# Potential Huge Tax Issue



## TheMooMoo (Jan 9, 2019)

Hi there everyone first post that I'm making as I am a more than a little worried about my spouses tax situation. 

A bit of background information first.

1/ My spouse is a US citizen currently residing in the UK
2/ They currently have ILR here and have been paying their taxes in the UK for many years. They have also been filing a US tax return where the accountant has used Foreign Tax Credit to reduce taxes in the US.
3/ They are self employed. They have a totalisation agreement to pay self employment taxes in the UK. 

-------------------

So the potentially huge issue is this, something we were unaware of completely and hopefully have simply misunderstood.

Before they originally moved to the UK they were self employed in the US mainly receiving money from a US company they did some contractual work for and from a few US individuals too. Since moving permanently to the UK the vast majority of their work has been paid to her by US companies into a UK paypal account.

The big issue here is that I heard out of the blue today that you cannot include "US Sourced Income" on a Foreign Tax Credit form. If that means she can't include income from a US company and US individual paying her we are basically screwed. If so wouldn't this mean that she needs to pay double taxes on all previous years and let the IRS know? With a huge bill to come of course. 

If she is resident here and carrying out all the work here does that mean it is now UK Sourced regardless of who is paying her?

Her accountant is away for a few days so posting here so we can maybe get an idea about what to be prepared for in the future. If there is a problem at least we can let the IRS know instead of them coming to us. But it's pretty worrying.

Thanks,


----------



## Omegaman477 (Jan 9, 2019)

TheMooMoo said:


> Hi there everyone first post that I'm making as I am a more than a little worried about my spouses tax situation.
> 
> A bit of background information first.
> 
> ...


Firstly, get a qualified UK based Tax Accountant onto the case. U cant afford to screw this up.


----------



## TheMooMoo (Jan 9, 2019)

Omegaman477 said:


> Firstly, get a qualified UK based Tax Accountant onto the case. U cant afford to screw this up.


Its unrelated to UK tax, we need a US accountant. The UK taxes have been done and paid just fine. In my experience most UK accountants know zero about US tax.


----------



## Nononymous (Jul 12, 2011)

I would take the view that if she's living in the UK, and doing the work in the UK, and payments are being made into a UK account, then it's not US-source income, it's simply US clients. But ask your accountant of course. You could also explore the option of claiming the FEIE instead of FTCs.

In the unlikely event that the IRS were to present her with a huge bill, she could choose not to pay it if she doesn't have US assets, as there is no means of collecting such debts. But she might want a UK passport in that case.


----------



## Bevdeforges (Nov 16, 2007)

> I heard out of the blue today that you cannot include "US Sourced Income" on a Foreign Tax Credit form. If that means she can't include income from a US company and US individual paying her we are basically screwed.


Don't know where you heard it from, but it's wrong.

If your spouse is doing work for a US company, but doing the work as a contractor while physically located outside the US, then your spouse is working in the UK (or wherever) and the income is part of his or her self-employment income. As long as your spouse is paying UK taxes and is enrolled in the UK social insurances program (and could prove it if challenged), then they're good to go - and to continue as they have been doing.


----------



## Moulard (Feb 3, 2017)

Where did you hear that US Sourced income is ineligible? Is it a reliable source? 

I'd have to go back to the IRC to be sure, but in all the reading that I have done on the FTC I don't believe I have ever seen any reference to a limitation related to US Sourced Income. 

The Foreign Tax Credit is just that.. a credit for taxes paid on income. If the Foreign Jurisdiction has taxed your US income (for example because you are a resident of that country) then you can claim a tax credit for it.

There are a number of limitations... You have to have legally owed the tax, can't be taxes paid to certain "naughty" countries etc, but as far as I am aware, no limitation on the "source" of the income.


----------



## JustLurking (Mar 25, 2015)

Also potentially of use if income is somehow determined to be 'US source' and yet also unavoidably taxable to the UK:

https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-special-issues



> *Tax Treaties*
> The United States is a party to tax treaties designed to prevent double taxation of the same income by the United States and the treaty country. Certain treaties allow a U.S. citizen an additional credit for part of the tax imposed by the treaty partner on U.S. source income. It is separate from, and in addition to, your foreign tax credit for foreign taxes paid or accrued on foreign source income.
> 
> The treaties that provide for this additional credit include those with Australia, Austria, Bangladesh, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Malta, Mexico, the Netherlands, New Zealand, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, and the United Kingdom.
> ...


----------



## SoCal85 (Jan 14, 2019)

Just wanted to add some insight to your issue. I agree this is mainly a sourcing issue. If you look at the internal revenue code & regulations under Section 861, sourcing for services is based on where the services are being performed. Thus, if services are being performed in the UK this is considered foreign sourced income, regardless of who is paying them.

With respect to the foreign tax credit, I agree it does not allow for US sourced income. The formula for determining the amount of the credit, otherwise known as the foreign tax credit limitation is (foreign sourced income / worldwide income) x income tax = foreign tax credit limitation. However, since the income is foreign sourced income she should be able to take the foreign tax credit on income taxes paid in the UK on this. As others mentioned, the accountant should maximize between the foreign earned income exclusion or the foreign tax credit. You can choose one or the other related to that specific income.


----------

