CA resident and US citizen and AMT?

Elwood · Post by **Elwood** » Tue Jul 07, 2009 3:16 pm

Sorry if this is long, I am just making sure I understand correctly. :?:

I have a client and I work on their US taxes, someone else does the CA tax. Born CA, later became a US citizen, now resides in CA. Has passive income in both countries. (Mostly interest, cd's in US and T-bills in CA.

I figured the US taxes based on the tax rate from the treaty for the US income only. (most income is from interest). 60% of the income is CA 40% US. So the US interest is taxed at treaty rates, and the CA interest is taxed at "normal" graduated tax rates after deductions and exemptions. Correct??

The problem is the credit for foreign tax is only 60% of the US tax, so not enough to wipe things out. Am I missing something. Also the income is high enough to trigger AMT.
I have read other posts where someone has discussed "re-sourced by treaty"? What does that mean. I am just trying to completely understand this so I can get it right.

Any help, input or links would be appreciated.

Thank you, Elwood

nelsona · Post by **nelsona** » Tue Jul 07, 2009 6:00 pm

Not sure whay you are using the treaty to figure US tax. So your initial calculation is wrong. All interest is reported and calculated as normal on 1040.

Elwood · Post by **Elwood** » Wed Jul 08, 2009 10:16 am

So the tax is figured normally, the US income is re-sourced by treaty on the 1116? Then use the worksheet "Additional Foreign Tax Credit on US Income" to figure the additional credit for the difference in tax rates?

Does the 8833 need to be used?

Thank you for your help.

Elwood

nelsona · Post by **nelsona** » Wed Jul 08, 2009 11:09 am

Assuming all the income is passive, you will have 2 1116s:

1. You will have the 'normal' 1116 for passive income, which will include only the Cdn interest, and, assuming the Cdn taxrate was higer that the US rate (before any FTC), this will result in little of no US tax on that portion of their income. Any unused Cdn tax on that portion will become carryforward.

2. Then you will prepare the 're-sourced' 1116, which will include sufficient 're-sourced' US income to reduce the US tax on that portion to zero. There shall not be any carryforward.

The result should be 'nominally' zero US tax, but the first 1116 may yeild some tax and some carryforwad.

There should have been no FTC on the Cdn tax return, as none of the income would be eligible for FTC in canada, since the US tax is arising solely due to the taxpayers US citizenship.

I would be filing an 8833 but it is probably not required; the fact that you are submitting an 1116 with "income resourced by TREATY" should be enough aof a clue to IRS as to what you are doing. But no harm in filing 8833.