# AMT/Form 1116 or just 2555 and other self-filing questions



## a2lette

I'm a dual citizen, and have lived in the UK for years. I've always correctly filed my taxes, prepared by accountants. I decided to try to do it myself this year, which hopefully won't be a mistake! I've filed for an extention so am working towards the October deadline, but would like to finish sooner if possible.

My annual income in USD is just over $50k. I also earned about $2k in interest from bank accounts in the UK. 

At first, I thought this would be straightforward. I registered with Free Fillable Forms, and did the 1040, and form 2555EZ, plus Schedule B for interest and dividends, as well as 8938 for foreign accounts. (I've already done my FBAR online before that deadline)

I thought that since I was well below the $99k Foreign Earned Income Exclusion, that this would be all I need to do. But looking back at my returns from recent years, the two accountants also filled 1116, including two sets of 1116 for the Alternative Minimum Tax (one each for passive and general income). Trying to do a bit of reading on this has done my head in! 

Am I missing something here? Is my original plan of sticking with those basic forms legit, or do I actually need to consider the AMT and multiple sets of form 1116? 

I genuinely don't know why I might need to do that, but if it was done that way in the past by professionals, it gives me pause. [NB in case it's relevant, taxes had mostly been done my hometown US accountant with limited international experience, and once by a well-reviewed expat preparer]

Thanks in advance for any advice!


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## BBCWatcher

First of all, do what the pros do: use tax preparation software! Even they don't try to fill in the forms manually. TaxAct.com and TaxSlayer.com have free editions, so give one of those a try first and see if it helps. (It should!)

OK, the most likely reason the pros' tax preparation software is spitting out IRS Form 1116 is because of your non-excludable income, in your case your interest income. Presumably you paid some U.K. income tax on that interest, thus a Foreign Tax Credit (Form 1116) is available on your U.S. tax return to account for that U.K. income tax. That's all good.

The AMT "double run" isn't _necessarily_ triggered by the FTC -- that's really a separate matter. To explain a bit more, the U.S. tax code has something called the "Alternative Minimum Tax" (AMT). If you have to run through the AMT calculation -- and many filers do -- then essentially you have a complete, separate tax calculation with duplicate forms that sets various limits on credits, exemptions, etc. You have an "alternative" tax calculation, in other words. Then, if the AMT results in a higher tax owed, you pay that tax instead of the "normally" calculated tax. From your description it's very unlikely you'll end up owing any U.S. tax, but yes, having to run the AMT calculation isn't at all surprising. It's annoying of course, but the reason it exists is that Congress put too many loopholes into the tax code. They realized that, and as an imperfect fix the AMT was born to try to prevent too many people from getting away with too little tax. [The President and Democrats would like to see a provision called the "Buffet Rule" which sets a 30% net effective tax rate on the highest income filers. As I understand it, the Buffet Rule would likely eliminate the AMT and thus greatly simplify tax filing for tens of millions of Americans. Warren Buffet, one of the wealthiest people in the world, favors this provision, which is why it's named after him. Republicans oppose it, and thus it hasn't passed Congress to land on the President's desk. It's fair to say that most middle class tax complexity results from efforts among the most well-to-do to avoid and evade tax, so you can thank rich people for the AMT. ]


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## a2lette

Thanks, BBCWatcher, helpful thoughts. I'll give one of the free software sites a try, although I think I had some serious problems with TaxAct initially and that made me think doing it "by hand" might be easier, but I guess I can try again. 

Follow-up question on the interest income. Yes, I presumably paid some tax on that, but it's behind the scenes, basically built into the interest rate (as I understand it). I've never seen a statement or info online about the amount of tax I've paid on interest. So I definitely didn't tell the accountants how much tax I've paid, so how could they include that?

Ugh, the whole AMT thing just makes me so frustrated. I know I'm not making enough money to owe the US anything, so why can't it just be a tiny bit more simple? Since we're talking about relatively low levels of interest income, and presumably not much tax paid on that, do I even need to worry about that? It's not like I'm anywhere close to the Foreign Earned Income Exclusion limit; in my mind these are maneuvers that would help someone close to that $90k limit not have to pay taxes, but I must be missing something...


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## iota2014

@a2lette - I'm also a dual UK/US citizen, and have lived in the UK for many years. I get an annual statement of tax withheld on interest paid on my accounts. If you don't, could you not ask the banks in question to send you a statement?

Edit - called a Certificate of Tax Deducted:


> Your bank or building society can send you a ‘Certificate of Tax Deducted’ or a statement after the end of each tax year (5 April) which will tell you your net interest.


https://www.gov.uk/apply-tax-free-interest-on-savings/declare-interest-on-your-tax-return


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## BBCWatcher

a2lette said:


> Follow-up question on the interest income. Yes, I presumably paid some tax on that, but it's behind the scenes, basically built into the interest rate (as I understand it). I've never seen a statement or info online about the amount of tax I've paid on interest. So I definitely didn't tell the accountants how much tax I've paid, so how could they include that?


Easily, as you can, too. The award-winning (literally) Gov.uk provides this helpful answer: the U.K. income tax rate on ordinary bank interest is 20%.

So let's suppose you received £840 in total ordinary bank interest in 2014 -- the amount you actually saw added to your bank account(s) in that calendar year. To determine the U.K. income tax that you paid on that interest take £840, first divide by 1-0.20 (0.8). That gives you £1050, and that's the _gross_ amount of ordinary bank interest income you would report on your IRS Form 1040 Schedule B. The U.K. income tax you paid, of course, is the difference between the gross and the net: £210 in this example. Of course you'd have to convert pound figures to U.S. dollar figures. You can use the IRS's published exchange rate, or you can use any reasonable, defensible alternative currency conversion as long as you convert using a consistent set of rules. I wouldn't recommend getting fancy here, so just use the IRS's published yearly average rate of 0.632 for 2014. So, in this example, your gross ordinary bank interest would be £1050 divided by 0.632, i.e. US$1661.39. The U.K. income tax you paid is £210 divided by 0.632 which equals US$332.28. Done!

Adjust accordingly if you (also) received non-ordinary bank interest. For example, if you had a U.S. tax free NSI account holding, say, a bond that paid 5% in 2014, then unless the tax treaty says otherwise you'd report that interest income on your U.S. tax return, but you didn't pay U.K. income tax on that particular U.K. tax free account so you wouldn't report any U.K. income tax paid on IRS Form 1116 (since you didn't).



> Since we're talking about relatively low levels of interest income, and presumably not much tax paid on that, do I even need to worry about that?


OK, you do not have to worry about that -- it isn't mandatory. However, it's a very good idea to calculate and to take any FTCs you are eligible to receive whether or not you take the (optional) Foreign Earned Income Exclusion -- and your accountant was doing the right thing. Here's why....

Set aside any U.K. tax free interest -- let's assume that didn't exist. Let's suppose your net effective U.S. income tax rate on ordinary bank interest would hypothetically be 15% (US$249.21 in this example). Your U.K. income tax rate is, of course, 20%. That's a 5 percentage point gap, which means that instead of $332.28 you would have paid $249.21, a difference of $83.07 in this example. So what?

Well, this part is really nice: you get to "bank" that $83.07 of Foreign Tax Credit as an excess FTC. You can then "spend" that excess FTC to offset U.S. income tax on passive income -- one year in the past, in the present tax year, or up to 10 tax years into the future. So let's further suppose, 5 years from now, you receive $1500 in ordinary bank interest on a U.S. bank account. You then get to "spend" your $83.07 to offset any U.S. income tax owed on that $1500 of interest, reducing your U.S. income tax.

Pretty nifty, eh? This is one of the perks of U.S. citizenship: the U.S. can (and often does) effectively pay you to compensate for any higher foreign rates of income tax.

See above how I mentioned that taking the FEIE is optional? That's because excess FTCs work the same way on earned income, too. If your foreign (non-U.S.) income tax is higher on your earned income than the hypothetical U.S. income tax rate, you get to bank those excess FTCs provided you don't take the FEIE on that income. Your accountant presumably has determined that you're better off taking the FEIE, and hopefully he or she is correct. (There are also some rules that make it difficult to flip back and forth between taking and not taking the FEIE.) Regardless, for non-excluded income you can (and should) still run through the FTC calculation and still bank excess credits -- and you're likely to have excess credits, I'd say, since the U.K. income tax rate is a flat 20% on this income. That seems high to me compared to U.S. norms given your overall income level, so I think it likely you'll get a bit of excess FTC to bank.

Did all that make sense?


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## BBCWatcher

I meant _U.K._ tax free NSI account above, of course. That was a typo.


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## Bevdeforges

OK, a couple of points for clarification:

You say your US income is $50K - but what sort of income is that? If you are resident in the UK, it would appear to be passive income, and thus not eligible for the FEIE (and thus forum 2555). If you're working for a US company and doing that work while in the UK, then it's "earned income" and so is eligible for the FEIE (and for reclaiming any taxes withheld on that income).

The other "trick" is that, last I knew, the IRS Free File Fillable forms still won't work for overseas residents. It used to be that they could accept a non-US address. Don't know what problem still remains, but they haven't been cited recently as being "overseas filer friendly."

TaxAct or Tax Slayer should be ok to use - and especially if you use the dialogue (at least on the first pass). There are, however, some tricks to how to answer the questions to get things to turn out the way you want them to - especially for your foreign income.
Cheers,
Bev


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## a2lette

First I just wanted to say thank you so much for all the advice on this thread. It's rare in this day and age to have a forum where people are genuinely kind and helpful, and so I really appreciate it. 

Apology for the gap in coming back with questions, I had some time away and put taxes as far in the back of my mind as possible (to be honest, I'm finding it all irrationally stressful, but need to get it done for the mid-Oct deadline)

@iota2014 - thank you very much for the suggestion of getting the "Certificate of Tax Deducted". I did this, but it just tells me the total interest paid over the UK tax year (April-March), which isn't the same as the US tax year. I guess if I only got paid interest once per year, this would tell me all I needed to know, but as it's paid monthly (and varies) it doesn't seem to give me the information I need for the IRS. Am I being stupid and missing some way of using it? I have used @BBCWatcher's helpful mechanism in the meantime. 

I think I have everything else sorted out with respect to the 1116 forms, but I'm pretty confused about something with the general income form. The professionals who have filed for me before have filed one for the taxes I've paid in the UK, which I don't entirely understand. All of my income is reported on 2555 as it is under the allowance for foreign earned income exclusion, so there is no income (other than passive interest) for the 1066.

However, they have filed a general income 1116 with nothing at all in section I.1, and my foreign taxes in Part II, which then balances out to zero, ending up with a foreign tax credit of zero. Firstly, I'm not sure what the point of this form is - is it really needed? But secondly, I've been unable to make TaxAct reproduce it! If I put in any positive amount of general income for form 1116 (e.g. $1), I can make the form look exactly the same as the ones I've filed before, but with an error of (e.g.) $1 at various places; but if I put 0 in for the general income, it warns me I'm doing something wrong, and the form doesn't come out anything like it should. Is this an error in TaxAct, or are these forms supposed to be filled out differently?


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## iota2014

a2lette said:


> @iota2014 - thank you very much for the suggestion of getting the "Certificate of Tax Deducted". I did this, but it just tells me the total interest paid over the UK tax year (April-March), which isn't the same as the US tax year. I guess if I only got paid interest once per year, this would tell me all I needed to know, but as it's paid monthly (and varies) it doesn't seem to give me the information I need for the IRS. Am I being stupid and missing some way of using it?


No you're right, it was my oversight - works for me but I only get interest paid annually at fixed rates.



> I have used @BBCWatcher's helpful mechanism in the meantime.


Good.


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## Bevdeforges

Just be aware that the paid tax preparers may be filing additional forms to "cover their butts." It sounds to me as if the 1116 form was, strictly speaking, not necessary. 

On the interest statement, the way you're "supposed" to do it is to use the monthly statements to accumulate the interest paid from January through December. Practically speaking, if you declare the UK tax year (April to April) interest paid, no one is going to complain. Just do it consistently one year to the next.
Cheers,
Bev


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## a2lette

Thanks, Bev, good to remember. 

I've removed the 1116 for general income (on Tax Act's recommendation) and have just managed to e-file. What a relief!


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