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Member I

How to report foreign tax if the tax rates are different for each type of income?

I have income from a foreign country. The tax rates are different for different sources of income there eg: stocks are taxed at 15%, dividends are taxed at 0%, interest taxed at 20% etc.Also there is a deduction applicable on the income (much like standard deduction in US).

How do I report these income to IRS?

- Should I use the effective rate of tax I paid in that country and use that single rate to find out taxes on each sources?

-or Should I be reporting each item's tax as is and find out a way to report the deduction I got there?

4 Comments
Catalyst V

How to report foreign tax if the tax rates are different for each type of income?

All foreign income received from all foreign sources is reported under the Personal Income tab in the Foreign Income & Exclusion section.

All foreign taxes *ACTUALLY PAID* are reported under the Deductions & Credits tab in the Estimates & Other Taxes Paid section. There's a sub-section in there for foreign taxes. The tax rate DOES NOT MATTER. You report the foreign taxes ACTUALLY PAID in the tax year. That's it.

Then your tax liability to the IRS will be reduced accordingly. It will NOT be reduced dollar for dollar in most cases.

Member I

How to report foreign tax if the tax rates are different for each type of income?

@Carl, Thank you for the response. I understand your point. But consider the scenario below.

 

 

I got $500 income from a foreign bank A and paid $50 foreign tax

I got $1000 income from a foreign ETF B and paid $75 foreign tax

I had standard deduction of $1000 in that foreign country. so after filing return that govt will credit back the excess tax (say $45)next year.

 

So in this case, do i have to report the tax paid as $50 and $75 for each income this year and $45 as a separate income for the next year? If so, under what head should I report the income from foreign tax refund next year?

Catalyst V

How to report foreign tax if the tax rates are different for each type of income?

You report the total amount of foreign tax paid to all foreign entities in the tax year. Period. End of Story.

 credit back the excess tax (say $45)next year

Assuming "next year" is 2018, then that $45 dollars is foreign income paid to you in 2018.

Taxes are claimed in the year they are actually paid, regardless of who the tax is paid to or why. (one exception covered below.)

Income is claimed in the year it is physically paid, regardless of who paid it, why they paid, or in what year you actually may have earned that income.

So say your 2015 tax return is audited by the taxing authority and in that audit it's discovered you overpaid your 2015 taxes by $500. They refund you that $500 in 2018. Then it's reportable income on your 2018 return.

 

Now just like U.S. Taxes, if you file a 2017 foreign tax return for 2017, but you file it in 2018 and you owe 2017 taxes that you pay with that 2017 return when you file it in 2018, then the tax is considered to have been paid with 2017 income, since that's the only income being taxed. So don't over complicate that which is 5-year old simple. You'll just screw yourself up and end up owing penalties, fines and back taxes.

Member I

How to report foreign tax if the tax rates are different for each type of income?

Thank you Carl