The more I think about the foreign tax credit for 1116, the more confusing it becomes. I am completing a Self-Assessment for the first time (2022/23). It will have earned income, (easy to exclude on the FEIE - 2555). This then leave interest income and personal pension income from the U.K and 401(k) distributions from back Stateside.
How I would do this is:
Once my Self-assessment is complete and I know the total tax lability for the tax year in question, I would need to apportion the tax paid into:
1, General for U.K Personal Pension income
2, Re-sourced by Treaty for the 401(k)
3, Passive, for interest.
Once I have figured those amounts, I would use either the average exchange rate, (U.S. Treasury source) or a specific month rate from HMRC for the 401(k) (one payment per year), as otherwise SA and 1116 would show differing amounts due to the exchange rate source.
On my 1040 for 2023, I would input these figures onto the 1116 forms, (being the U.K. tax paid from April 6th 2022 to April 5th 2023). I guess I’d also need to convert the USD amount of the 401(k) in to GPB too? (Hence my thought of using the HMRC monthly rate for both SA and the IRS).
Part 1 Q1a of 1116 asks for your total Gross income for the calendar year, (from U.K). This would be different however to the tax paid on the income for the U.K. tax year, as other U.K income will come after April 6th to December 31st and so will not form a part of the SA and thus no FTC until the next year.
I would be interested to learn how others report. Would you just include the total tax paid to HMRC for that tax year paid on your 1040 for that same calendar year despite the gross income being different in part 1? You may have had a drop in income post April 6th, so the ‘Gross Income from all sources’ maybe small, but the U.K. tax paid higher and disproportionate. I understand you can’t exceed your U.S. tax liability and any credit can be carried forward.
Is it permissible to use the average exchange rate for all the HMRC tax paid, even if there was a one single payment and other multiple, (although the single payment would be for both retirement income)? Would you need two exchange rates to figure out the 401(k), (HMRC rate and U.S Treasury) This would give however two differing amounts on the same income for SA and IRS.
I see that there is a schedule B and C for the 1116 too, Redeterminations, looks complicated, although HMRC would credit back any tax refund via PAYE code change for the following year. Not really a refund, or is it?
Perhaps I‘m over complicating things, or is it really this tricky?
