Assuming most are done and dusted for 2010 tax returns, I'll bring on the first question for 2011.
Whilst reading through the 2010 info for Form 1116, I came across the notice about the changes in 2011, specifically the resourced income basket related to income influenced by the treaties. My first impression is that it won't result in additional tax for the average taxpayer, but it may add supplemental 1116’s and yet another pool of differing tax credits along with the 'general limitation' basket and the 'passive' basket. 'Resourced by treaty' has always been there as well, but its application was quite limited. In fact, excluding the nuisance of added forms, it could make reporting much more understandable (apportioning US and UK income and UK tax paid on each).
From 2010 Form 1116 Instructions:
Income re-sourced by treaty. For tax years beginning after August 10, 2010, you must compute a separate foreign tax limit for any item of U.S. source income under an income tax treaty of which you claim benefits….
If a sourcing rule in an applicable income tax treaty treats any of the types of income described below as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.
1. Certain gains (section 865(h)), or
2. Certain income from a 904(h)(10)).
3. For tax years beginning after August 10, 2010, any item of U.S. source income (not only (1) and (2) above) that is re-sourced as foreign income.
Important. You must compute a separate foreign tax credit limitation for any such income for which you claim benefits under a treaty, using a separate Form 1116 for each amount of re-sourced income from a treaty….. In addition, you may be required to file Form 8833…..
In addition to Form 8938 (I already submit 8833), yet another Form 1116 and 1116AMT for 2011? I assume ROTH’s may escape this (?), but what about Social Security or a pension from an individual State (NY, for example)? Does the fact that Social Security (exempt income) is taxed by the UK, and not the US, determine it to be subject to a ‘sourcing rule’?
Two questions:
1. Has anyone any further information on these changes to 1116?
2. What is the difference between ‘resourced income’, ‘exempt’ income, and ‘excluded’ income. I think I understand resourced and excluded, but how does this fit with exempt income?
