1116 Categories

With so many 1116 limitation options, you'd be forgiven for some head scratching on which basket actually aligns with a certain income. The vast majority of those 1116 limitations that we'd use would be:

'Re-sourced by Treaty',  - fairly straight forward, - U.S. sourced income.
'Passive' Interest income for example
'General' Earned income for example.

There is a grey area between the 'Passive' and 'General' category though and there has been much head scratching by me in trying to figure out if lottery winnings are passive or General. (only a 'few' quid) also certain none benefit income such as Carers Allowance that is fully taxable in the U.K. Certainly not earned income and i'd think more 'Passive' as it's not a job? U.K Pension, is that General or passive? Annuities are shown to be Passive in the instructions - So does that mean if you have regular pension drawdown it would be classed as General, but a retirement annuity would be Passive? (more head scratching)!

With multiple categories, I don't think that a credit in one can help towards the others. For example, you can't use a $100 credit in Re-sourced by Treaty' category to cover a $50 shortfall in the 'Passive' category. All categories seem to merge on the 1116, but is that $100 'Re-sourced by Treaty' going to age out, despite being of benefit elsewhere?

Our income only goes into 2 categories, “resourced by treaty” and “General”.  Under General is my UK pensions.  We do have premium bond winnings each year which are not taxed in the UK so can’t be used as foreign tax credit. The same goes for our UK interest income which is split between our 2 UK tax returns and is not enough to be taxed by the UK so like the premium bond winnings is only taxed in the US.

Our income only goes into 2 categories, “resourced by treaty” and “General”.  Under General is my UK pensions.  We do have premium bond winnings each year which are not taxed in the UK so can’t be used as foreign tax credit. The same goes for our UK interest income which is split between our 2 UK tax returns and is not enough to be taxed by the UK so like the premium bond winnings is only taxed in the US.

I read that all income whether it's tax free or not in the U.K needs to be included in a 1116 category. This then gives a larger ratio of foreign to domestic income, so more of the credits can be absorbed.

I read that all income whether it's tax free or not in the U.K needs to be included in a 1116 category. This then gives a larger ratio of foreign to domestic income, so more of the credits can be absorbed.

Good to know. Our UK interest is so small that our tax preparer probably does include it but I don’t know the exact exchange rate she uses when converting our UK income to USD.

Good to know. Our UK interest is so small that our tax preparer probably does include it but I don’t know the exact exchange rate she uses when converting our UK income to USD.

Particular handy if you win a lot on the PB's and have more other 'passive' income that is taxable. 1a of the 1116 being gross income from non domestic sources then will match

I've always put my PB 'winnings' alongside UK bank interest income (pittance though it is) in the passive category alongside UK capital gains tax.

I'm now in receipt of US SS (just got my first payment deposited into Wise (formerly TransferWise) - will that go into Resourced by Treaty on my 2022 return?

I've always put my PB 'winnings' alongside UK bank interest income (pittance though it is) in the passive category alongside UK capital gains tax.

I'm now in receipt of US SS (just got my first payment deposited into Wise (formerly TransferWise) - will that go into Resourced by Treaty on my 2022 return?

As a UK resident you are not taxed at all on SS income by the IRS. I’ve asked what to do about this as TurboTax does not include the treaty form to claim an exemption. Someone here, Nan, used the same solution as I discovered on the TurboTax users forum, that is to enter SS as normal then negate it exactly as “Other income” with the comment along the lines of “SS income not taxed as per UK US tax treaty, section 17”.

I've have seen several ways of treating US SS.
- Enter a zero taxeable amount on 1040,
- Claim treaty benefits
- other income as a minus.

This year I am having my taxes done by Greenback, they have done things differently still. On 1116 (passive) I have foreign sourced income (sourced - not re-sourced) as
- 2021 UK interest and 2021 dividends from my UK broker
- plus the total income from my 20/21 HMRC return.

I guess in effect, this applies FTC to my SS as it was included in the 20/21 HMRC return.

Regarding tax free income, they informed me that this does not contribute to the total of foreign income.

I've have seen several ways of treating US SS.
- Enter a zero taxeable amount on 1040,
- Claim treaty benefits
- other income as a minus.

This year I am having my taxes done by Greenback, they have done things differently still. On 1116 (passive) I have foreign sourced income (sourced - not re-sourced) as
- 2021 UK interest and 2021 dividends from my UK broker
- plus the total income from my 20/21 HMRC return.

I guess in effect, this applies FTC to my SS as it was included in the 20/21 HMRC return.

Regarding tax free income, they informed me that this does not contribute to the total of foreign income.

Looks like taxes are done as interpreted - maybe there is no right or wrong way in some circumstances. The 1116 does say however that you must include income even if it isn't taxable by that foreign country. Kind of makes sense as you can absorb a greater proportion of the FTC and any previous carry overs.

The 1116 does say however that you must include income even if it isn't taxable by that foreign country.

Interesting. What they said to me was "That bank interest  is untaxed in the UK - on Form 1116 we have to report the gross taxable income and associated tax." I explained that untaxed meant not taxed at source not tax free and requested a review by someone else...

I think the more important figures on the 1116 forms are not total taxable income but the actual foreign tax that was paid eligible for FTCs.  Currently for me all of my income is from UK and US private pensions so all the UK tax paid is eligible to claim as FTCs.  However, last year I started receiving UK OAP which is only taxable in the UK and not reportable on the IRS return.  My accountant has not yet done my IRS return so I don't know what she will do but I have assumed that the tax available for FTCs would be suitably proportioned. e.g. if Total income is £32k including £8k, the OAP,  which is not taxed in the USA then the UK tax entered on the 1116 would be 75%, so if the UK tax was £2k then £1.5k can be claimed as a FTC.

Only guessing here....

 

Interesting. What they said to me was "That bank interest  is untaxed in the UK - on Form 1116 we have to report the gross taxable income and associated tax." I explained that untaxed meant not taxed at source not tax free and requested a review by someone else...

I agree with you, interest definitely is taxable in the UK, as is dividend income and capital gains. The first £1k of interest is tax free and the first £2k of dividend income is tax free, but it is all taxable even if you don't exceed the tax free portions.

With capital gains the first £12.5k is tax free but you still have to enter it on your SA return as taxable income even if you are below the tax-free portion.

Proportioning of retirement pensions and working out the percentage per category is one thing (not always easy). Assuming you have premium bond and ISA income of say £5,000 and £5,000 of taxed passive income then again assuming £800 (minus PSA) of tax paid on regular HMRC tax will leave you with an IRS bill of £200  (assuming 10% rate). Otherwise £5000 @ 10%  (£500) and then separately £5,000 in which £800 tax was paid as the ISA and PB's would not go in line 1. You proportion of U.K/U.S income is spit 50/50 - ISA and PB's would then be seen as U.S. income. You want to absorb all FT paid. (worked in GBP - just for examples). So £10,000 of total passive income of which £800 of tax was paid.

Re: Lottery winnings - According to this article gambling winnings are considered "general" income for FTC purposes.

Re: Lottery winnings - According to this article gambling winnings are considered "general" income for FTC purposes.

I hear all sorts of conflicting options for gambling income. Premium Bond income would be 'passive', as it's not gambling. Some simply treat it as interest income, which I feel is the better option, (unless there is a very large win - explaining away a profound interest rate would be tricky, but a nice problem to have). The article lists retirement account distributions as general. This i'm sure would be 're-sourced by treaty' though for those in the U.K, with IRA/401(k) income etc.