# Passive vs Earned income tax paid in foreign country



## mr.bowtie (Apr 25, 2017)

I'm trying to figure out how much I've paid in foreign taxes. I know the total tax I've paid, but I'm not sure how to allocate it between passive and earned income. 

Say I have $100k earned income and $20k passive income. In the foreign country I'll be taxed in two categories:

Tax on total income: ($120k total income - $20k deduction) * 0.25 = $25K taxes
Tax on earned income only: ($100k earned income - $10k deduction) * 0,1 = $9K taxes

Am I correct in assuming that the passive portion is (20/120) * $25K = $4.17K and the rest is taxes on earned income? 

This seems like the obvious way to do it, but I haven't seen it explicitly stated anywhere.


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## Moulard (Feb 3, 2017)

The short answer is you are on the right track, but it is a little bit more complicated than that.. the reality is the such that it never works out exactly proportional.

For starters, you also have to proportionally allocated deductions that are specifically related to your general and passive income.

The other thing to remember is that if you have excluded any foreign earned income you must reduce your tax credit proportionally too. 

It used to be explicitly stated in one of the IRS pubs but hasn't been in there fore a few years now. 

Search the internet for "Form 1116 Comprehensive example". 

None of the tax tools I have played with are able to calculate a lot of this... so what I did was to used that worked examples to build a spreadsheet that came up with the the same numbers as the worked example (to prove the formulas were right) then swapped out my numbers...

If this is the first year you are taking a FTC remember you have to decide whether or not you will use a cash basis or accrual basis for calculating your foreign taxes. This is meant to be done the first year you take a FTC and is (as far as I am aware cannot be changed) If using a cash basis, basically you just use the figure on your foreign tax return. Cash basis is much easier if you are dealing with a country which has a different tax year. But there is a risk that the misalignment can result in US taxes. If for example your income increases significantly in a calendar year but due to a misaligned tax years, you haven't actually paid taxes on it yet. After the first few years the risk is mitigated a bit if you have a build up of tax credits you can roll forward. But it is something to bear in mind.

Accrual based accounting means you have to calculate how much tax you will owe but the downside is you then may have to amend your returns to reflect the actual amount paid.


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## mr.bowtie (Apr 25, 2017)

Moulard said:


> The short answer is you are on the right track, but it is a little bit more complicated than that.. the reality is the such that it never works out exactly proportional.
> 
> For starters, you also have to proportionally allocated deductions that are specifically related to your general and passive income.
> 
> ...


Thank you for the search tip "Form 1116 Comprehensive example". It's been a lot of help


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