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The Chinchilla legislative coalition is considering a “universal” income tax similar to that which is imposed by the IRS Code on all U.S. citizens. Under the IRS Code, income derived from any source, anywhere in the world, is subject to U.S. taxation. There are, of course, some exceptions.
[b]Question: [/b]Does anyone know for certain if the IRS Code makes any allowance for income taxes paid to a foreign country? If I pay (say) $1,000 in income tax under this Costa Rican proposal, do I get any relief under the IRS Code? We itemize our federal return and deduct our property taxes on the Schedule A. Is there a means to deduct or (better still) claim as a credit foreign income taxes?
All our income is derived from U.S. sources (Social Security and government retirement).
The IRS does indeed have double taxation agreements with many countries where a U.S. citizen would NOT pay taxes twice…
Based on Costa Rica’s very close relationship with the U.S., I think you’ll find than there will be very little chance of double taxation…
Like every other bloody silly proposal that comes out of the mouths of most politicians, let’s hope that is not actually implemented.
Based on the fact the U.S. citizens should be paying taxes on their worldwide income anyway, this would have very little impact on U.S. citizens however, I do know one British guy (who does NOT have to pay taxes on his worldwide income) who makes a decent income generated outside of Costa Rica who does not like this idea at all…
Scott
Spanish readers can see the article: PAC y Gobierno negocian 18 puntos para agilizar plan fiscal at:
Foreign Tax Credit
1.Tax must be imposed on you.
2.You must have paid or accrued the tax.
3.The tax must be legal.
4.The tax must be income tax.
5.Use Form 1040, Schedule A.
6.Use Form 1116, and attached to Form 1040.Reference: http://www.irs.gov
[quote=”DavidCMurray”]Thank you, DV. so this is a credit, not a deduction, right?[/quote]
Either a deduction or a credit, David. Otherwise people who can’t itemize would be penalized.
The saying “don’t expect what you don’t inspect” comes to mind. How would Costa Rica enforce the tax? The IRS knows a great deal about each individual’s income through W-2 and 1099 forms (for interest, dividends, stock sales, contract wages, retirement income, etc). Where would Costa Rica get the information about income earned in other countries?
P.S. And what percentage of Americans actually report income earned in another country?
First, I would be very surprised if any tax applied to non-CR income of non-citizen residents. If it were to do so, the credit is generated from Form 1116 and you do not need to file Schedule A. Although 1116 generally is used to gain a credit for foreign tax paid on foreign income, I believe it allows for a credit on any taxation of US based income as well.
A longstanding problem in Latin America is the very low percentage of GNP that is collected in taxes. This greatly limits their ability to invest in infrastructure, security, education, etc. Surprisingly, Costa Rica ranks near the bottom (lowest % of GNP collected) of countries in this category.
Correction
Posted Saturday, September 17, 2011 at 1:49 PM from 186.4.52.241
I stand corrected, although I still doubt that any CR income tax would be levied on non-CR income of non-citizens. However, the foreign Tax Credit (Form 1116) is limited to the LESSER of; 1) Foreign tax paid or 2) US tax allocated to foreign source income. Thus, if CR were to tax you on US source income, you would not be able to claim the credit. You could still take it as an itemized deduction, but that would not help the many people who take the standard deduction.
[quote=”CostaRica2011″]
Either a deduction or a credit, David. Otherwise people who can’t itemize would be penalized.[/quote]Er . . . ah . . . I don’t think so.
In IRS Code parlance, a “tax [u]credit[/u]” is a dollar-for-dollar reduction in the net amount of tax you owe. If you get (say) a $1,000 solar tax [u]credit[/u], then your net tax obligation is reduced by $1,000.
A “tax [u]deduction[/u]”, by comparison, reduces the size of your net income [u]that is subject to taxation[/u]. So if you have a new $1,000 tax [u]deduction[/u] and your marginal tax bracket is (say) 25%, then your ultimate tax obligation is reduced by $250.
A tax credit is much more valuable than a tax deduction. In this hypothetical case, the difference is $750 which is real money where I grew up.
Taxpayers have a choice. If they would benefit from itemizing, they should do so; if they would benefit more from taking the standard deduction, they should do that. So if they would do better by itemizing and declaring the tax paid to another government, in this case, that’s what they should do. Otherwise, they should take the standard deduction and reap its benefits.
Hi David,
Maybe you qualify for the Foreign Earned Income Exclusion. Here are the details, hope this is helpful:
http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html
Cheers,
Felo Fallas[quote=”DavidCMurray”]The Chinchilla legislative coalition is considering a “universal” income tax similar to that which is imposed by the IRS Code on all U.S. citizens. Under the IRS Code, income derived from any source, anywhere in the world, is subject to U.S. taxation. There are, of course, some exceptions.
[b]Question: [/b]Does anyone know for certain if the IRS Code makes any allowance for income taxes paid to a foreign country? If I pay (say) $1,000 in income tax under this Costa Rican proposal, do I get any relief under the IRS Code? We itemize our federal return and deduct our property taxes on the Schedule A. Is there a means to deduct or (better still) claim as a credit foreign income taxes?
All our income is derived from U.S. sources (Social Security and government retirement).[/quote]
Hi Jack,
I don’t find it surprising that Costa Rica collects a very small amount of their GNP in taxes. Their taxes are very low relative to anywhere I’ve seen, particularly income taxes. Property taxes are comical. Most of their tax revenue is based on cruelly regressive forms of taxing like their astronomically high sales tax. For such a human-rights-oriented society, I find the regressive taxing to be quite surprising.
As you mention, the inability to collect tax revenue reflects on a society’s ability to build major capital projects. Costa Rica’s transportation infrastructure is an obvious reflection, along with the weak security and justice system. At least they focus what they do collect on something useful, like education, instead of shiny weapons.
Cheers,
Felo Falls[quote=”Jackdiv”]First, I would be very surprised if any tax applied to non-CR income of non-citizen residents. If it were to do so, the credit is generated from Form 1116 and you do not need to file Schedule A. Although 1116 generally is used to gain a credit for foreign tax paid on foreign income, I believe it allows for a credit on any taxation of US based income as well.
A longstanding problem in Latin America is the very low percentage of GNP that is collected in taxes. This greatly limits their ability to invest in infrastructure, security, education, etc. Surprisingly, Costa Rica ranks near the bottom (lowest % of GNP collected) of countries in this category.[/quote]
[quote=”FeloF”]Hi David,
Maybe you qualify for the Foreign Earned Income Exclusion.
Nope, the Foreign Earned Income Tax Exclusion only applies to earnings from work performed. Rents, dividends and interest, pension and retirement savings distributions are not “earned” income for these purposes.
Right you are. Sorry I did not notice your income was of the “unearned” variety. If you are being taxed twice on the same income, I would suggest you could contact the U.S. embassy to see if someone could provide you with advice on the situation. I believe it is fundamentally wrong for you to have to pay taxes to both countries for the same revenue. If that’s the way it is now, it needs to change. No U.S. citizen should be penalized for choosing to live elsewhere.
[quote=”DavidCMurray”][quote=”FeloF”]Hi David,
Maybe you qualify for the Foreign Earned Income Exclusion.
Nope, the Foreign Earned Income Tax Exclusion only applies to earnings from work performed. Rents, dividends and interest, pension and retirement savings distributions are not “earned” income for these purposes.[/quote]
Try out this scenario: a single retiree can have about $28,000 of income before paying any US income tax (e.g. social security plus another 10k of income, using the standard deduction).
I’m no tax expert, but I believe if the same income were taxed in Costa Rica, there would be an income tax of about $3900 (only the first $5600 is exempt, and the rest taxed at 10, 15 or 20%).
So, if this person has no US tax, any credit would be useless. He would simply have a new $3900 tax due to Costa Rica.
[b]Question: [/b]Does anyone know for certain if the IRS Code makes any allowance for income taxes paid to a foreign country? If I pay (say) $1,000 in income tax under this Costa Rican proposal, do I get any relief under the IRS Code? We itemize our federal return and deduct our property taxes on the Schedule A. Is there a means to deduct or (better still) claim as a credit foreign income taxes?
I’ll try to get this in the right place this time. I was incorrect in my earlier post – the Foreign Tax Credit is limited to the LESSER of 1) Foreign tax paid or 2) US tax allocated to foreign earnings. Thus, if we were assessed tax on just US source earnings, there would be no credit. You need to have a US tax liability for foreign income to use the credit. There is a carry-forward provision.
However, I doubt there will be a tax on non-CR income for non-citizens. Even the US does not tax the foreign earnings of aliens, even resident aliens (different rules for joint filing with a citizen) – only the US source income.
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