Discussion:Foreign Taxes - refundable?
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| 5 March 2009 | |
| For another one of my traveling entertainer clients, they made significant income from England, Australia and Canada. Taxes were withheld by each country. Questions about how to handle this:
1. I assume the US has a tax treaty with each of these countries, therefore the taxes are potentially refundable and should not be included on an 1116, correct? 2. If I want to go after a refund for each, is there an easier way to do it rather than me becoming a expert on non-resident tax returns for England, Australia and Canada? 3. Only Canada provided paperwork to my client (their T4A-NR form, similar to our 1099-M). Will that be a problem for me if I want to file for England and Australia, both of which I have zero paperwork on other than a statement of earnings from the parent USA corp my client contracted under. Anyone with experience in this area, I would be grateful for any pointers you can give me. Thanks, Chris | |
| 5 March 2009 | |
| There is a form ( the number escapes me) that gets attached to the 1040 for income earned in foreign country. You also would need an 1116 for the taxes paid. You would get credit against the federal taxes due. | |
| 5 March 2009 | |
| Are you sure I need to put these taxes on an 1116 if they could potentially be refunded via a NR return filed back to the source country (under a tax treaty)? I thought using the 1116 was disallowed in that case (?) | |
| March 5, 2009 | |
| The taxes are NOT read my lips: 'NOT' refundable. They are: once again, read my lips: a Non-Refundable credit. If you do not know what the difference between a non-refundable credit and a refundable credit read Publication 17. And yes, you do need to attatch Form 1116 to the 1040. | |
| 5 March 2009 | |
| Well, if I look at the instructions for 1116, page 2, heading 2 it clearly says that ...you cannot take a credit for foreign taxes paid to a foreign country that you do not legally owe, including amounts eligible for refund by the foreign country. So, Canada for example -- the withheld non-passive income tax is eligible for refund if I file a return for my client. Even if I fail to attempt to get the refund the taxes that could be refunded cannot be claimed on 1116.
You sound like you have a lot more experience with this than I do, so if I misinterpreted the rules for 1116 please let me know. No need for me to read Pub 17; I'm perfectly aware of what a tax credit is versus a refundable tax credit. I didn't think we were talking about any credit in this case, thus my original line of questioning. Please let me know how you are handling non-passive income/taxes in a country that USA has a tax treaty with. Thanks! | |
Death&Taxes (talk|edits) said: | 5 March 2009 |
| I think all are unclear about Chris' term 'refundable.' He is not saying the Treasury will refund the money, but perhaps the client will receive a refund from Inland Revenue, or Canada or whereever.
There are people on this Board such as Lizzit or Guya who specialize in preparing taxes overseas who can probably give a more detailed answer. If the person has an agent, they too could know someone who could help. This occurred for me when an opera singer had Italian taxes withheld. | |
| 5 March 2009 | |
| sorry, yes -- poor choice of word. I meant refundable from the foreign taxing authority. | |
| March 5, 2009 | |
| np problem.. Chris, I interepreted your term 'refunable' as in the Treasury will refund the money. Also, Cris, if I sounded rude or anything of the sort I am sorry. I was up late, very tired, unable to sleep. I did not mean to take anything out on you. | |
| 5 March 2009 | |
| thanks...not at all...my fault for using a word that has a very specific meaning to this crowd.
I think I have my interpretation of 1116 correct, but further reading indicates that I probably won't get too far trying to get the withheld tax back from the source countries -- which means that in the end I should be ok claiming it on 1116. To be safe I may allocate expenses (travel, etc) to the earnings from those countries to net it and only claim foreign tax credit on the taxable portion of the netted amount. I found a few websites if anyone else ever comes across this: | |
| 5 March 2009 | |
| Many - perhaps all of these - countries have sophisticated regimes for withholding on such entertainers and sportsfolk. Did the United States tax Prime Minister Brown on his US source wages attributable to the time he addressed Congress this week, or is he not entertaining enough? | |
| 5 March 2009 | |
| Oh god. Almanac just wiped out my very lengthy and erudite reply. Here we go again:
Hi! 1) Can't deduct unless it was due AND paid. If it's refundable, it ain't due and it ain't deductable. If he owes more than what was withheld, and never pays it, he can't deduct it either. So: due and payable. How do you know what's due? 2) US/UK treaty article 16 $20,000 or less in gross (not net) earnings is exempt. More and the whole thing's taxed in the host country. Contact a reliable UK tax person to compute the UK tax actually due. If it's a big refund, file a return. If it's small, you might want to skip filing, but you can only claim the tax due, not the full withholding. If there's a balance due, he'll need to file and pay and take a deduction for that payment in 2009. 3) US/Canada treaty article 16 CAD$15,000 or less in gross (not net) earnings is exempt. I know a great Canadian guy, email me offline. Same remaining advice applies. 4) US/Australian treaty article 17 US$10,000 or less in gross (not net) earnings is exempt. Same remaining advice applies. 5) I find it easiest to create two Schedule C's. One for US income and expenses and one for offshore income and expenses. You then code the offshore one as 100% foreign in your software (General Limitation basket!) and it flows through perfectly to the 1116 without needing to futz and fudge about. 6) Don't forget your FOCONUS for per diems! And don't forget not all artists are eligible for CONUS and FOCONUS, as some are deemed to have no tax home and thus no tax deductions for travel away from home. 7) This may all be a moot discussion, as most artists have their AGENT/MANAGER arrange the taxes in advance. The Agent/Manager works with the touring agents in the host countries to pre-file and pre-pay the tax in advance of the gig, adjusting for allowable expenses and paying tax on the net figure at a rate fairly close to what they'd pay if they waited and filed a year-end return. This is an alternative to withholding at a flat rate on the gross income, which is usually much higher. So, actually, the first step is to check to see whether the Agent/Manager is earning their 15% pound of flesh or not. Lizzit] | |
| 5 March 2009 | |
| Guya, he was actually quite entertaining! I watched it live (the joys of working from home). But as his salary for the event was covered under his contract with his employer the Crown, then it falls under Article 14 and his payment for the day is exempt from US tax. | |
Death&Taxes (talk|edits) said: | 5 March 2009 |
| What did I tell you, Chris? | |
| 6 March 2009 | |
| D&T you were right on...
Lizzit, thank you so much for your guidance. Thank you for retyping your response as well - wow, it is a perfect primer about how to deal with this. When I go into the office tonight I will take a look at the return I'm working on and see how it plays against the points you made (especially of course #7). Guya, if the Prime Minister asks me to look at his taxes I'll make sure to tell him his day's earnings are exempt. Unless of course he wants to show some income to qualify for EIC... Many thanks, Chris | |
