Howto: take tax credit for tax paid to UK on US source income

How does one take a credit, when completing 1040, for tax paid to the UK on US source income?

I am US-UK dual national, resident in UK for many years, with some US source income (in the form of interest, dividends and capital gains). I pay UK tax on that since the UK taxes on worldwide income.

I understand how to use Forms 1116 (general and passive) to take a tax credit for UK taxes paid on UK source income (wages and bank interest). But how do I take a credit for the UK taxes I pay on US source income? Some years ago an IRS helpline person told me that I should simply add the amount at the bottom of my summary 1116 and write "Line 30 includes an additional credit of $xxx for tax paid to the UK on US source income under tax treaty." That has never been questioned, and my tax bill is thus $0, but I am wondering if there is some other way I should be figuring it - perhaps with a Form 1116 for "(d) Certain income re-sourced by treaty", and a Form 8833. But I do not understand how one completes those.

I have been searching the IRS web site and the internet for days. But can't find an example. I'd really appreciate some help.

You use the "income re-sourced by treaty" option but you have to read the treaty and make sure you understand how it applies to your particular type of income. I've recently attempted this for the first time on my own US tax return and I can attest that getting the resourcing right is one of the more challenging aspects of preparing the return.

For some types of income (e.g. interest, earnings from a UK employer relating to workdays spent in the US), it's not too hard. The treaty says that for a UK resident these are exclusively UK taxable (meaning UK sourced). Of course for you as a US citizen they are also US taxable because of the saving clause, but they remain UK sourced if you meet the treaty definition of a UK resident. Therefore you simply move these income items to the resourced copy of Form 1116.

For other types of income (e.g. dividends) it's a bit more complicated because the treaty permits the US to withhold a specified rate of tax for a UK resident (it's 15% for dividends). You're expected to take a foreign tax credit on your UK tax return for the amount allowed by treaty. You then resource income to the UK as above, but only to the extent needed to avoid double taxation. The instructions for calculating how much income to resource are shown on pages 103-105 of this document:
http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf

Thank you for that reply. I have one other question. Can income that would go in the "resourced by treaty" basket become HTKO and need to be put the the "general" basket?

For example, suppose I receive interest from a US bank account, which is re-sourced to the UK under treaty and taxed at 40% in the UK. This is high-taxed income. Does it stay on the 1116 "resourced by treaty", or get moved to 1116 "general"? There does not seem to be anything about this in the Form 1116 instructions.

Great question. My view on this would be that your high-taxed passive income would be considered general category under US law, but the treaty overrides both US and UK domestic law where there is a conflict, so the treaty provisions providing for the resourcing take precedence and you put the income down as resourced. I emphasize that this is only my opinion so you may wish to ask the IRS.