Hello. Could someone give an example of accrued taxes vs paid taxes in a year, as defined for the foreign tax credit calculation?
Here is a glimpse into why I am so confused:
If withholding occurs during the year of receipt (as with employment), are those actual amounts of tax held by the government treated as 'paid' or 'accrued' re the foreign tax credit? Such payments do indeed seem to have been handed over to the relevant government (a sort of meaning of 'paid'), but they are really just an estimated type of tax being delivered as a sort of security against the actual liability -- which crystallizes on the date final/complete discharge of the tax obligation is due.
It seems to me that the optimal use of the credit is to match off foreign vs US income tax liabilities on specific income items in each year as they are crystallized and paid off. But if, for example, someone wants to use what ended up being calculated and finetuned for Canadian liability purposes in 2010 against US liability for that same year, how is that done? If the Canadian return is finalized first, and then there is a little refund or additional payment, how can all that final amount then be used in 2011 (the year in which filing takes place) to offset US tax liability on the same income with regard to the US 2010 tax year?
This form is confusing, to me at least.
Foreign tax credits: accrued vs paid?
Moderator: Mark T Serbinski CA CPA
Make your life easier and just use the 'accrued' method. The only thing with that, is once you select the 'accrued' method, then you always have to use the 'accrued' method for all future years as well.
Basically, you can choose 'paid' or 'accrued'. 'Paid' means you take the tax credit for the year that you actually paid (or had withheld) the taxes. 'Accrued' means that you take the tax credit for the year that the taxes apply to.
So for your 2010 Canada taxes, you won't actually file the return (and pay the balance) until sometime in 2011. But to make your life easier, you just count all the Canadian taxes due for the 2010 year as being accrued in 2010 and then take that credit on your 2010 US tax return.
You could also choose the 'paid' method. In that case, all your taxes that were withheld during 2010 would be applied towards your 2010 US return, and the balance owing (only if you owe a balance - a refund would apply back to your 2010 US return) on your Cdn 2010 return would apply to your US 2011 return because you didn't actually pay the balance owing until you filed your Cdn 2010 return sometime in 2011.
You can see where it starts to get to be more work every year. You have to keep your withholding taxes (employment, investments, etc.) separate from your balance owing on your Cdn tax returns, and have to claim them in separate years. Whereas if you just stick with the 'accrued' method, then everything is the same between the US and Cdn returns every year. Whatever taxes are accounted for in your Cdn 2010 return apply to your tax credit on your 2010 US return.
Basically, you can choose 'paid' or 'accrued'. 'Paid' means you take the tax credit for the year that you actually paid (or had withheld) the taxes. 'Accrued' means that you take the tax credit for the year that the taxes apply to.
So for your 2010 Canada taxes, you won't actually file the return (and pay the balance) until sometime in 2011. But to make your life easier, you just count all the Canadian taxes due for the 2010 year as being accrued in 2010 and then take that credit on your 2010 US tax return.
You could also choose the 'paid' method. In that case, all your taxes that were withheld during 2010 would be applied towards your 2010 US return, and the balance owing (only if you owe a balance - a refund would apply back to your 2010 US return) on your Cdn 2010 return would apply to your US 2011 return because you didn't actually pay the balance owing until you filed your Cdn 2010 return sometime in 2011.
You can see where it starts to get to be more work every year. You have to keep your withholding taxes (employment, investments, etc.) separate from your balance owing on your Cdn tax returns, and have to claim them in separate years. Whereas if you just stick with the 'accrued' method, then everything is the same between the US and Cdn returns every year. Whatever taxes are accounted for in your Cdn 2010 return apply to your tax credit on your 2010 US return.
Just to make one teeny correction to Dalthiens's excellent post. Once can switch from acrrued to paid tc. One is not locked in to any one method.
However, accrued is almost always easiest method, especially if one has continuous stream of foreign income/taxes.
However, accrued is almost always easiest method, especially if one has continuous stream of foreign income/taxes.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thank you for that point, nelsona. But you are right -- as an annual event, accrual makes the most sense until and unless something big might shift.
I am also trying to come to grips with the fiscal year issue (see Sp 05 post) and the exclusion plus credits vs credits-only approaches. I see that that shift (from exclusion to credits only) may not be quite as flexible as the reporting period choice, so that is a big issue all on its own.
I am also trying to come to grips with the fiscal year issue (see Sp 05 post) and the exclusion plus credits vs credits-only approaches. I see that that shift (from exclusion to credits only) may not be quite as flexible as the reporting period choice, so that is a big issue all on its own.