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Topic: Foreign tax credit / Physical presence test  (Read 706 times)

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Foreign tax credit / Physical presence test
« on: November 19, 2020, 04:46:16 AM »
Question about physical presence test / foreign tax credit. I have been living and working in the UK full time for 20 years so I am permanently settled (also now a British citizen) and I have always claimed a foreign tax credit on my taxes, but, due to Covid, I came back to the US on 28 Oct to be near my parents until end of the year  (taking advantage of being able to work remotely) which means I will have been in the UK for less than 330 days in a 12 month period. I have no idea what the implications of this are as I have never spent this much time in the US. Does this mean I will be taxed in the US on the income I’ve made this year (even though I am paying tax in the UK)? Do I have any other options here?


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Re: Foreign tax credit / Physical presence test
« Reply #1 on: November 19, 2020, 08:44:46 AM »
Income related to US workdays is US source and subject to Federal and State tax. The UK gives credit for US tax on income that is doubly taxed. As you are working in the United States, why is your employer not operating US withholding and giving you a W-2?


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Re: Foreign tax credit / Physical presence test
« Reply #2 on: November 19, 2020, 12:03:45 PM »
I am not working for a US Employer, I am my own employer - I run my own UK limited company and I pay myself through this company. I always have and have been doing this for over 10 years, filing my US taxes and taking the foreign tax credit. I have never worked for a US employer. The only reason I'm in the US right now is because we are in a global pandemic and I am able to work remotely so I took the opportunity to come  be near to my vulnerable parents for a couple of months as they are suffering emotionally from being isolated.


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Re: Foreign tax credit / Physical presence test
« Reply #3 on: November 19, 2020, 01:22:57 PM »
I am not working for a US Employer, I am my own employer - I run my own UK limited company and I pay myself through this company. I always have and have been doing this for over 10 years, filing my US taxes and taking the foreign tax credit. I have never worked for a US employer. The only reason I'm in the US right now is because we are in a global pandemic and I am able to work remotely so I took the opportunity to come  be near to my vulnerable parents for a couple of months as they are suffering emotionally from being isolated.

I think you can argue that you are most certainly domiciled in the UK so HMRC should be the primary taxing authority.

Try working through the statutory residence test.

https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3

Dual USC/UKC living in the UK since May 2016


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Re: Foreign tax credit / Physical presence test
« Reply #4 on: November 20, 2020, 11:05:07 AM »
I think you can argue that you are most certainly domiciled in the UK so HMRC should be the primary taxing authority.

Try working through the statutory residence test.

https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3



Thanks so much for this! I hadn't seen this on the .gov site. This makes total sense and helps to clarify things.


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Re: Foreign tax credit / Physical presence test
« Reply #5 on: November 20, 2020, 05:07:50 PM »
I may be entirely misunderstanding, but has the company made a check the box election? If not, electing to claim the FEIE each year would not make much sense except for the small amount paid as salary.  The company will want to file an 1120-F for the current year, because it has US source income.  As it is operating in the US, it may also have US Federal and/or State withholding requirements if it pays you wages.


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Re: Foreign tax credit / Physical presence test
« Reply #6 on: November 27, 2020, 01:37:45 PM »
Update: my tax advisor says I would indeed have bonafide residency status.

So here’s another related question....

What would be the tax implication of dividing my time equally between US and UK - so living 6 months in the US and 6 months in the UK (or another country)?

Does that mean I’d no longer be considered a bonafide resident and be taxed in the US on my earnings for the entire year despite living in the UK for half the year (and then would I not have to pay UK taxes)? Or would I be taxed for half the year in the US and half in the UK?

(Reminder of relevant info: I’m a dual US / British citizen, have lived in the UK for 20 years full time and I also work for myself as director a UK my own limited company.)
« Last Edit: November 27, 2020, 01:40:03 PM by londonbos »


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Re: Foreign tax credit / Physical presence test
« Reply #7 on: November 27, 2020, 03:41:10 PM »
Primary question. This is the only important one. Has the limited company elected to be disregarded for US tax purposes by filing Form 8832: https://www.irs.gov/forms-pubs/about-form-8832?


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Re: Foreign tax credit / Physical presence test
« Reply #8 on: November 27, 2020, 03:59:35 PM »
In 2018 I took the 962 election but not in 2019. I will likely not do for 2020/21 - unless doing so would significantly impact my wanting to split next year in the UK / US.

What would be the difference or impact if I didn't?


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Re: Foreign tax credit / Physical presence test
« Reply #9 on: November 27, 2020, 08:55:07 PM »
If you are an employee of a UK limited company and you are performing services in the US as an employee of that UK company, both the income earned by you (your wages) and the income earned by your UK company (its profits) may be subject to US tax.  Your UK company would need to file Form 1120-F and it would likely be subject to US federal (and possibly state) corporate income tax.  Your employer (the UK company) would need to file US payroll tax returns and withhold US federal income tax, US FICA, and US FUTA from your wages.  It doesn’t matter if the wages are paid into your UK bank account.  What matters is where the services are performed.

Your questions are about claiming the foreign earned income exclusion.  However, you can only exclude “foreign-source” income.  To the extent you perform services in the US, you will earn US source income and you cannot claim the foreign earned income exclusion on US source income. The US source income will be subject to US tax.  You might be able to claim a credit in the UK for the US tax imposed on your U.S. source wages.

You should ask your US tax advisor if your UK company needs to file Forms 1120-F and 941.  Guya has referred to these issues above.


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Re: Foreign tax credit / Physical presence test
« Reply #10 on: December 09, 2020, 05:35:02 PM »
Thank you all for your replies, which I really appreciate. I'm afraid that the more into the weeds it gets, the more I’m becoming confused (admittedly, I'm not great at this stuff) so I have more questions…..

So far it looks like none of the forms mentioned in your replies (1120-F, 941 or 8832) have been filed.

Although as I understood,  I took the check the box election in 2018, and this is what my accountant has said in an exchange we had last year:

"In 2018, the 962 election was taken; this resulted in 0 tax being paid on the GILTI income.

In 2019, there was GILTI income of $16973; however, you still paid 0 tax; the FEIE against your earned income, foreign tax credit and standard deduction reduced your tax liability to zero."

--

Perhaps it would be easiest to show the forms that were shown on my returns for my last two years, 2018 and 2019, which you can see here:
 https://www.dropbox.com/s/l6r4zpjri0bw8c2/forms-filed.png?dl=0

Does this clarify my situation enough to answer my initial questions? 



Also, could I just avoid this source income situation all together by saying I’m on holiday (not working) while in the US for these 3 months?

Sorry again for all the questions! I hope this clarifies my situation a bit more.


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