US brokerage account while living abroad

1. Turbotax cannot cope with foreign source and 1116s adequately let alone US/UK treaty resourcing.
2. No the gains are not foreign - not even passive basket - in most cases. Treat them the same way as a gain on a US stock.

1. Turbotax cannot cope with foreign source and 1116s adequately let alone US/UK treaty resourcing.
2. No the gains are not foreign - not even passive basket - in most cases. Treat them the same way as a gain on a US stock.

So what are the "Qualified Foreign Dividends and Capital Gains" mentioned in the instructions to Form 1116. Are you saying that if I sell UK stocks through a UK broker and pay UK capital gains tax, these are not considered foreign....what gives?

If I put the UK sale of stocks on a Shecdule D where do I claim the tax paid to the UK?

Gains of the type you mentioned are not foreign in the sense the foreign income is income from services performed outside the US, interest income from a foreign source, dividends from corporations incorporated outside the US or sale on nondepreciable property while you have a tax home outside the US if you paid tax of at least 10% of the gain.  Selling or trading stock in a foreign market has no bearing on the definition of foreign income based on the definition in the 1116 instructions.

Also, it is most likely a gain from selling a foreign stock would not be considered passive income, but interest or dividends and gains from foreign currency or commidities transactions might be considered passive income.  It depends on what is specifically in the transaction that was conducted.

So guya is correct that they are neither foreign earned income nor passive from the IRS point of view.

What he is saying is that it is unlikely that you will get credit for taxes you paid based in the UK in the US.  There are a few exceptions in 1116 that might apply, but again, it depends much more on the specific nature of the transaction and you need to consider what is general limitation income and what is "High Taxed Income":

In some cases, passive income and taxes must be treated as general limitation income and taxes.  Generally, passive income and taxes must be placed in the general limitation income category if the foreign taxes you paid on the income (after allocation of expense) exceed the highest U.S. tax that can be imposed on the income.  However, no part of the passive income that is financial services income is treated as high-taxed income.  See Regulations section 1.904-4(c) for more information.

In other words, get professional advice...

Gains of the type you mentioned are not foreign in the sense the foreign income is income from services performed outside the US, interest income from a foreign source, dividends from corporations incorporated outside the US or sale on nondepreciable property while you have a tax home outside the US if you paid tax of at least 10% of the gain.  Selling or trading stock in a foreign market has no bearing on the definition of foreign income based on the definition in the 1116 instructions.

This is all very confusing. Can you explain what the Capital Gains mentioned in the instructions to Form 1116 are? It also looks like a situation of double taxation, is this covered in the Treaty.

If I earn $60k in the UK and have say $5k dividends and $5k in capital gains from UK based stocks how do I I fill in my 1040? Is there anywhere to claim back the UK tax I will pay on the dividends and capital gains. This should not be a difficult question.

Ignoring complications such as UK residence, US workdays, UK employer pensions, State filing obligations and assuming you qualify for the foreign earned income exclusion on the entire earned income, the the answer is quite straightforward (phew!):

1. The earnings get excluded from US tax.
2. There is no UK tax on the dividend income because the UK tax is notional, so does not actually ever get paid.
3. There is no UK tax on the capital gains because they fall below the annual capital gains tax exemption.

So you report the $10,000 (of which $5,000 goes into a passive 1116, although there is actually no passive tax paid), deduct your deductions and exemptions and pay US tax on what's left.

The treaty may help in getting the qualified rate on the dividends, depending on the time you held he stock.  It will not eliminate US taxes entirely, nor will foreign tax credits because you'd not have paid any foreign taxes at all on the investment income.

3. There is no UK tax on the capital gains because they fall below the annual capital gains tax exemption.

Thanks Guya that helps. I was intrugued by your 3rd statement wrt UK taxation. It sounds like if you own UK stocks and sell them at a capital gain and that gain falls below some annual allowance (what is that by the way) you don't pay UK CGT. So what's to stop you selling your stocks every year to use that annual allowance and immeiately repurchasing the stock?

The UK only introduced capital gains tax in 1965, so back then it was only expected to be fair to tax the wealthy.

The current CGT exemption is £8,200.  If you can teach me how to make £8,200 of capital gains each year I'd love to meet you!

The UK only introduced capital gains tax in 1965, so back then it was only expected to be fair to tax the wealthy.

The current CGT exemption is £8,200.  If you can teach me how to make £8,200 of capital gains each year I'd love to meet you!

At 6% return you'd need 136k pounds invested to make 8.2k. That doesn't seem an outrageous amount. So any sensible UK investor can completely avoid capital gains tax
if they have less than 8.2k in gains each year and sell and repurchase every year.

Investment advice is not my industry, but;

1. how would I know what stocks etc to buy that would not go down by that 6%?
2. surely churning investments each year adds to brokerage fees?
3. i assume you are recommending selling and rebuying a different stock in the same sector to avoid bed and breakfast identification problems?

Investment advice is not my industry, but;

1. how would I know what stocks etc to buy that would not go down by that 6%?
2. surely churning investments each year adds to brokerage fees?
3. i assume you are recommending selling and rebuying a different stock in the same sector to avoid bed and breakfast identification problems?

1) Well that's the $64M dollar - you carn't be sure that stocks will rise, but over the long run they're a good bet, particularly if you dollar cost average.
2) Yes, that's why I'd use a discount broker, but if it reduced the overall CGT it would be worth it.
3) Now you've answered my original question apparently the UK does have some rules to stop people selling and immeiately repurchasing the same shares to using the annual
CGT allowance.