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Topic: forms 1116 - "income re-sourced by treaty" ?  (Read 2240 times)

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forms 1116 - "income re-sourced by treaty" ?
« on: March 13, 2025, 01:24:42 PM »
Hi - does anyone have experience with US income re-sourced for FTC purposes?

I am US/UK citizen and UK resident. I have UK income (mostly salary), dividends and interest from US broker, and RMD from US 401K.
I was under the impression that interests/dividends and RMD are "income re-sourced by treaty", and so I have to file a septate 1116 for each of them (+ form(s) for UK income), aggravated by the fact that US actually has 1st right to tax US dividends (at up to 15% rate).
But I am being now told that I actually have to simply put all three US sourced income groups on one "passive income" 1116 (which should also include any UK source passive income).

It relies on the statement from instructions for 1116 (page 6):
"You must compute a separate foreign tax credit limitation for any income for which you claim benefits under a treaty, using a separate Form 1116 for each amount of re-sourced income from a treaty country. This rule doesn’t apply to income that is re-sourced by reason of the relief from double taxation rules in any U.S. income tax treaty that is solely applicable to U.S. citizens who are residents of the foreign treaty country."
I also found similar statement here:
https://www.fenwick.com/insights/publications/the-new-foreign-tax-credit-proposed-regulations-an-executive-summary
And here (at the end, 1:26 approximately):
https://www.youtube.com/live/YQUiRKM2ddo

Any thoughts?


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Re: forms 1116 - "income re-sourced by treaty" ?
« Reply #1 on: March 13, 2025, 03:31:37 PM »
My wife and I are also dual citizens living in the UK and I can tell you what our dual qualified tax preparer does for us each year.  We file 2 Forms 1116, one marked as Certain Income Resourced By Treaty for US pensions and US dividends, and the other marked as General Category income with our UK pensions and interest income.
Dual USC/UKC living in the UK since May 2016


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Re: forms 1116 - "income re-sourced by treaty" ?
« Reply #2 on: March 14, 2025, 09:37:42 AM »
Oh! Thanks so much.
Yes, it might be your preparer interprets instructions for 1116 as that you do not need to separate different types of incomes resourced by treaty to different "baskets", just submit one form for all of them.

I would agree with them, but the second link I fund is a recent video webinar by IRS (for tax preparers)
https://www.youtube.com/live/YQUiRKM2ddo
It says, I copy from its transcript:
<the three bite rule is  - a classical example is US dividends for UK resident/US citizen - when US taxes 15% of dividends, then UK taxes it giving credit for 15%, and then US taxes it again giving credit for UK tax>

1:26:13 : you said the Three-Bite re-sourced income does not  go into the treaty basket.
Sure. Even though there is a separate basket from  the four general limitation categories for income  re-sourced by treaty, there's a different rule  with respect to income that's re-sourced under the Three-Bite Rule. And this is outlined  in the Section 904-4 regulations, and income  that's re-sourced under the Three-Bite Rule  doesn't actually go into the treaty basket.
This was a rule that was added in  a recent TD. And it's effective,  I believe, for tax years after  2018 or specifically 12/31/2017. 
So the income would be placed into the  assigned to the basket that reflects  the kind of income that was earned before any  re-sourcing occurs. So if it's dividend income,  it would be passive. If it were wage income, it  would be general. If it were dividend income that was taxed at a higher rate of taxation, it might  be kicked out of passive and put into general.

Here is the full transcript of that video on IRS website: 
https://www.irs.gov/newsroom/form-1116-certain-income-re-sourced-by-treaty-youtube-video-text-script

P.S. Section 904-4 is written in a way which completely breaks my brain...
Probably it means one has to do one 1116 for income resourced by treaty, except when three bite rule applies (say if one has US dividends taxed in US at 20%), in which case income subject to three bite rule does not go into resourced basket..

My goal here is to understand in which form 1116 to put unused UK tax to cary forward (since it could be useful for us next year in fact)


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