# Foreign tax credit - help



## Arcticgirl (Jun 4, 2016)

I'm a US citizen permanently resident in Germany, have until now always used the FEIE but for 2015 my income puts me over the limit. I am hoping to get help on how to use the foreign tax credit. 
-Employer is an international NGO organization (not on the IRS list) where we pay internal tax (income tax) to the organization and not to Germany.
-Received ca USD170K in income, on which USD 71K tax has been paid.
-Additionally received USD 20200 in unemployment benefits. (No tax payable or paid)

How can I claim the foreign tax credit?

Complication: a part of the USD 170K is a refund from a pension plan where I am no longer able to participate, as I no longer work for the NGO. (Have not reached retirement age either). Tax was paid on this as well, as I mentioned above.

Any help is appreciated regarding the foreign tax credit!


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## Bevdeforges (Nov 16, 2007)

I don't believe you'll be able to use the "internal tax" of the NGO as a "foreign tax credit" on your US returns. But take a look at IRS Publication 514 for more details on what qualifies as a "foreign income tax" https://www.irs.gov/publications/p514/index.html

On the unemployment benefits, it may depend on the source of those benefits. If it's the German national unemployment system, your benefits may qualify as "public assistance" (though in that case you'd probably have been paying into the German social insurance system) and thus be exonerated. If it's a private unemployment system through your employer, then you may only owe US tax on what you received over and above what you paid into the fund.



> Complication: a part of the USD 170K is a refund from a pension plan where I am no longer able to participate, as I no longer work for the NGO. (Have not reached retirement age either). Tax was paid on this as well, as I mentioned above.


For the part of the 170K that was a refund of a pension plan, again, the part that represents your contributions to the plan, there is no tax as you have already "paid" your taxes (or the taxes are considered "paid" when you excluded the income using the FEIE), If part of the refund was earnings on the pension fund money, that should have been declared on your prior year US returns and if so, then it's also tax free as a genuine refund. 

Unfortunately, can't be much more specific without more information, but it could be that the FEIE is still the way to go. In any event, the FEIE only applies to salary income (or salary-like income) and wouldn't apply to either the unemployment nor to the pension plan pay-out.
Cheers,
Bev


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## Arcticgirl (Jun 4, 2016)

The unemployment scheme is from the employer (we are not allowed in the German social security system), I had to make a mandatory contribution to it, but only in previous years. I don't know how one would calculate what's my share and what's the employers. But of course it is a welfare type payment.

The pension plan refund was also mandatory and there was no choice as to my contribution level etc either. I have not put it on my taxes before as I have not had any access to it before now. Is this a problem now? Any chance the pension refund is earned income?

I have read the guidance for the foreign tax credit and what I have paid is like an income tax, however it is not paid to a government, as the organization is tax exempt in Germany because of its own internal tax system. (So if I were German, I would be exempt from German income tax becuse of the internal tax having been paid already.)


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## BBCWatcher (Dec 28, 2012)

It's not public assistance/welfare if it's a private insurance plan. Generally then the payout minus the premiums equals the reportable and taxable income, less any foreign income tax owed and paid (foreign tax credit).

Generally it's fundamentally the same thing with your (private) pension refund. You calculate the payout minus your personal contributions (not your employer's unless you've previously reported those employer contributions as income), i.e. the gains are reportable and taxable, less any foreign tax credit.


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## Arcticgirl (Jun 4, 2016)

So my contributions during the past years (during all the years I participated)? It might be that this amount is higher than the unemployment benefit I actually received. I would have to calculate. 

In what line would I report the unemployment then? Wages or under other income on the 1040? Would the same apply for the pension refund?(According to the employer, the refund was given because I did not reach the minimum years of contribution to receive an actual pension. In this regard, it is not a pension plan payout, but simply money returned.)

All your help is very appreciated!


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## BBCWatcher (Dec 28, 2012)

There are lines available on IRS Form 1040. That's never a problem. Lines 16, 19, and 21 are available, as examples (2015 edition).

Yes, you have to run some basic calculations. There's a significant difference between what you personally contributed (if anything) and what your employer did. Gains (if any) and whatever your employer contributed (if anything) are generally reportable and taxable income. Your personal contributions (which would be from previously reported income) are not income again.


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## Bevdeforges (Nov 16, 2007)

Just a side note: This is one of the big reasons why the NGO employees in particular are incensed whenever Congress proposes doing away with Section 911 of the Internal Revenue Code. (Section 911 is the one that grants the FEIE.)

In many countries (if not most) employees of recognized International NGOs (sometimes referred to as the International Civil Service) do not pay local income taxes on their salaries. If Congress were to abolish Section 911 (as they periodically threaten to do) it would put US citizens working for these organizations at a huge disadvantage vis a vis their colleagues. And some have suggested that it might lead to NGOs avoiding hiring US citizens or to US citizens turning down this type of international employment - which would lead to the US losing influence in some of the organizations. (Such as the OECD, UNESCO, NATO, etc.)

Yet another "interesting" unintended consequence of citizenship-based taxation.
Cheers,
Bev


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## iota2014 (Jul 30, 2015)

Arcticgirl said:


> I'm a US citizen permanently resident in Germany, have until now always used the FEIE but for 2015 my income puts me over the limit. I am hoping to get help on how to use the foreign tax credit.
> -Employer is an international NGO organization (not on the IRS list) where we pay internal tax (income tax) to the organization and not to Germany.
> -Received ca USD170K in income, on which USD 71K tax has been paid.


What does the NGO do with the $71K?


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> (Such as the OECD, UNESCO, NATO, etc.)


Or FIFA?


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## Nononymous (Jul 12, 2011)

iota2014 said:


> What does the NGO do with the $71K?


I assume they just keep the money. Some years ago, while living in Germany, I worked for a third-country embassy (i.e. not a country that I was a citizen of). I didn't pay German taxes, but the embassy withheld from my pay an amount roughly equivalent to what a German employee would pay - to make it fair for the locals - and that money presumably went back to the government for whom I was working. I think that arrangement is fairly standard for NGOs, diplomatic posts, etc.

The nice thing about this arrangement was not having to fill out a German tax return. No paperwork at all. No room for negotiation either, of course.


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## iota2014 (Jul 30, 2015)

My train of thought was that if the deduction doesn't count as tax, and can't generate a credit, effectively it just reduces the OP's gross income to $99K which might be within the FEIE limit, thus obviating the need for tax credits. But I may be wrong, never having used either FEIE or FTCs.


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## Bevdeforges (Nov 16, 2007)

iota2014 said:


> My train of thought was that if the deduction doesn't count as tax, and can't generate a credit, effectively it just reduces the OP's gross income to $99K which might be within the FEIE limit, thus obviating the need for tax credits. But I may be wrong, never having used either FEIE or FTCs.


That's definitely an approach worth considering.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

"Internal tax to the organization" certainly sounds like a pure, private reduction in salary/wages. But where would that go? Possibly directly subtracted from earned income, possibly Schedule A Line 21 (2015 edition) (unreimbursed employee expenses). "More information required," I'd say.

But a NGO isn't a government, so whatever a NGO charges isn't a tax for purposes of the Foreign Tax Credit (IRS Form 1116).


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