss Government $200 and Turbo Tax will calculate total interest including your manual entry. If the amount of interest is less than $10, it is not reportable.

http://www.irs.gov/pub/irs-pdf/f1040sb.pdf

If Swiss is withheld tax on interest paid, that can be used as a foreign tax credit. I believe if the total foreign tax credits are less than $600 for married filing jointly, it is just a straight foreign tax credit and prorating it is not necessary. I believe you can just manually enter the tax credits on form 1116 and Turbo Tax will calculate.

Don't get too concerned as long as you make a "good faith effort" since the amount will likely be small and the IRS won't likely question it and even if they do, the penalty would likely be small.

Last edited by Michael; Jan 17th 2014 at 5:40 pm.
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Old Jan 17th 2014, 6:15 pm
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Default Re: Tax rebate from a foreign government - taxable income in the US?

Thank you, guys - it all sounds quite straightforward. I'm glad I asked about this, as I hadn't even considered the 'taxable interest' element. It's likely to be the $250-300 region, if the Swiss govt is still paying the 2% I remember from when we were there, so needs reporting but I don't thiiiiink they then withhold tax on it (and even if they did it's probably not even worth worrying about foreign credits).

Think I shall have a little play with Turbo Tax Premier over the weekend, then I'll have more of an idea of what I'd need to find out/ have in front of me to prepare taxes.
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