I'm slogging through IRS publication 514 trying to understand the Foreign Tax Credit. I have a question that I'll try to put in basic terms:
Since I am a German resident and my German income tax is always higher than my US tax obligations, will the Foreign Tax Credit (FTC) generally ALWAYS reflect a dollar for dollar reduction to $0 owed in US tax obligations due to taking the FTC?
I'm trying to determine this for sure because I'd like to start investing--I know dividends, etc. complicate the picture, and I know what to stay away from (e.g., PFICs), but I'm trying to keep my need for clarification here as simplified as possible.
Example with made up numbers:
My German salary is $90,000. I pay $30,000 in German income tax. US income tax obligation is $20,000. For FTC purposes, my understanding is this is general income.
I purchase and sell stocks (long term capital gains) through a foreign brokerage account for a $20,000 capital gains profit. I pay $5,000 in German capital gains tax. US capital gains tax obligation is $3,000. For FTC purposes, my understanding is this is passive income.
Would I owe 0$ in US taxes on the German income and capital gains in this situation when applying the FTC? Would it be a 1 for 1 dollar reduction, with $10,000 carryover for general income and $2,000 carryover for passive income? My research tells me no due to the calculations involved, but I'm simplifying it to this 'wrong' understanding to see if someone can help me understand.
Thanks in advance.
Since I am a German resident and my German income tax is always higher than my US tax obligations, will the Foreign Tax Credit (FTC) generally ALWAYS reflect a dollar for dollar reduction to $0 owed in US tax obligations due to taking the FTC?
I'm trying to determine this for sure because I'd like to start investing--I know dividends, etc. complicate the picture, and I know what to stay away from (e.g., PFICs), but I'm trying to keep my need for clarification here as simplified as possible.
Example with made up numbers:
My German salary is $90,000. I pay $30,000 in German income tax. US income tax obligation is $20,000. For FTC purposes, my understanding is this is general income.
I purchase and sell stocks (long term capital gains) through a foreign brokerage account for a $20,000 capital gains profit. I pay $5,000 in German capital gains tax. US capital gains tax obligation is $3,000. For FTC purposes, my understanding is this is passive income.
Would I owe 0$ in US taxes on the German income and capital gains in this situation when applying the FTC? Would it be a 1 for 1 dollar reduction, with $10,000 carryover for general income and $2,000 carryover for passive income? My research tells me no due to the calculations involved, but I'm simplifying it to this 'wrong' understanding to see if someone can help me understand.
Thanks in advance.