# FTC and UK / US taxes



## Meepmeepy (Sep 17, 2014)

Hi guys,

Had a quick query here.

So my wife lives here in the UK and works full time. She has a pretty lucrative business. Last year she paid no tax in the US as an error a few years prior meant the IRS owed her money. 

This year is the first time she is filing her US return with a full year of being resident in the UK. As the UK tax year doesn't end till April and she won't get the return back from the accountant till early May we are a little lost as to what to pay (if anything) when it comes to filing her US extension.

If the UK taxes are higher in amount than they are in the US does that mean that US taxation responsibility is reduced to zero? Or is does it reduce it to a certain percentage? Im so confused has to how it works essentially. Is someone working abroad and claiming FTC on an income that will likely accrue more tax in their country of residence also likely to pay "some" US tax? 

Please advise.


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## iota2014 (Jul 30, 2015)

In theory, if the USC has enough "active income" FTCs to cover her "active" income, and enough "passive income" FTCs to cover her "passive" income, there should be no US tax to pay.

In practice, it doesn't always work out that way; for instance, UK tax breaks may significantly reduce the UK tax and therefore the credits that can be claimed.


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## Bevdeforges (Nov 16, 2007)

Other than the FTC, don't forget about the FEIE (Foreign Earned Income Exclusion). The FEIE applies to "self-employment" or personal business income as well as to straight up salary income.

Take a look at IRS Publication 54 https://www.irs.gov/uac/about-publication-54 for an overview. But the US tax year is the calendar year - and the fact that the UK tax year is different doesn't change how you file. OTOH, filing from overseas you get an automatic extension in the time to file until June 15th. 
Cheers,
Bev


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## Moulard (Feb 3, 2017)

You have to split your foreign tax credit proportionally between active and passive income, 
You also have to split your deductions between US and Foreign Related and then again within based on whether they are related to the active income or the passive income.

As Iota says, in practice it doesn't always work about.

The other thing to remember is that she can exclude the first USD 100,300 (indexed annually) of her earned income. If she chooses to do so then she has to proportionally exclude the the portion of the tax credit that is related to the excluded income - if her wages are above that. 

Once you choose not to file a 2555 you are stuck with that decision for the next 5 years. 
Remember it can be handy to revoke the FEIE to build up a sizable pool of tax credits as they carry over for up to 10 years and can be carried back 1 year.

If wages are below the 2555 threshold and your other income is below standard deductions and exclusions then you are unlikely to owe any US taxes any may not even have to worry about the foreign tax credit.


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