Expatriation – Foreign Tax Credits

An expatriate’s income, subsequent to expatriation, is not likely to be U.S. source income and will be taxed by the expatriate’s country of residence upon receipt.

The expatriate may only receive a foreign tax credit, applied against any U.S. tax due on the income, if the income is foreign income and not U.S. source income (IRS Section 906(b)(4), Section 871(a).

An expatriate’s income, subsequent to expatriation, must be evaluated as either U.S. source income, or foreign source income in order to determine proper application in the U.S. of any foreign tax credits for the income. In particular, the following income must be evaluated as either U.S. source income or foreign source income (for proper application in the U.S. of foreign tax credits):

1. Gains arising from the subsequent actual disposition of a covered expatriate’s assets.
2. Deferred compensation.
3. Non-grantor trust distributions received subsequent to expatriation.

Under IRC Section 877A(d)(1), (f)(1), if amounts received subject to tax are not U.S. source income (i.e., income from foreign sources IRC 906(b)(4)), Section 871(a) will not apply and the expatriate (who becomes a non-resident alien upon expatriation and must file Form 1040 NR) should receive foreign tax credits (for foreign taxes paid to the expatriate country of residence) against any U.S. tax due under Form 1040 NR).

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