Getting Started with Tax Credits

Hi,

I am a US citizen and am resident in the UK where I live and work full time. To date my annual income I was covered under the Foreign Earned Income Exclusion as I was earning under $95,000 however last year my earnings will exceed that amount.

I am working as a salaried UK employee paying UK taxes (they are deducted from my salary).

How do I go about filing the Foreign Tax Credit for the amounts earned over excluded amount. To-date I have used Turbo Tax for my returns, can I set up FTC using this?

Thanks

First, a disclaimer: I know nothing of TurboTax.

Are you going to be earning similar or greater amounts in years to come? In other words, was this a one off year? If, in future years, your earnings will remain above the FEIE limit, it may be time to make a big jump and forget entirely about using Form 2555 and start using only Form 1116 (both general and passive). You may find this to be to your advantage due to the banking of carryover credits. You should still owe $0 (generally speaking) due to the amount of tax paid to the UK on your salary. Run TT both ways to confirm.

If it's a one off year, you may decide not to do the general and passive 1116's only since once you elect not to use 2555, you cannot go back to using it for 5 years.

TurboTax does foreign tax credits. I've never needed them myself, but I imagine it will be just the same as the usual set of seemingly random and longwinded questions.

I'd recommend you get the TT that you download rather than do it online so you can see the forms and double check what TT is doing as you go along. Also if you abandon FEIE and just use FTC you might well be slightly better off and you can also make ROTH contributions if you already have a ROTH account or can find a US company that will open one for you.

Hi,

I was able to successfully use Turbo Tax to reduce my tax liability due to taxes already paid overseas.

- I used 2555 to exclude up to the maximum amount ($99,500)
- For the rest of the income I used 1116 and then deducted the tax amount I paid in the UK
- Not sure the tax credit vs. deduction and if there is any different (or risk of being audited)
- For the UK taxes amount I included the tax and national insurance
- My US federal tax burden went down to zero on my foreign income

It was fairly simple - please let me know if I missed a trick before I actually send across.

- For the UK taxes amount I included the tax and national insurance

You may want to check the admissibility of national insurance contributions being claimed as part of UK income tax paid.

Ok, I re-did the form a little bit. Would be good to understand if this makes sense.

- I used the 2555 to reduce the maximum amount ($99,500)
- There is remaining amount to pay US taxes on
- I then used the 1116 to do add a foreign tax credit for the taxes I paid on the (total income - minus $99,500) x tax percentage.
- I did not add calculate national insurance in the amount above
- My tax credit to US is zero

Does the above make sense?

Thanks,
George 

The final version sounds great; you may be in a UK pension plan and have employer contributions to report as well, which would be non-qualifying for the FEIE.