# Timing foreign tax credit



## Giulietti (Nov 4, 2021)

Hi- i am a future US expat here- moving US to Italy: In first year as an expat, foreign tax may not yet be paid at year end, and US tax credit is calculated based on foreign tax payments. So in the first year it seems we would need to pay US tax and foreign tax, and wait for the credit in the next years return. Make sense? If so, is there any way to avoid having to shell out double tax in the first year? Any Italy based expats here with general comments on issues you have faced in US-Italy tax ?


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## Moulard (Feb 3, 2017)

I am not familiar with the US-Italy Tax treaty, but assuming it follows the pattern of the US model treaty

The US will tax you on your global income on the basis of your US citizenship so you will continue to report all of your income to the IRS
The US will allow you to take a tax credit for Italian income taxes accrued or paid on Italian sourced income
Italy will allow you to tax a tax credit, deduction, offset or other means according to its domestic laws for US income taxes on US sourced income
The reduction in double taxation clause is designed to protect the tax base not you, so you will end up paying the higher of the two tax rates because the credits are capped to what is owed in that country not the other.
You will still have to pay US State income tax on your global income until you are no longer deemed a tax resident of that state
Once you do break residence or domicile (depending on the state ) you would likely have a part year resident tax return
As US States are not party to the tax treaty, whether Italy offers you tax relief for US State taxes will depend entirely on Italian tax law.

Do familiarise yourself with the US-Italy tax treaty. They are written in diplomatic language, so you can refer to the technical explanation which tends to go into more detail and is written so that those executing and/or ratifiying the treaty can understand it.






Italy - Tax Treaty Documents | Internal Revenue Service


Italy - Tax Treaty Documents




www.irs.gov





Unless I am mistaken, both the US and Italy use the calendar year as the fiscal year so that simplifies things considerably.

Without reference to Italian tax law on how it deals with foreign tax credits, offsets, deductions or exclusions in the most broad and simple terms 

Determine your US sourced income (in USD and EUR)
Determine your Italian sourced income (in USD and EUR)
Prepare and submit both tax returns accordingly
File amended returns if necessary to recover any foreign tax credit, offset, exclusion or deduction or take into account any refund of taxes withheld due to deductions or other tax treatment
The thing is that because most countries withhold income tax at a rate that ignores any deductions or other offsets you may be able to claim, and thus obtain a refund, you will have paid the tax - and simply be due a refund. If you can accurately judge when preparing your tax returns what your refund will be (or any extra tax owed if that is the case) then you may well be able to avoid the amended returns step.


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## Bevdeforges (Nov 16, 2007)

You may also want to take a look at IRS Publication 54, which is the guide for Overseas Taxpayers. They used to have extensive examples to follow, but at a minimum they will have a fairly detailed discussion of the Foreign Tax Credit and how it works.





Publication 54 (2022), Tax Guide for U.S. Citizens and Resident Aliens Abroad | Internal Revenue Service







www.irs.gov




Depending on how Italy handles their taxation, there may be a couple of alternatives for when and how you claim your Italian taxes paid.


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## Giulietti (Nov 4, 2021)

Thank you Moulard and Bev for the very useful suggestions: I appreciate the time you dedicated to this question. I will follow the leads you provide. There is a ton of very good info..thank you. In the end it seems it comes down to being able to manage the timing of Italian payments so that they can be declared on the US return in the FTC calculation for the same fiscal year in both countries. Im not concerned about the ability to use Italian payments in the FTC calculation, just concerned about the first year when Italian payments might happen after fiscal year end and might not be creditable until year 2, meaning we would have to put out a lot of cash in year 1 and wait a year to recover it.


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## Moulard (Feb 3, 2017)

Remember that Italian payments are effectively made when your employer withholds income tax on your behalf. So they will likely be happening from your first Italian pay-cheque.

So long as you do not have a significant income that does not have income tax withheld then you don't really have a lot to worry about.

If that is the case then instead of using a cash basis, you can use an accrual basis of accounting and you settle up once your Italian tax affairs for the year are sorted.

Never a need to wait a year to recover it, although given US delays in processing amended returns, and the fact that you can easily obtain an extension for US filing until October.


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## Bevdeforges (Nov 16, 2007)

One other thing to remember is that, if you use an accrual method (i.e. claiming any withholdings when they are taken rather than waiting until you settle your Italian tax bill), if you then receive a refund of amounts overwithheld, those refunds are considered income (for US tax purposes) in the year received. It's a fine point, but depending on your circumstances may or may not be significant.


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## Giulietti (Nov 4, 2021)

Thanks again to Moulard and Bev for the excellent suggestions. I will use them and am sure now that I can make this work! Many thanks


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