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I claim a tax credit on UK taxes for taxes paid in the USA.

Resolved Question:

I claim a tax credit on UK taxes for taxes paid in the USA. When calculating my tax credit from the USA, I need to decide whether to add back in amounts excluded from USA taxes by specific features of the USA tax law such as 'exclusion of foreign source earned income' (not from the UK or the USA) and a depletion deduction for mineral royalty income.
If I add back the protected amounts, then my claim for a tax credit amount for UK tax relief is measurably smaller than if I do not add back in these protected amounts.
Does UK tax law recognize USA tax protections when calculating a tax credit?
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi
Thanks for your question, I am Sam and I am one of the UK tax experts here on Just Answer.
I am afraid the whole amount will be subjected to UK tax (less the USA tax suffered) so whilst this does not allow you the benefit of amounts that would be excluded in the USA, this position is not continued into the UK tax jurisdiction.
This sadly applies to many "tax free" or "excluded" amounts merely because the UK does not recognise the other countries treatment of such income.
So you can only claim the tax credit that actually applied, which will see you suffering an amount of UK tax.
Sorry the news is not more favourable.
Let me know if you have any follow up questions
Thanks
Sam
Customer: replied 2 years ago.

Thank you for your answer, which I anticipated. However, my situation is complicated by my need to calculate the tax credit for USA income. The USA has removed my overseas earned income before calculating USA taxes. There are 2 scenarios:

Scenario 1 - from my 2013 USA return (as per USA practice)

a. Total income after subtraction of foreign earned income $ 153,573

b. Total USA tax $ 31,522

c. Effective USA tax rate 20.525 percent

Scenario 2

d. Total income adding back foreign earned income $ 214682

e. Effective USA tax rate 14.683 percent

I obviously prefer Scenario 1, but understand that the likely situation is Scenario 2.

I also need to clarify what tax treatment the following items receive under UK tax law.

1. Social security taxes on the foreign earned income. I am treating these taxes as expenses reducing the earned income amount.

2. Depletion deductions on the mineral income. This in USA tax law is recognized as a depreciation in the asset of the 'mineral assets in place'. I am reporting income for mineral royalty income after subtracting depletion.

3. The different tax year between the calendar USA year and the UK tax year to 05 April is a complicated accounting problem. I am having to accrue amounts for USA tax credits for one year and provide a correction to actuals on the following years return.

Can you advise on these matters, or can you suggest a tax accountant who I can work with near Woking, Surrey. Or does HMRC provide advise on these matters?

thanks,

Lee Moore

Expert:  Sam replied 2 years ago.
Hi Lee
Thanks for your response and further questions
I agree scenario 2 is the correct way to proceed
With your further questions
1. Social security taxes on the foreign earned income. I am treating these taxes as expenses reducing the earned income amount.
No the taxes are not expenses - you declare the gross income and also show the tax suffered, or you will be considered for too little UK tax, (which then has the USA tax suffered set off against it)
2. Depletion deductions on the mineral income. This in USA tax law is recognized as a depreciation in the asset of the 'mineral assets in place'. I am reporting income for mineral royalty income after subtracting depletion.
This is more than the original question advised, and as per Just Answer policy, I am afraid you will need to list this as a new question.
3. The different tax year between the calendar USA year and the UK tax year to 05 April is a complicated accounting problem. I am having to accrue amounts for USA tax credits for one year and provide a correction to actuals on the following years return.
I agree this is a nuisance, but not an uncommon problem and you just need to allocate the position from 6th April 2013 to 05th April 2014
As 8/12ths os the 2013 USA reported income and then also calculate the position for 4/12ths from the 2014 position ( which may well end up being estimated)
Thanks
Sam
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Category: Tax
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Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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