# Confused about IRS form 1116 and the Foreign Tax Credit



## erinh

Hi all,

I know there's tons of US tax info on here (thank god) and maybe I've missed this, apologies if so...

I am so confused about the Foreign Tax Credit. From what I can gather, the only foreign tax credit I could potentially claim is on any tax that I pay here in Australia?

If this is correct, and I will write off all my owed taxes, than I would have nothing to claim for the Foreign Tax Credit?

How does this fit in with the Overseas Earned Income Exclusion?

Thanks to all those who have already posted about tax stuff, I'm so happy I found this forum. If anyone can shed some light on the above, it would be much appreciated!

Cheers
Erin


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## Bevdeforges

Your best option is to download publication 54 from the IRS website. There are some examples in the final pages of the publication that should explain how these things work.

Basically, you're normally better off to take the earned income exclusion first. The foreign tax credit then applies only to any income over and above the exclusion (or to any "unearned" foreign source income). The earned income exclusion simply excludes your salary income from US taxation, whereas the foreign tax credit merely offsets US tax with what you paid to a foreign government. If the foreign tax on that income is less than the US tax, you'll wind up paying the difference to the US.

The other "catch" with the foreign tax credit is that it usually tips you into the AMT category, meaning that you have to fill out the AMT forms, which may result in your paying taxes to the US. (Not always - but it's a risk you run.)
Cheers,
Bev


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## erinh

Hi Bev,

Thanks for the help. I've gotten through a few years filing returns as an employee without much drama, using the Foreign Earned Income Exemption. 

My problem is that I'm now self-employed, and paying all taxes etc here in Australia. I was under the impression that paying into Australia's version of social security meant that I wouldn't have to pay self-employment taxes when I file for the US. If this is correct, any idea how I might deduct/exempt them? I thought I was on to the right answer with the Foreign Tax Credit... But I see that's not the case. I get the feeling that I can't just write it all off with the 2555 either... 

I'd definitely rather not get hit with the double tax, and it's cheaper to pay into it here rather than back in the States (I'm aware of the ramifications of not paying into Soc Sec... I'm pretty sure it will have run out by the time I would be eligible anyway...)

I'm that bloody confused. I'm on the verge of calling the IRS, which is definitely a last resort. If you've got any insight into the self-employment aspect, I'd love to hear it.

Thanks so much for your help, by the way! You seem to be the resident tax expert, I can't imagine how much time you've spent looking at this stuff!


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## Bevdeforges

Damn - I just wrote you a brilliant reply and it got eaten up in the system. OK, in a nutshell - if you are self-employed, then I assume you're filing a schedule C. The taxes you are paying to Australia are just another of your deductions - including the Australian social security. It's only the final net figure (minus all the business expenses) that counts as your income and that's the number you carry over to your form 2555. Technically, you can only count your earnings due to "personal services" but if you're in business for yourself the net result is all "personal services income."

In chapter 3 of pub 54 there is a section titled: Exemption from Social Security and Medicare Taxes. It includes the following sentence: "As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system of the country where they reside."

There is a social security treaty between the US and Australia. Some information on it is here: Description of the U.S.-Australian Social Security Agreement
Cheers,
Bev


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## cescolar

Bevdeforges said:


> Damn - I just wrote you a brilliant reply and it got eaten up in the system.


Funny! The exact same thing happened to me when I tried to answer you!

Do you think this thread is cursed? 

Actually, I figured out what happened: While editing, I hit the backspace. But somehow the input text field had lost focus, and the backspace was interpreted by the browser as a request to go to the previous page. Bang! All the typing gone!
(I was a web programmer in my previous life...)

The solution? Now when I type a long reply I type it into an external program (like word or notepad) and then copy it and paste it into the page. Or simply make sure that the cursor is blinking in the text field before I hit the backspace key...)

I know that this is off topic, but it is probably useful to know for all the users of this forum (for all browser users really, but it is hard to reach them all!  )


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