Form 1116 paid v accrued - someone tell me if I'm right or wrong?

Ok, being a cash-basis taxpayer (income "counts" when I receive it or spend it), I have the option to choose to deal with my foreign tax credits on a "paid" v "accrued" basis.  Dealing only with form 1116 & FTC here:

Mismatch - How does the mis-match between tax years impact FTC? You get a bill from HMRC for taxes for April 2017 - April 2018. Your IRS taxes are for income Jan-Dec 2018. Does the IRS not allow you to consider HMRC taxes paid for the portion of the HMRC tax year prior to January 1 2018 on your 2018 tax return?

Paid - So, you get a tax bill from HMRC in 2018 for tax year 2017/18. If you don't pay the bill until 2019, you have to use the HRMC taxes towards 2019 IRS taxes. That is, you can only claim FTC in the year you pay the tax. Is this correct?

If the HMRC comes back at any point in a future year and adds taxes to your bill for the 2017/18 year, you cannot amend your IRS tax return to get credit for those taxes to 2017/18 if you have selected the "paid" basis. You have to add them to the tax year's return for the year in which you actually pay them. Is this correct?

Accrued - HMRC taxes formally accrued on 5 April 2018. If you select "accrued" on the 1116 Foreign Tax Credit form you attribute them to your 2018 IRS tax year when you file your IRS taxes in 2019, or soon thereafter. If you select accrued, you don't have to actually have paid the taxes in 2018 to be able to get credit for them for 2018 if you, for instance, have to file an amended return. If the HMRC comes back and levies more tax on that same year's income at a later date, you can still retroactively take that extra off your 2018 IRS taxes. Is this correct?

Paid vs Accrued (form 1116) -  It would seem prudent to select "accrued" on section II of the form, as it would give you much more flexibility as to when you actually pay your tax to HMRC.  There is a mis-match between tax years. If one has a simple income stream (say, retirement income), why would they ~not~ want to check "accrued" instead of "paid"?

Set-in-Stone?  Once you choose "accrued" you always have to use "accrued".  There is nothing that I see in the IRS regs that says if you chose "paid" you cannot then amend your return to "accrued". I did see one reference on a website that says that there's an IRS policy to not allow that. But it doesn't say that in the 1116 forms - just the "once accrued, always accrued". Does the IRS allow you to change from "paid" to "accrued" on a 1040X?

Retirement Income Resource Basketing - All retirement income (pension income, 401k/403b, IRA) from US sources that you want to have count as UK (foreign) income and that the DTA says should be taxed as UK income are put in the same "resourced by treaty" basket for the purposes of claiming Foreign Tax Credit. [That is, they might include "passive" income, but according to the DTA they should be considered primarily taxable in the UK, and so should be "resourced by treaty" and that box ticked on the form.] Is this correct?

Or, is it "foreign" income-tax, and not "foreign-income" tax?   That is, if the UK taxes it, do you HAVE to "resource" it to be UK income to use a FTC? If you don't have to resource it as foreign to use FTC, why would you want to select "resourced by treaty"?

Excess credit limits - If you pay more in HMRC taxes in 2018 than you owe to the IRS for 2018 for the specific basket income (let's say "resourced by treaty"), you can sometimes "carry back" some of that HMRC tax credit to the prior IRS tax year to apply to any IRS tax on the "resourced by treaty" income for that year that wasn't already negated by a foreign tax credit. Alternately, you can "carry it forward" and apply to future years' resourced by treaty IRS taxes. For up to 10 years. Is this correct?

If you have less income in year two (first full year after arrival), you may not have any excess credits to carry back, so you'll be double-taxed in the first year in that case. (Unless you can convince HMRC to give you credit for US tax paid.)

Hedging One's Bets - Let's say HMRC doesn't reach a final decision on what I owe until after 31 Dec.  Can I pre-pay what I ~think~ my tax bill might be before 31 Dec so that I can still claim FTC on the finally decided amount? If so, and if I've over-estimated, will HMRC return that over-payment?



Eventually I'll write a "step-by-step" or do a flowchart of all this, I think. Once I truly understand it.

Simple answers or yes/no, would be of much greater help to me than long, involved answers at this point. It's kinda like explaining nuclear explosions to a kindergartner. You just say that the atoms are pushed into each other and then there's a big explosion. You don't try to tell the kiddo about the finer points sub-atomic physics, quarks, etc. 

Alternately, is there a taxes for dummies book that already addresses these questions?

I don’t know the answers but am very interested and appreciate you laying it all out like this. One question/option I don’t see is, can you make the HMRC tax year align with the calendar year? Having the tax years aligned, reporting and paying HMRC taxes on the calendar year would make things easier in my opinion.

You've not mentioned 'apportioning', therefore I assume you fully understand it. A 1116 cannot be started until foreign tax paid is properly apportioned to all sources of income with computations allowing for the different baskets, foreign tax applicable to each basket once apportioned, the appropriate income amount reportable for each basket, tax free income included in all income relevant for that basket, excluded income, etc.

Mismatch - How does the mis-match between tax years impact FTC? You get a bill from HMRC for taxes for April 2017 - April 2018. Your IRS taxes are for income Jan-Dec 2018. Does the IRS not allow you to consider HMRC taxes paid for the portion of the HMRC tax year prior to January 1 2018 on your 2018 tax return?

Yes and no. (Paid vs. accrued)

Paid - So, if you get a tax bill from HMRC in 2018 for tax year 2017/18. If you don't pay the bill until 2019, you have to use the HRMC taxes towards 2019 IRS taxes. That is, you can only claim FTC in the year you pay the tax. Is this correct?

For 'paid' basis only - yes, but only if options for excess tax paid is disregarded.

If the HMRC comes back at any point in a future year and adds taxes to your bill for the 2017/18 year, you cannot amend your IRS tax return to get credit for those taxes to 2017/18 if you have selected the "paid" basis. You have to add them to the tax year's return for the year in which you actually pay them. Is this correct?

Yes and no. [bold mine]

Accrued - HMRC taxes formally accrued on 5 April 2018. If you select "accrued" on the 1116 Foreign Tax Credit form you attribute them to your 2018 IRS tax year when you file your IRS taxes in 2019, or soon thereafter. If you select accrued, you don't have to actually have paid the taxes in 2018 to be able to get credit for them for 2018...

Yes. [bold mine]

....if you, for instance, have to file an amended return. If the HMRC comes back and levies more tax on that same year's income at a later date, you can still retroactively take that extra off your 2018 IRS taxes. Is this correct?

Yes, but the computations required is an example of what makes the 'accrued' method difficult.

Paid vs Accrued (form 1116) -  It would seem prudent to select "accrued" on section II of the form, as it would give you much more flexibility as to when you actually pay your tax to HMRC.  There is a mis-match between tax years. If one has a simple income stream (say, retirement income), why would they ~not~ want to check "accrued" instead of "paid"?

Yes(?), some do, but they may have no choice. 

Set-in-Stone?  Once you choose "accrued" you always have to use "accrued".  There is nothing that I see in the IRS regs that says if you chose "paid" you cannot then amend your return to "accrued". I did see one reference on a website that says that there's an IRS policy to not allow that. But it doesn't say that in the 1116 forms - just the "once accrued, always accrued". Does the IRS allow you to change from "paid" to "accrued" on a 1040X?

No.

Retirement Income Resource Basketing - All retirement income (pension income, 401k/403b, IRA) from US sources that you want to have count as UK (foreign) income and that the DTA says should be taxed as UK income are put in the same "resourced by treaty" basket for the purposes of claiming Foreign Tax Credit.....

Yes. [bold mine]

[That is, they might include "passive" income, but according to the DTA they should be considered primarily taxable in the UK, and so should be "resourced by treaty" and that box ticked on the form.] Is this correct?

No. [bold mine]

Or, is it "foreign" income-tax, and not "foreign-income" tax? That is, if the UK taxes it, do you HAVE to "resource" it to be UK income to use a FTC?.....

Yes and no.

If you don't have to resource it as foreign to use FTC, why would you want to select "resourced by treaty"?

Cannot answer yes or no.

Excess credit limits - If you pay more in HMRC taxes in 2018 than you owe to the IRS for 2018 for the specific basket income(let's say "resourced by treaty"), you can sometimes "carry back" some of that HMRC tax credit to the prior IRS tax year to apply to any IRS tax on the "resourced by treaty" income for that year that wasn't already negated by a foreign tax credit. Alternately, you can "carry it forward" and apply to future years' resourced by treaty IRS taxes. For up to 10 years. Is this correct?

Generally, yes.

If you have less income in a subsequent year, you may not have any excess credits to carry back, so you'll be double-taxed in the first year in that case. (Unless you can convince HMRC to give you credit for US tax paid.)

Cannot answer yes or no.

Hedging One's Bets - Let's say HMRC doesn't reach a final decision on what I owe until after 31 Dec.  Can I pre-pay what I ~think~ my tax bill might be before 31 Dec so that I can still claim FTC on the finally decided amount?....

Which basis, 'paid' or 'accrued'? ('Paid' - yes.)

If so, and if I've over-estimated, will HMRC return that over-payment?

Possibly yes, depending on which box you tick for what to do with excesses.

NOTE: ALL IN MY AMATEUR OPINION.
(2nd Note, multiple professional opinions regards these questions might vary from each other.)
(3rd Note, multiple IRS agents opinions regards these questions might vary from each other.)
(4th Note, all opinions expressed by professional tax preparers, IRS agents, TurboTax [et al], or instructions contained on form 1116 or information contained in any IRS Publication relating to form 1116 does not constitute substantial authority.)

One additional question not asked,

Yes, if one wishes to carryforward or carryback any excess FTCs on 1116 to another years 1116, IRS instructions say a computation sheet, prepared according to an IRS format, is to be included detailing where and how the excess FTCs are determined. 

ROUND TWO!

You've not mentioned 'apportioning', therefore I assume you fully understand it. A 1116 cannot be started until foreign tax paid is properly apportioned to all sources of income with computations allowing for the different baskets, foreign tax applicable to each basket once apportioned, the appropriate income amount reportable for each basket, tax free income included in all income relevant for that basket, excluded income, etc.

Possibly.    You look at all the different incomes you have. You group them together by IRS "type" (passive, general, RBT, etc." You fill that info in on a 1116 form, one for each type of income.  Tax free income included? So if you are not taxed by HMRC on an item of income (for whatever reason) you keep that amount in the total amount of income you are using on the 1116 form to calculate the amount of FTC you could possibly use on that particular type of income.  Is that correct?

Mismatch - How does the mis-match between tax years impact FTC? You get a bill from HMRC for taxes for April 2017 - April 2018. Your IRS taxes are for income Jan-Dec 2018. Does the IRS not allow you to consider HMRC taxes paid for the portion of the HMRC tax year prior to January 1 2018 on your 2018 tax return?

Yes and no. (Paid vs. accrued) 

SO, you check "paid" on the 1116 and put down all the HMRC tax you paid in 2018 and it covers HMRC 2017/18 and you can use (hopefully) credit for paid above the IRS taxes paid for 2018 back to 2017. So it's better to guess, if you don't know for sure and the end of the IRS tax year is coming, and make a payment to HMRC to cover what you think your tax for 2017/18 would be. Because if you do not make a big enough payment in 2018 to cover your full 2017/18 taxes, you would potentially lose some of the credit for 2017 part of the taxes paid to HMRC?

    Paid - So, if you get a tax bill from HMRC in 2018 for tax year 2017/18. If you don't pay the bill until 2019, you have to use the HRMC taxes towards 2019 IRS taxes. That is, you can only claim FTC in the year you pay the tax. Is this correct?

For 'paid' basis only - yes, but only if options for excess tax paid is disregarded.

Excess tax paid options? Can you elaborate slightly?

If the HMRC comes back at any point in a future year and adds taxes to your bill for the 2017/18 year, you cannot amend your IRS tax return to get credit for those taxes to 2017/18 if you have selected the "paid" basis. You have to add them to the tax year's return for the year in which you actually pay them. Is this correct?

Yes and no. [bold mine] 

So, if HMRC pops back up with additional taxes later for year 2017/18, if you originally filed using "paid" basis on 1116, to what year would you attach them if not the year in which you paid them? Or are they, potentially, just "lost" to double-taxation?

    ....if you, for instance, have to file an amended return. If the HMRC comes back and levies more tax on that same year's income at a later date, you can still retroactively take that extra off your 2018 IRS taxes. Is this correct?

Yes, but the computations required is an example of what makes the 'accrued' method difficult.

The computations. Would you not just revisit your original 1116 and plug the additional tax paid in on top of the tax already used in the computation of your FTC, and send in a 1040x with an amended 1116, in the appropriate basket?

    Paid vs Accrued (form 1116) -  It would seem prudent to select "accrued" on section II of the form, as it would give you much more flexibility as to when you actually pay your tax to HMRC.  There is a mis-match between tax years. If one has a simple income stream (say, retirement income), why would they ~not~ want to check "accrued" instead of "paid"?

Yes(?), some do, but they may have no choice.   

What kind of situation would leave them no choice? Is it common?

    Retirement Income Resource Basketing - All retirement income (pension income, 401k/403b, IRA) from US sources that you want to have count as UK (foreign) income and that the DTA says should be taxed as UK income are put in the same "resourced by treaty" basket for the purposes of claiming Foreign Tax Credit.....

Yes. [bold mine]

    [That is, they might include "passive" income, but according to the DTA they should be considered primarily taxable in the UK, and so should be "resourced by treaty" and that box ticked on the form.]

No. [bold mine]   

Passive Income (pensions, IRS, 401k, 403b)  received by US citizens living in the UK  that the DTA says should be taxed in the UK are "RBT" (unless it's a government pension).  You do not check the box that says "passive income" for it on the 1116 form.  That is, does "resourced by treaty" trump "passive"? Correct?

NOTE: ALL IN MY AMATEUR OPINION.
(2nd Note, multiple professional opinions regards these questions might vary from each other.)
(3rd Note, multiple IRS agents opinions regards these questions might vary from each other.)
(4th Note, all opinions expressed by professional tax preparers, IRS agents, TurboTax [et al], or instructions contained on form 1116 or information contained in any IRS Publication relating to form 1116 does not constitute substantial authority.)

Translation being, sweet-hopping-Jeez, "your guess is as good as mine"? 

ROUND TWO!

Possibly.    You look at all the different incomes you have. You group them together by IRS "type" (passive, general, RBT, etc." You fill that info in on a 1116 form, one for each type of income.  Tax free income included? So if you are not taxed by HMRC on an item of income (for whatever reason) you keep that amount in the total amount of income you are using on the 1116 form to calculate the amount of FTC you could possibly use on that particular type of income.  Is that correct?

See 1116 instructions, page 15, for lines 1a and 1b.
https://www.irs.gov/pub/irs-pdf/i1116.pdf
"Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line g. You must include income even if it isn't taxable by that foreign country."
[bold mine]

Out of time, so I will continue later.

Possibly.  :)Tax free income included?

From reply #5 above:
See 1116 instructions, page 15, for lines 1a and 1b.
https://www.irs.gov/pub/irs-pdf/i1116.pdf
"Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line g. You must include income even if it isn't taxable by that foreign country." [bold mine]

Consider the interest on a cash ISA, the tax free portion of 'taxable' interest, and the tax paid on interest above the tax free portion of the 'taxable interest. The tax paid is considered as applying to all interest income received, taxed or not.

Consider US SS paid in the UK. It is exempt from US taxation, but is taxed in the UK. Since it is exempt income in the US, it cannot be included on 1116, and therefore, the UK tax paid on the US SS is 'apportioned' to the US SS in relation to all pensions and the apportioned amount must be deducted from the total tax paid in the UK for all income in that basket and cannot be used as UK tax paid on the 1116.

SO, you check "paid" on the 1116 and put down all the HMRC tax you paid in 2018 and it covers HMRC 2017/18 and you can use (hopefully) credit for paid above the IRS taxes paid for 2018 back to 2017. So it's better to guess, if you don't know for sure and the end of the IRS tax year is coming, and make a payment to HMRC to cover what you think your tax for 2017/18 would be. Because if you do not make a big enough payment in 2018 to cover your full 2017/18 taxes, you would potentially lose some of the credit for 2017 part of the taxes paid to HMRC?

As I've mentioned in other threads, probably 90% of those on this site will have a PAYE deduction from their paycheques on a regular basis. The PAYE constitutes tax paid to the UK during the US tax year it is deducted. That includes PAYE on UK source pensions (including tax for the UK State pension), and for non-UK sourced pensions through additional tax via a UK tax code (and then via PAYE). If the individual uses the FTC method, they may owe additional tax, but it will generally be manageable (and if on the 'paid' basis, attributable to the year the payment is made). If they wish to pay a suspected tax amount for the year, that payment should be made prior to 31 Dec. of that year. If they ultimately have paid too much, then any rebate from HMRC must be rectified on a 1040X for the US year the (excessive) claim of FTCs was made, and the refund amount will require 'apportionment' for each basket.

Excess tax paid options? Can you elaborate slightly?

Use of a 1040X.

So, if HMRC pops back up with additional taxes later for year 2017/18, if you originally filed using "paid" basis on 1116, to what year would you attach them if not the year in which you paid them? Or are they, potentially, just "lost" to double-taxation?

In whatever year you claim UK tax paid, it will be credited against US tax. Therefore, it is not lost. Use of 1040X if excess FTCs exist can be applied if they are within the allowed time frame. Nonetheless, in some instances, there can be double taxation.

The computations. Would you not just revisit your original 1116 and plug the additional tax paid in on top of the tax already used in the computation of your FTC, and send in a 1040x with an amended 1116, in the appropriate basket?

Due to apportionment on an accrued return, it is not that simple.

What kind of situation would leave them no choice? Is it common?

It's not that common. If a USC were resident in a country where income tax was not collected on a substantial salary until (up to - depending on the country) 2 years after the salary was received (France, for example), the accrued method may be selected. If that person then moves to the UK, they are still bound to the accrued method.

Passive Income (pensions, IRS, 401k, 403b)  received by US citizens living in the UK  that the DTA says should be taxed in the UK are "RBT" (unless it's a government pension).  You do not check the box that says "passive income" for it on the 1116 form.  That is, does "resourced by treaty" trump "passive"? Correct?

I believe you'll find 99% of tax professionals will say pension income is never passive.

Translation being, sweet-hopping-Jeez, "your guess is as good as mine"? 

Ahhh, I think you've got it!

I appreciate what you are attempting. Personally, I don't believe you'll ever achieve your goal. We all have a tendency to consider our own personal situation as, more or less, the norm. There are innumerable permutations to form 1116 (and we haven't even considered 1116AMT) depending on the innumerable circumstances that exist for each individual. Add on top the numerous inconsistencies and omissions found on 1116, and an idiots guide simply isn't possible, IMO.

You may chart your individual situation, but it will unlikely apply 100% to any one else.

Take your best shot at completing the 1116 accurately. Chances are any 1116 prepared by an individual may contain some inaccuracies. If it bothers the IRS, they will respond, but it is unlikely to happen. Obvious mistakes will prompt a response.

Thanks.

In hindsight, it looks like I did mine correctly. Now I just have to hear from HMRC in enough time to get ~them~ paid before Dec 31.

I am happy that I've only got the Govmt. pension and that 403b distribution. Hopefully HMRC is not going to come back on me and say that their initial advice was incorrect.  I'd have a chunk-o-change I'd owe them, but it's nothing I can't manage - and then try to get back from the IRS. But I sure don't want to have to go there!

And yeah, the more I read, the more I think it's an impossible task. Or, at least, for someone with more of a background in it than I've got. (I passed government budgeting, but only because I could BS my way through a good research paper. The IRS is a whole 'nuther can-o-worms. Literally.)

Thanks.

In hindsight, it looks like I did mine correctly. Now I just have to hear from HMRC in enough time to get ~them~ paid before Dec 31.

I don't know if this helps any but the first payment is not due until Jan 31st.

Overview

The deadlines for paying your tax bill are:

31 January - for any tax you owe for the previous tax year (known as a balancing payment) and your first payment on account
31 July for your second payment on account
If you prefer to pay regularly throughout the year, you can use a budget payment plan.

https://www.gov.uk/pay-self-assessment-tax-bill

I'm less worried about paying HMRC, than paying HMRC by Dec 31 to get the tax credit to take of my IRS taxes so I've not double-paid. But thanks for the info just the same - it's good to know.

I'm less worried about paying HMRC, than paying HMRC by Dec 31 to get the tax credit to take of my IRS taxes so I've not double-paid. But thanks for the info just the same - it's good to know.

Sorry, I missed that point! 

I am, as I tend to do, worrying unnecessarily (probably). Once I know precisely what is expected of me, I'll settle down. I'm not a person who deals with uncertainty when it comes to things like the government or medical issues very well at all. I tend to be a concrete thinker and like things all lined up and tidy. Unfortunately, the world is not always cooperative.

My tax situation is pretty simple. 403b and Govmt Pension. HMRC has been provided with the details of the pension, and responded in writing that it is considered a governmental pension. Ordinarily I'd be happy with that and proceed blissfully on. But having now discussed other matters with HMRC, and gotten multiple, often diametrically opposing sets of advice, I am unsettled. I just want to know one way or the other so I can plan.

Too many irons in the fire right now with too many different governments, and too much inherent neuroses. 

When I filed online last year I had notification from HMRC within a week or 2. I was then able to log on to the HMRC website and make a payment at a date of my choosing to pay the tax owed and I paid it before the end of the year. By end of January 2018 I was due to make a payment towards my 2018/19 taxes which I did and I also have to make another payment by July 31st this year towards my 18/19 taxes. These estimated taxes are similar to the IRS estimated payment system and is because my income is almost entirely from my US private pensions which are obviously not subject to PAYE but taxed by HMRC.

Good to know, thanks.