re-sourcing income from USA to UK - accrue v cash

Nevermind. Checking directly with the IRS.

[Edit] - HAH, that was a mistake. As always. I hate talking to the IRS on the phone (auditory processing disorder does not help) and they don't have a webchat like the HMRC does. (I love the HMRC webchat, as it's both in writing and gives me a paper-trail.)  If you write to the IRS it takes months, literally, to get a response. If you get one at all.

So I asked the IRS lady if I needed to file a 1116 form for 2017 now to reserve my "resourced basket" for when I filed a 1040X later on, and how I'd do that since I haven't formally "accrued" or paid tax on my May-Dec part of UK 2017/18 yet.  She insisted that if I had a ballpark figure of what I'd owe I could file now the 1116 form and list what I assumed my UK taxes were that "had accrued" from May-Dec 2017 .

I was under the impression (and am sure I read it in one of the IRS's documents) that UK  taxes only "accrued" at the end of the income tax year (aka April 2018). So what she told me to do was impossible. (?)

My cash flow is severely limited now. (I had been planning to pay my HMRC taxes in one go with a credit card as soon as I had a hard number from HMRC, but they no longer take credit cards!) I'm wondering if there is any horrible negative to going with "foreign taxes accrued" rather than "foreign taxes paid [cash]"? I know once you choose to go "accrued" rather than "cash" it is forever.  (But it seems "accrued" gives me more time to pony up the cash to the HMRC, even if it's into next year.)

The gurus at TurboTax are stating that I can do "accrued" taxes for 2017. This is the same thing that the IRS told me. But contrary to what I've been reading on this board. Note to self - check further.  (TurboTax can't handle the form 8833, apparently, so I can't e-file with them and cite the tax treaty. Of course, just when I had weakened enough to decide to go ahead and pay them....)  And in IRS publication 514 it states:

Accrual method of accounting.

If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. You are using an accrual method of accounting if you report income when you earn it, rather than when you receive it, and you deduct your expenses when you incur them, rather than when you pay them.  In most cases, foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it. Generally, this occurs on the last day of the tax year for which your foreign return is filed.

Obviously I'm misunderstanding the major point here. Per italics, the tax would accrue April 5 2018. And I could only actually take credit for them next year when I file my 2018 US return, correct?

Nan, I have a really excellent dual US/UK accountant. He's not cheap but he does do consultations so he would clarify all of your questions but you could still do the actual filing yourself and save money that way. Having said that, this is the busy season so not sure about his availability to new clients but let me know if you would like his details anyway and I will pm them to you.

I may also be wrong here, and I am not a tax guru, but it seems to me that the UK tax ac rues during the course of the tax year, so that portion of the total tax for the 2017/2018 tax year that accrues for income received during the 2017 portion could be deducted from your US tax.

It just doesn't seem logical to take a tax credit on your 2018 return for tax paid (accrued) on income *earned* during 2017. Seems to me that's what TurboTax and the IRS are telling you.

But, my logic may be flawed. Up to now I haven't needed to be overly concerned, as we are living solely on our US Social Security and the pittance of interest (A whopping $2.88 on our US account during 2017 and about £58 on our UK account) plus DH's UK Old Age Pension (now just over £70/week). That will change for the 2018/2019 UK tax year when I have to take RMDs from my Traditional and SEP IRAs. But like Scarlett, I will worry about that tomorrow.

Well, HMRC now says that the earned income is not taxable after all.     

At this point I just need to sort out how to mitigate the double tax for the pension and 403B income from June-Dec 2017.  I know I can re-source it. That part seems relatively straight-forward.

For the life of me I am now completely confused about how to get the IRS to cough up what they have already taken as taxes for that period, since although logically it would seem that the tax accrues each month over the April-April period,  the IRS language quoted above seems to state that it doesn't actually "accrue" until the last day of the UK tax year (April 5 2018).

IRS employee and TurboTax expert say to file 1116 with my 2017 taxes and claim it now. (Filing also the 8833 form to re-source it to the UK per Article 17 of tax treaty). I do need to hear something from an expert. So I'll be PM'ing you shortly. Thanks.

It just doesn't seem logical to take a tax credit on your 2018 return for tax paid (accrued) on income *earned* during 2017.

But, that's exactly how the accrual method works.

Not to get involved in the general conversation, but in line with the topic of this thread:

When using the accrual method, one point becomes obvious - with any unusual taxable event that will affect a US tax return, it is best for it to take place in the first 3 months of the calendar year.

For example:
Jane has a normal, constant yearly income of $30,000, pays US tax on the accrual method, thereby not using the FEIE. One year, she receives an unexpected bonus of $20,000 in year 20BB.

Two scenarios: (Disregarding PAYE which is not factor in the accrued method.)

1) Jane receives the bonus in August of year 20BB. UK tax will not be assessed  until 5 April, 20CC. For Jane's 20BB US return, she will owe US tax on $50,000, but will only have UK tax credits on $30,000 from UK 20AA/20BB. Here's where some basic workarounds that have not been considered come into effect such as a 1040X and a bank of excess credits. 

2) Jane receives the bonus in February of year 20BB. UK tax will be assessed on 5 April 20BB on her 20AA/20BB income ($50,000). Jane will owe tax on $50,000 on her 20BB US tax return, but will have UK tax credits on $50,000 from UK 20AA/20BB available per the accrual method.

One consideration of using the accrual method.

Such timing considerations can become most important when, for example, one has a UK redundancy with associated UK redundancy pay. Pray for an understanding UK company that will time the event in line with the consequences of a US tax return. There are a number of various events which cause equal timing problems.

 

EEEK.

[ Well, I'm pretty much planning to remain entirely retired. But I'd love to think that a hypothetical employer would pay me a bonus.   ]

If you read the 1116 instructions very carefully, there is a reference to using an accrual within the cash basis. Perhaps this is what your IRS person and the TurboTax person were relating to. Perhaps not.

A 1116 can be completed with '0' foreign tax credits. It makes no difference to the form, but of course the result is '0' tax credits available. A 1116 within a 1040X with now allowable excess credits will have very little difference to the original with '0' allowances. The all important limitation will still be the same.

The IRS knows US taxation of USCs living abroad can lead to complications, but do nothing about it. At times, they can decide to ignore the grey regulations and suggest alternative ways to solve a problem. It's Congress's responsibility to change tax laws.

It's most unfortunate USCs abroad prefer to politicise tax problems. It's the US Government and CBT who must be challenged, and that's not dependent on whoever is in the White House.

EDIT:
I fear I was not clear on the differences between the original and modified 1116 in the second paragraph above. The most important line, the bottom line, will change. It will be either the full amount of excess credits, or a partial amount of excess credits equalling the limitation. Part II will not change, there will still be no tax credits available. The top lines of Part III will be the same ('0'), but the line pertaining to excess credits available will change, along with one or two lines at the bottom of Part III. And, of course, the bottom line.

So, at the risk of duplicating the posts -

I can file the 1116 form and 8833 forms when I send in my 2017 tax stuff to the IRS. Got it.
If I actually have the final amount of accrued tax (aka, the tax bill or whatever is provided by HMRC) to apportion back for the 2017 double-taxing, can I request the credit for it at the time I file my 2017 tax?

Or am I still going to have to wait until 2019, and then look at what I owe the IRS for 2018, subtract it from the HMRC 2017/18 tax, and 1040X the difference back as a credit to 2017?

If that's the case, if I were to pay the HMRC 2017/18 and enough of the projected 2018/19 HMRC tax bill before Dec. 31 2018, can I, up to the limit of the passive income/resourced income basket, take credit for it all against what the IRS  has withheld in 2017?

If I actually have the final amount of accrued tax (aka, the tax bill or whatever is provided by HMRC) to apportion back for the 2017 double-taxing, can I request the credit for it at the time I file my 2017 tax?

Or am I still going to have to wait until 2019, and then look at what I owe the IRS for 2018, subtract it from the HMRC 2017/18 tax, and 1040X the difference back as a credit to 2017?

I've made an edit to my reply above for clarification, but in response to these questions, that is what you must decide as to how to proceed, and if you will use the cash or accrued basis. If you wish to wait for a full confirmation statement from HMRC (which, according to the text, may not be accurate, and is usually sent out in October if using the paper method of filing), you'll have to delay your US filing. Your UK filing after 6 April 2018, if using either paper or online, and if accurate, should give you the provisional figure of UK tax due for 2017/18. Apportioning the UK tax paid and the US tax due between the different types of income sources is very important for the US return. As we know, the pro's will have one method they feel is correct in mind, but, YMMV depending on which pro you talk to. You've talked to the IRS and know their (1 agents) opinion (which is not binding). Not being pedantic, but it's your return and you sign your name which means you have full responsibility for how you have completed the forms.

Well, HMRC now says that the earned income is not taxable after all.     

Funny that; it is what I said the statute says in the first place. Not sure why you disagreed?

Thanks for that. I don't have an issue with accrued or cash.  Once I have an idea of what I think the taxes to HMRC are, I will pay them. I'm so, so sorry for not being able to be clear with the question. 

What I need to know is if I can file the 8833 and the form 1116 with my USA 2017 tax return and get  tax credit for the period of  May-Dec 2017 from amount I pay HMRC in, say, May of 2018.

I've only got one kind of income. Retirement income. That's all I'll be resourcing. So it apportions all to the same place.

So, I figure out the HMRC probable taxes due in. I pay them. I assume I'll have some sort of receipt or cancelled check to prove I've paid.

I then file my 1040, schedule B, 1116 and 8833. On the 1116 I put the pension income for May - Dec 2017.

If the amount turns out to be incorrect later, I file a 1040X to fix it.

Is this doable?

Funny that; it is what I said the statute says in the first place. Not sure why you disagreed?

I didn't. The HMRC did when I was discussing it with them. I believe you said you disagreed with the HMRC, but did not go further than that. 

Because of the UKs quaint tax year end on 5 April; electing the accrued method for FTC is generally an absolute disaster. Don't go there.