IRS Office in Philadelphia provides international tax assistance

I have spent  days and sleepless nights trying to figure out how to report my income. I have thoroughly read all the instructions for Form 1116, and Pub 514. I have also read pages 103-105 of this document:
http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf,

I decided I might try the IRS international helpline:

IRS Office in Philadelphia provides international tax assistance. 1-267-941-1000, open Monday through Friday from 6:00 a.m. to 11:00 p.m. EST.

I feel sure there are others of you who have a similar profile of income, and so I hope what I have learned from my phone call will be helpful. You may skip the lines in blue and go directly to the punchline, below.

I said, "I have income from 4 sources:

(1) UK wages, say $ UKw
(2) UK bank interest, say $ UKint
(3) US bank interest,  say $ USint
(4) US qualified and non-qualified dividends, say $ USdivQ and $ USdivNQ

All of these are taxed in the UK."

"I know I can claim foreign tax credits for tax paid in the UK by putting
(1)  on a 1116 General;
(2)  on a 1116 Passive (possibly a HTKO since taxed at 40% in the UK?)
(3)  on a 1116 Resourced by treaty."

But for the life of me, I cannot figure out what to do with (4), the dividends.  If I do nothing more then when I subtract the 1116 tax credits from my nominal US tax I am left paying less than 15% on item (4). Maybe that is right? Perhaps so. (I use the Schedule D Tax Worksheet to figure my tax).

In Line 18 of each Form 1116 I know I need to make an adjustment by subtracting 0.6212*USdivQ from my Form 1040 line 41 (line 41 is (1)+(2)+(3)+(4) minus the standard deduction).

I have tried understanding the "Worksheet for Additional Foreign Tax Credit on U.S. income" at the back of Pub 514, but the instructions are very opaque.

My best understanding is that under the UK-US double taxation treaty I should be paying US tax of 15% on the dividends and no US tax on any of the other items. But I should also somehow be building up a record of carry-forward credit on my other income items since my UK tax exceeds my US tax.

Now for the punchline: after 15 minutes waiting (not bad) and then about 3 minutes on the phone to the above number I had the following IRS advice.

"Do not use Forms 1116. Just do the computation you think is right and attach a statement to your 1040 to explain how you figured it that way. They will come back to you if they think it is wrong."

Really? !! It's that easy? So I can just I figure my taxable income on 1040 line 44, figure the tax on line 46, and then insert whatever tax credit figure I need on line 47 so that the net tax that I am left to pay to the US equals 15% of the USdivQ+USdivNQ?

I then take that 15% as a credit on my UK self-assessment when reporting dividends.

That seems to put the right amount of tax money in the coffers of each country. But what about keeping a record of carry-forward excess tax credits on income items (1), (2) and (3)?

Should I follow the IRS helpline advice? Or can someone give me better guidance what to do with the income described above in blue? I feel I am close, but that I am just missing one or two key ideas. Then the penny will drop and I can rest easy.

I believe that the treaty imposes 15% US tax on your US dividends. That will have to be paid and then you can take a UK tax credit for it. However, how your US dividends are taxed will depend on how HMRC sees them. If they are from non-reporting funds they will be taxed at your income tax rate if they are from individual shares there should be no problems.

nun: Thank you. You confirm exactly what I believe is true.

I have no problem with paying 15% US tax on company dividends received in the US and then taking that as a credit on my UK taxes (where dividends are taxed at 32.5%). This would leave me owing the UK a fraction
(10/9)(.325)-0.15 -0.1(10/9)=0.1 of the dividend value.
My problem is how to show the US tax when I complete my US tax return according to the rules.

I cannot figure out any method of completing Forms 1116 that leaves me owing tax equal to 15% of the value of my US dividends. If I complete 1116 general and passive, as instructed, (for UK source wages and bank interest), and also a 1116 "resourced by treaty"  (for US bank interest), and then subtract those 3 credits from my nominal US tax the remainder that is to pay is less than 15% of the dividends. The calculation is mandated in such a way that it is a mathematical impossibility for the remainder to equal 15% of the dividends, unless my nominal US tax bill was 39.6% of my line 41 (AGI-deduction) (but of course it is much less, roughly 21%).

Perhaps the IRS advice is correct: ignore the Forms 1116 and just do my own computation and show a tax bill of 15% of the dividends. Does anyone do that?

Here's a simplified illustration of what I mean.

Suppose Tom's total income is $100,000 UK wages, and $10,000 US qualified dividends. What US tax should Tom pay? Assume he is single, his deduction is 6100 and exemption 3900.

From the Qualified Dividends Worksheet (or direct computation), Tom's US nominal tax is:

0.28*(100000-6100-3900) - 6706.75 + 0.15*(10000) = 19,993.

On Form 1116 General his allowable tax credit for his UK wages is figured as:

19993 * (100000-6100*100000/110000)/(110000-6100-10000*0.6212)
= 19331.

The denominator of (110000-6100-10000*0.6212) is from the adjustment required for line 18 of Form 1116.

Assume Tom can take all this as foreign tax credit since the UK tax bill on his wages exceeds 19,331.

This leaves Tom paying the US only $632. Whereas under tax treaty, the US has the right to take 15% of dividend income, which would be $1,500.  

I'm not really following the details, but the dividends don't need a 1116 because you aren't claiming any foreign tax paid on them. So you just need to show the tax on them as 15% because of the treaty.

That is correct. I am not completing a 1116 for dividends,  only a 1116 general for wages. Problem is, that this produces so large a tax credit that when deducted from my notional tax there is then less than 15% of the dividends left as tax.