Question about US Ireland Tax Treaty

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Question about US Ireland Tax Treaty

Post by Breadwinner »

Hello,
I wonder if there are any experts on the US Ireland Tax Treaty that could help me please? My wife and I have dual Irish/US citizenship and have lived in the US for the last 20 years. Last year, we sold the house in Ireland that I had inherited from my parents, and paid Capital Gains Tax to the Irish Revenue Commissioners on the sale. Now I am trying to determine if we also have to pay CGT in the US. The treaty says "Gains on real property are taxable in the country in which the property is located, and gains from the sale of personal property are taxed only in the State of residence of the seller". In 2019 we cashed in an investment in Ireland and only paid US CGT, because we are not resident in Ireland. However, our accountant here in the US believes that we have to pay US CGT on the sale of the house in Ireland, even though we also paid tax in Ireland on that sale. Even allowing for the Foreign Tax Credit, this means that we will pay roughly 70K CGT to the Irish tax authority, and an additional 20K to the US tax authorities. One of the intents of the tax treaty is stated to be to eliminate dual taxation. I have no problem paying the tax that we owe, but it seems to go against the tax treaty to have to pay tax in both countries on the same income.
I tried calling the IRS international department and spoke to a very nice and helpful lady there. However she told me that they get very little training and the best that she could do was to point me at some IRS publications (which I have already reviewed), and that I ask an accountant. As you can imagine, the US is not awash in accountants that are experts in the implementation of the US - Irish tax treaty :happy . So any help that anyone here can offer would be most welcome. And I expect that there are other people in a similar position to us that would also benefit from the input of an expert.
Thank you.
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Question about US Ireland Tax Treaty

Post by TedSwippet »

Breadwinner wrote: Thu Mar 11, 2021 12:28 am I wonder if there are any experts on the US Ireland Tax Treaty that could help me please? My wife and I have dual Irish/US citizenship and have lived in the US for the last 20 years. Last year, we sold the house in Ireland that I had inherited from my parents, and paid Capital Gains Tax to the Irish Revenue Commissioners on the sale. Now I am trying to determine if we also have to pay CGT in the US. The treaty says "Gains on real property are taxable in the country in which the property is located, and gains from the sale of personal property are taxed only in the State of residence of the seller". In 2019 we cashed in an investment in Ireland and only paid US CGT, because we are not resident in Ireland. However, our accountant here in the US believes that we have to pay US CGT on the sale of the house in Ireland, even though we also paid tax in Ireland on that sale. Even allowing for the Foreign Tax Credit, this means that we will pay roughly 70K CGT to the Irish tax authority, and an additional 20K to the US tax authorities. One of the intents of the tax treaty is stated to be to eliminate dual taxation. I have no problem paying the tax that we owe, but it seems to go against the tax treaty to have to pay tax in both countries on the same income.
Not an expert on any tax treaty, and the only one I'm familiar with is the US/UK treaty, but the US/Ireland treaty looks similar enough that I'll take a stab at this. Article 13 states:
1. Gains derived by a resident of a Contracting State from the alienation of immovable property (real property) referred to in Article 4 (Income from Immovable Property (Real Property)) and situated in the other Contracting State may be taxed in that other State.
So Ireland may tax your gains from holding real estate that is situated in Ireland, even though you do not live there. What this article does not say though, is that only Ireland may tax those gains. The treaty technical explanation expands a bit on this. The emphasis below is mine:
Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax gains attributable to the alienation of real property situated in that State. ... Gains attributable to the alienation of real property include gain from any other property that is treated as a real property interest within the meaning of paragraph 2. Although Ireland uses the term “immovable property”, it is to be understood from the parenthetical use of “real property” that the two terms are synonymous.
Non-exclusive. That is, this treaty article allows Ireland to tax your real estate gains, but also does not prevent the US taxing this same gain under normal US residency (or citizenship) rules. Tax credits, treaty Article 24 paragraph 1, will mean you pay overall the highest of the two countries' tax rates and with the lowest of the two countries' allowances and exemptions, but avoid pure double-tax. Assuming (on the numbers you gave) that your US tax liability here without credits would have been $90k and you paid $70k to Ireland, your accountant appears to be correct that you will owe the difference, $20k, in US tax.

Finally, even if you were no longer US residents, as US citizens you would still have this problem with the treaty. In common with many treaties, the US has inserted a 'saving clause' that neuters much of the treaty for you. It is in Article 1 paragraph 4; again emphasis is mine. There are some exceptions to paragraph 4 that are noted in paragraph 5, but Article 13 is not one of them:
4. Notwithstanding any provision of the Convention, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect. For this purpose, the term "citizen" shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Re: Question about US Ireland Tax Treaty

Post by Breadwinner »

Hello Ted,
Thank you so much for your help and for all the time you spent on providing such a comprehensive answer.

I have a little additional information - I didn't want to clog my original post with it, but it might be helpful to others that find themselves in a similar situation to me.

The Irish CGT is relatively simple and straightforward, and that 70K is already paid (it was withheld from the proceeds of the sale). For the US part, I went through IRS Form 1116, entering the values as best I could. If I understand it correctly, the sole objective of the Form 1116 is to determine your Foreign Tax Credit (the US CGT on the gain is calculated elsewhere). In our case, the Irish CGT was 70K, and the US CGT was roughly 35K (so, less than the Irish CGT). However, the Foreign Tax Credit is not quite as straightforward as it would initially (and logically) appear.

- For a start, because this is a 'passive category income', the capital gain is reduced by 59.46% (God knows where that number comes from).
- Then you reduce that number again by a percentage of your standard deduction - that percentage represents the part of your GROSS worldwide income that came from that foreign country.
- Then you take that number and divide it by your worldwide taxable income. That gives you a new percentage (17% in our case).
- Then you multiply your total tax due by that percentage. The answer to that calculation is your Foreign Tax Credit.

So, in our case, our CGT in Ireland was 70K. Our CGT in the US was 35K. And our FTC will only be about 15K. So, sadly, we will end up paying a total of 90K in CGT, even though the US CGT is less than the Irish CGT. I wish that your statement "will mean you pay overall the highest of the two countries' tax rates" was true - it certainly seems like a fair way to handle the tax. But in practice, that does not appear to be how it will work out.

I know that I have absolutely zero chance of changing the tax rules, regardless of whether they appear fair or logical or not. But I hope that my experience, and your help, will at least help other people in our position prepare for an unexpected tax bill.

Thank you again for your help.
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Question about US Ireland Tax Treaty

Post by TedSwippet »

Breadwinner wrote: Thu Mar 11, 2021 2:50 pm So, in our case, our CGT in Ireland was 70K. Our CGT in the US was 35K. And our FTC will only be about 15K. So, sadly, we will end up paying a total of 90K in CGT, even though the US CGT is less than the Irish CGT. I wish that your statement "will mean you pay overall the highest of the two countries' tax rates" was true - it certainly seems like a fair way to handle the tax. But in practice, that does not appear to be how it will work out.
Hm. It's been over a decade since I've needed to tangle with form 1116, but on the numbers given above, it seems like something is amiss here. A close reading of treaty Article 24 and its accompanying technical explanation very much suggests that the US is bound to fully credit tax paid to Ireland, and this should -- from what you wrote -- simply reduce your US tax on this gain to zero. Not below zero, of course, but to zero.

I do recall some games you sometimes have to play with 'resourcing' income from a non-US country to the US, and filing an accompanying form 8833, to make the numbers work. Maybe that's what's required here? Or maybe not, and it's something else entirely. By now, this type of tax contortion is ancient history to me I'm afraid.

Maybe take this information back to your accountant and have them either redo the numbers or explain precisely why the US is not permitting a full credit for Ireland's tax paid here? Sorry I can't offer more.
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Re: Question about US Ireland Tax Treaty

Post by Breadwinner »

Hi Ted,
Please don't apologize, you are very kind to offer your help and advice.

I looked in the Form 1116 documentation and it says "If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.". I searched the US - Ireland Tax Treaty and I can't find any sourcing rule that applies to our situation.

I really am trying to do the right thing here, but all of the tax documentation (both in Ireland and the US) appears to be written with the primary intention of keeping accountants and tax lawyers in a job. Perhaps if the documentation was understandable by ordinary people, more people would pay what they actually owe. Instead, we get sentences that are an entire paragraph long and 'guides' that are unintelligible to mere mortals. And yet if a tax accountant makes a mistake, it is the taxpayer that is held liable. If I could charge the IRS for the amount of time that I have sunk into trying to understand my tax liability, I would be rich enough to hire a fancy accountant to make sure that I don't pay any tax at all! :)

Anyway, thank you again for your help. I will update this entry with whatever answer I end up with.
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Question about US Ireland Tax Treaty

Post by TedSwippet »

Breadwinner wrote: Thu Mar 11, 2021 5:58 pm I looked in the Form 1116 documentation and it says "If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.". I searched the US - Ireland Tax Treaty and I can't find any sourcing rule that applies to our situation.
Now that you mention it, my recollection of 'resourcing' was moving US source income to being treating as non-US so as to obtain a US foreign tax credit, rather than moving from non-US to US source. Sorry if that was a misleading pointer. :-(
Breadwinner wrote: Thu Mar 11, 2021 5:58 pm I really am trying to do the right thing here, but all of the tax documentation (both in Ireland and the US) appears to be written with the primary intention of keeping accountants and tax lawyers in a job. Perhaps if the documentation was understandable by ordinary people, more people would pay what they actually owe. Instead, we get sentences that are an entire paragraph long and 'guides' that are unintelligible to mere mortals. And yet if a tax accountant makes a mistake, it is the taxpayer that is held liable. If I could charge the IRS for the amount of time that I have sunk into trying to understand my tax liability, I would be rich enough to hire a fancy accountant to make sure that I don't pay any tax at all! :)
I hear you. I've been wrestling with this nonsense for two decades now, and have not fully straightened out chunks of it even so. As you've already noted, treaties are sometimes unclear. Not just in the language they use, but also once it's parsed. There are grey areas, including places where multiple diverging interpretation is possible and where any of them could be correct and intended. Malleable and porous. And the US in particular is much keener to sign treaties than it is to abide by them.
Breadwinner wrote: Thu Mar 11, 2021 5:58 pm I will update this entry with whatever answer I end up with.
Please do. I cannot help but believe that there has to be some way that the paperwork can be constructed so that the US is forced here into providing full relief from double-tax, as defined by Article 24. Sorry for your struggles. This type of nonsense is the main reason I did not become a US citizen when I had the opportunity.
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Re: Question about US Ireland Tax Treaty

Post by Breadwinner »

Hi Ted,
Thank you for your help and your comments.

You observation about not becoming a US citizen is spot on. I was born in the US and moved to Ireland as a child, so I didn't have that choice. But if I had realized how complex it would be to have any sort of financial presence in two countries, I really never would have moved back. The tax rates in Ireland might be higher, but when you have the US double-dipping, there is not much financial advantage from living over here. But it is the ridiculous complexity of the whole thing that really bugs me. It makes it basically impossible for an ordinary person to do their own taxes, and unless you pay a fortune for an international tax specialist, you never know if your taxes have been prepared correctly. We are not wealthy enough for that luxury - just because you have spent part of your life in another country does not mean that you are rich. How anyone, other than a tax accountant or a tax lawyer, can think that the current system makes sense is beyond me.

Anyway, thank you again for your help. Enjoy your weekend.
theresearcher
Posts: 109
Joined: Sat Jul 25, 2020 12:51 pm

Re: Question about US Ireland Tax Treaty

Post by theresearcher »

Breadwinner wrote: Thu Mar 11, 2021 2:50 pm The Irish CGT is relatively simple and straightforward, and that 70K is already paid (it was withheld from the proceeds of the sale).
This doesn't make sense. Like many jurisdictions, Ireland has provisions regarding tax withholding when real estate is sold by a non-resident. In the case of Ireland, it's 15% of the gross proceeds- in certain instances.
https://www.revenue.ie/en/gains-gifts-a ... cg50a.aspx

However this is simply a withholding and not a final CGT liability. Ireland's capital gains tax is 33% of the taxable profit- which may be a lot more or less than 15% of gross proceeds. In the case of an inherited property, Ireland (like the U.S.) has basis step-up on death so there is usually not a capital gain when a property has been sold within a short period after inheritance. More usually, a small capital loss after allowing for selling expenses.

In other words- if there has been income tax withholding on gross proceeds, has an Irish (non-resident) income tax return been filed to determine the correct Irish CGT and claim a refund if necessary. If not, this should normally be done.

On the U.S. side- although there are some differences in calculating the capital gain, the holding period is normally assumed to be 1 year or longer on inherited assets, even if the actual period of ownership is less. https://www.irs.gov/publications/p544
"Inherited property. If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it." The U.S. federal tax rate should in most cases be 15% less deductions and form 1116 if completed correctly should give an equivalent tax credit if the foreign tax rate is higher.

Also consider any U.S. tax information reporting requirements related to the foreign estate- notably form 8938, form 3520 (report inheritance from non-U.S. person over $100,000 and FBAR/FinCen114 if proceeds have gone through a foreign bank account). Also any state inheritance tax, if applicable.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Question about US Ireland Tax Treaty

Post by international001 »

Breadwinner wrote: Thu Mar 11, 2021 2:50 pm - For a start, because this is a 'passive category income', the capital gain is reduced by 59.46% (God knows where that number comes from).
- Then you reduce that number again by a percentage of your standard deduction - that percentage represents the part of your GROSS worldwide income that came from that foreign country.
- Then you take that number and divide it by your worldwide taxable income. That gives you a new percentage (17% in our case).
- Then you multiply your total tax due by that percentage. The answer to that calculation is your Foreign Tax Credit.
I'm filing a 1116 now and I'm interested. I find it's complexity fascinating and so many of the tricks they use so they don't have to give you the full credit

Can you explain how you come up to that 59.46%. Is it about line 1a and you are using worksheet A or B?
As far as I could tell, you reduce the income in 1a if they are qualified dividends (that's one of those dirty tricks), but not if they are capital gains.
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Re: Question about US Ireland Tax Treaty

Post by Breadwinner »

This response is to "The Researcher" (sorry, I'm still getting to grips with using this board).

Thank you for your help.

We inherited the house when my dad passed away about 10 years ago. We've had the house rented for nearly all of the intervening period. I paid Irish inheritance tax at the time. And, as you noted, the basis that was used to calculate the gain for both Irish and US CGT was the value of the house at the time I inherited it. So I don't think that the inheritance aspect is relevant in this case.

The solicitor handling the sale our house is (how can I phrase this nicely) fanatical about following every last letter of the law. They withheld 1/3 of the gross proceeds from the sale, and paid the Capital Gains Tax out of that amount. As you state, the Irish CGT was 33%, and that has been paid.

My issue is that the US Ireland tax treaty basically appears to allow for double taxation of capital gains on real property. You might naively think that that form would say "How much foreign CGT was paid? What would the US CGT be? If the US CGT is higher, then you owe the IRS the difference. And if the US CGT is lower then you get a credit to offset the US CGT." However, when you get into the Form 1116 it doesn't work that way.

According to the Form 1116 instructions, "Passive income generally includes dividends, interest, royalties, rents, annuities, excess of gains over losses from the sale of property that produces such income or of non-income-producing investment property, and excess of gains over losses from foreign currency or commodities transactions. Capital gains not related to the active conduct of a trade or business are also generally passive income." Then later on (in relation to line 1a) "To adjust your foreign source qualified dividends or capital gain distributions, multiply your foreign source qualified dividends or capital gain distributions in each separate category by 0.4054 if the foreign source qualified dividends or capital gain distributions are taxed at a rate of 15%". Then there is another reduction where they reduce the credit to reflect the share of your worldwide income that came from the foreign country.

To be honest, the logic of the entire 50-line form escapes me, other than its objective is to minimize the foreign tax credit. I've gone through the form multiple times, and I believe that my calculation is correct. It is a little like the famous 'Savings Clause' which effectively says "We are the all-powerful US. We can tax you in any way we feel like. And the remaining 41 pages of this treaty are irrelevant." And those are basically the words than an IRS agent once told me. He agreed that it was unfair, but his job was to enforce the rules that he is given. As an aside, despite their terrible reputation, in any of my dealings with them, I have found IRS agents to be very nice, very helpful people that are overworked and under-appreciated.

Anyway, at this point, I've accepted that we are just going to have suck it up and pay up. I've spent many days of my time researching this, and used up the time of helpful people like you. My main objective in this post is to help other people that find themselves in the same position as us. If I can save others from wasting all the time that I've wasted, then it will be worthwhile.

Thank you again for your help, it is greatly appreciated. I hope that I can 'pay it forward' by providing information here to help others.
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Re: Question about US Ireland Tax Treaty

Post by Breadwinner »

international001 wrote: Fri Mar 12, 2021 6:48 pm
Can you explain how you come up to that 59.46%. Is it about line 1a and you are using worksheet A or B?
As far as I could tell, you reduce the income in 1a if they are qualified dividends (that's one of those dirty tricks), but not if they are capital gains.
Hi International one. Have you looked through the wonderfully user-friendly and crystal clear Form 1116 instructions? Yes, I know, it is not something I would wish on my worst enemy. Please have a look at my response to The Researcher - it contains text that I cut and paste from the Form 1116 instructions. Also, search that document for '4054' and '5946' and you will see where the 59.46% came from. For the life of me, I can't understand where those numbers came from, unless someone in the IRS likes playing with random number generators. These IRS forms that simply say "Multiply line 8 by .4054" drive me nuts. WHY??? What does that number mean? Subtracting losses from gains makes sense, or substracting the basis from the sale price makes sense. But multiplying a number by .4054? They don't (can't?) even put a name on that value - it is simply referred to by its line number.

Anyway, please check out my response to The Researcher and the Form 1116 instructions and if you still have questions, post here and I will help if I can. Obviously I'm not an accountant or a tax lawyer, I'm just an ordinary tax payer trying to understand how much I have to pay. So I can't give you expert answers, but I'm happy to share anything that I've learned as I go through this painful process.
theresearcher
Posts: 109
Joined: Sat Jul 25, 2020 12:51 pm

Re: Question about US Ireland Tax Treaty

Post by theresearcher »

Breadwinner wrote: Sat Mar 13, 2021 5:06 pm Hi International one. Have you looked through the wonderfully user-friendly and crystal clear Form 1116 instructions? Yes, I know, it is not something I would wish on my worst enemy. Please have a look at my response to The Researcher - it contains text that I cut and paste from the Form 1116 instructions. Also, search that document for '4054' and '5946' and you will see where the 59.46% came from. For the life of me, I can't understand where those numbers came from, unless someone in the IRS likes playing with random number generators. These IRS forms that simply say "Multiply line 8 by .4054" drive me nuts. WHY??? What does that number mean? Subtracting losses from gains makes sense, or substracting the basis from the sale price makes sense. But multiplying a number by .4054? They don't (can't?) even put a name on that value - it is simply referred to by its line number.
The formula is 15/37 = .4054. It's not made up at random. The source of these numbers is based on the U.S. federal income tax rate schedule. The reason it exists is to ensure that the credit on items of foreign sourced income taxed at lower rates than standard is limited to the average U.S. federal tax due on that income. As someone else has pointed out the formula is favorable to the IRS in many situations.
https://www.irs.gov/individuals/interna ... iance-tips

Since the Irish CGT is probably a lot higher than the U.S. federal income tax (excluding Net Investment Income Tax 3.8%), you should be able to prove out your form 1116 by doing the calculation with and without the Irish capital gain income included. Complications can arise from depreciation recapture and/or Alternative Minimum Tax. Any retail tax software package should allow you to do this calculation (Tax treaty is irrelevant). Or ask your accountant to calculate.

Regarding your Irish tax issues. You have been given a verifiable reference that withholding should be 15%, not 1/3 as you have said- unless you meant 1/3 of gain. Secondly, your Irish capital gains tax cannot have been paid without you filing an Irish non-resident income tax return to report the sale cost less cost basis and allowable expenses- assumed this has been done? In addition- it's also assumed there was an Irish non-resident income tax return filed each year since 2010- and you must also have already been filing a form 1116 to take a U.S. federal tax credit each year for U.S. tax on Irish rental income.

Actionable point. Since it appears you may still have unresolved tax issues in Ireland and/or an unclaimed refund, and you may need more time to understand how form 1116 works (the IRS will not correct you if you get the form wrong and pay too much) you may wish to consider filing form 4868 before April 15 to get a six month extension to file your federal tax return.
Last edited by theresearcher on Sat Mar 13, 2021 9:09 pm, edited 6 times in total.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Question about US Ireland Tax Treaty

Post by international001 »

Breadwinner wrote: Sat Mar 13, 2021 5:06 pm For the life of me, I can't understand where those numbers came from, unless someone in the IRS likes playing with random number generators. These IRS forms that simply say "Multiply line 8 by .4054" drive me nuts. WHY??? What does that number mean?
I had the same transcendental questions. But a Zen manual and testing on a spreadsheet can do wanders. So I figured myself.

It turns out 0.15/0.37 = 0.4054, 0.20/0.37=0.5405

So the idea if you have foreign qualified dividends income, you decrease that foreign income as if it was taxed at the maximum bracket.
Somebody making $10M of US ordinary income, will have a 37% bracket. If they have $1000k or qualified dividends, they shouldn't get a credit
of $370, just a credit of $150. This is what the formula does.

This is a dirty trick. Not everybody is on the 37% bracket. If you are not, the total amount of credit you can for those foreign qualified dividends is less that what you paid in taxes

Similarly, 1-(0.15/0.37)=0.5946, 1-(0.2/0.37)=0.4595 (i.e. 1 - numbers_above)

The above is used to adjust your total taxable income (US and foreign), and it applies to all (US and foreign) qualified dividends. The idea is similar, since you adjusted in the numerator (foreign income), now you have to adjust into the denominator (world income).
Using it the 37% bracket reduces the total taxable income that if you were in the 22% bracket. But usually (if ordinary income it's the greatest) it won't make much of a difference.

So you are trying to consider qdiv and ordinary income separate. Instead of doing 2 ratios foreign-income/total income (one for ordinary income and one for qdiv), you use the same ration and you just subtract quantities related to qdiv on the numerator or denominator. If you only have qdiv or ordinary income, it doesn't matter. Otherwise, you loose.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Question about US Ireland Tax Treaty

Post by international001 »

Breadwinner wrote: Sat Mar 13, 2021 4:54 pm
According to the Form 1116 instructions, "Passive income generally includes dividends, interest, royalties, rents, annuities, excess of gains over losses from the sale of property that produces such income or of non-income-producing investment property, and excess of gains over losses from foreign currency or commodities transactions. Capital gains not related to the active conduct of a trade or business are also generally passive income." Then later on (in relation to line 1a) "To adjust your foreign source qualified dividends or capital gain distributions, multiply your foreign source qualified dividends or capital gain distributions in each separate category by 0.4054 if the foreign source qualified dividends or capital gain distributions are taxed at a rate of 15%". Then there is another reduction where they reduce the credit to reflect the share of your worldwide income that came from the foreign country.
Let's asume the cap gains is 210k and you were withold 70k. You should have been withold 31.5k
You also had 1M on cap gains in US. Forget the deductions of section 1116 for simplification and assume all cap gains are at 15%

L1a should be 210k*0.4054
L18 should be (1M+210k)*0.405419
L19 should be L1a/L18
L20 should be (1M+210k) (total tax in 1040 = (1M+210k)*15%)
L21 = L20*L19 = 31.5k

L21 is the max credit you can get.
If you have other non QDIV things change and you may get L21 < 31.5k (per IRS dirty tricks)
Recovering the missing TFC in the future may require you to get some extra income from Ireland.
theresearcher
Posts: 109
Joined: Sat Jul 25, 2020 12:51 pm

Re: Question about US Ireland Tax Treaty

Post by theresearcher »

A summary of the discussion above. Ireland taxes the gain at 33% and the U.S. marginal federal rate (ignoring depreciation recapture and AMT) on a long term capital gain is normally 15%. However the U.S. limits the foreign tax credit to the taxpayer's average tax rate on that foreign income and therefore in this situation the amount of allowable credit may work out closer to 10% than 15%. The U.S. therefore takes another 5% or so on top of what Ireland has taxed and there's another few percent added on for the Net Investment Income Tax if applicable. State taxes also additional- most states with income tax do not give any credit or relief for foreign income taxes.

There is likely an excess foreign tax credit balance created for the taxpayer but it may not be possible to use up this credit.
The tax treaty probably doesn't help because it states that Ireland has full taxing right over real estate in that country and the U.S. does not appear to be obliged to go beyond its standard domestic law in giving credit for Irish tax. Any such treaty claim in the U.S. should be made on form 8833.
There is an option for the taxpayer to take an itemized deduction (for Irish capital gains tax incurred) instead of a foreign tax credit however even with the limitations on the credit it would be unusual for this to be advantageous.
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Question about US Ireland Tax Treaty

Post by TedSwippet »

theresearcher wrote: Sat Mar 13, 2021 6:56 pm The formula is 15/37 = .4054. It's not made up at random. The source of these numbers is based on the U.S. federal income tax rate schedule. The reason it exists is to ensure that the credit on items of foreign sourced income taxed at lower rates than standard is limited to the average U.S. federal tax due on that income. As someone else has pointed out the formula is favorable to the IRS in many situations.
And for anyone interested in just how these numbers work, and how much they favour the IRS, this article reveals some of the problems:

Defects in foreign tax credit rules
Moreover, this paper reveals some defects and inconsistencies in applying the above foreign tax rules. In one incidence, the highest applicable tax rate in the application of the ‘rate differential portion’ is fixed at 39.6%. Nevertheless, in many situations, a taxpayer’s marginal tax rate is only 35%, 33%, 28%, or 25%. As a consequence, the prescribed formula for ‘rate differential portion’ is flawed at the expense of the taxpayers at the lower-tax rate brackets. In another incidence, no foreign tax credit is allowed for the newly instituted ‘NIIT’. It is tantamount to double taxation.
I am unsure why the authors describe this as "tantamount to" double taxation". It is exactly double taxation.
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Re: Question about US Ireland Tax Treaty

Post by Breadwinner »

Hi Everybody,
Thank you all for your inputs and observations. It removes some of the frustration, when I see how those 'random' numbers are arrived it. Why could the IRS not simply include that information in the instructions? They should hire you guys to rewrite their documentation for them. :)

As you, and that document that Ted referred to, all point out, the current mechanism effectively means that capital gains on property in Ireland are subject to double taxation. And that people on lower marginal tax rates (ours is 25%) are impacted more than those on the highest bands. Well, welcome to life in the 21st century. Between the strangle hold that the wealthy have on US politics, and the government's growing overdraft, I'm under no illusion that this will be resolved during my lifetime.

Thank you for pointing out the option to treat the Irish CGT as a deduction rather than a credit. I believe that you are correct, that that would not result in a more equitable outcome, but I will run the numbers again to confirm that.

I have one outstanding question that might be of interest to others in our situation. On the Irish Form CG1, there is a section titled "Double Taxation Relief". I'm not clear on whether that applies to Irish residents that have had to pay CGT to a foreign tax authority on property in that other country, or if it applies to our situation. In that section it asks for 3 pieces of information (as opposed to the 50 lines in the Form 1116):
- The country.
- The 'Amount of Gain'. (I am not sure if this field should contain the gain as calculated with the Irish method, or the gain as according to that other countries rules)
- The 'Amount of Foreign Tax for which relief is now claimed'. (I'm not sure if this is the gross CGT liability in that other country, or the CGT after adjusting for the Foreign Tax Credit - I imagine that it is the latter, but would like to confirm that).
I hope to phone the Irish tax authority tomorrow to get these questions answered. I will post the answers here when I have them. And I'll try to summarize all of this discussion down, for those that like to skip straight to the end of a novel, rather than reading about all the twists and turns first. :)

Thank you all again for your help with this question. I'm sure that other readers will appreciate your help as much as I do.
theresearcher
Posts: 109
Joined: Sat Jul 25, 2020 12:51 pm

Re: Question about US Ireland Tax Treaty

Post by theresearcher »

Breadwinner wrote: Sun Mar 14, 2021 10:25 am Thank you for pointing out the option to treat the Irish CGT as a deduction rather than a credit. I believe that you are correct, that that would not result in a more equitable outcome, but I will run the numbers again to confirm that.
There is also the option to file married/separate (MFS) rather than married/joint. Usually it results in a higher tax bill but there are exceptions and it is possible that this could be one of them (a high foreign source income taxed at LTCG rates with a limitation on foreign tax credit). You should run numbers both ways and see what works best. Also keep in mind that there are a number of other consequences to filing married/separate, such as different income limitations for Roth IRA and various tax deductions/credits.
I have one outstanding question that might be of interest to others in our situation. On the Irish Form CG1, there is a section titled "Double Taxation Relief". I'm not clear on whether that applies to Irish residents that have had to pay CGT to a foreign tax authority on property in that other country, or if it applies to our situation. In that section it asks for 3 pieces of information (as opposed to the 50 lines in the Form 1116):
- The country.
- The 'Amount of Gain'. (I am not sure if this field should contain the gain as calculated with the Irish method, or the gain as according to that other countries rules)
- The 'Amount of Foreign Tax for which relief is now claimed'. (I'm not sure if this is the gross CGT liability in that other country, or the CGT after adjusting for the Foreign Tax Credit - I imagine that it is the latter, but would like to confirm that).
It is not commonplace for a tax authority to give a tax credit to a non-resident for foreign tax (foreign to that authority) against tax they charge on locally sourced income- unless a tax treaty says they have to- but you should of course confirm directly.
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Question about US Ireland Tax Treaty

Post by international001 »

theresearcher wrote: Sat Mar 13, 2021 10:27 pm A summary of the discussion above. Ireland taxes the gain at 33% and the U.S. marginal federal rate (ignoring depreciation recapture and AMT) on a long term capital gain is normally 15%. However the U.S. limits the foreign tax credit to the taxpayer's average tax rate on that foreign income and therefore in this situation the amount of allowable credit may work out closer to 10% than 15%.
Why 10%?
OP has a 210k capital gains income that is taxed at 15%
Even if he makes income taxed at lower rates (80k married taxed at 12%), his average rate would be closer to 14%
international001
Posts: 2748
Joined: Thu Feb 15, 2018 6:31 pm

Re: Question about US Ireland Tax Treaty

Post by international001 »

TedSwippet wrote: Sun Mar 14, 2021 5:31 am
Defects in foreign tax credit rules
Thanks for the article!

It describes some of the problems I found by reading 1116 instructions and playing Turbotax.
In case somebody is interested, here I describe some of my strategies for my personal situation:
https://bogleheads.org/forum/viewtopic. ... 0&t=343281
Topic Author
Breadwinner
Posts: 34
Joined: Tue Jun 23, 2015 10:53 pm

Re: Question about US Ireland Tax Treaty

Post by Breadwinner »

Hi Everybody,
I apologize for not updating this sooner. I don't have any great news, but I can describe my experience if that is any help.

In the end, we paid Capital Gains Tax in Ireland just as we would if we were resident in Ireland. There was no consideration from the Irish Revenue Commissioners in relation to any US tax liability.

On the US side, our capital gain was taxed as if the property was in the US. The Foreign Tax Credit offset the double taxation to an extent, however the whole process was a lot more complex than I had initially expected. Also, the US Ireland Tax Treaty did not provide any benefit in this case - it was basically as if the Treaty didn't exist.

All in all, if I knew 20 years ago what I know today, I don't think that I would have made the decision to move to the US. However our IUS accountant has done an excellent job of understanding the complications of cross-border taxation. If anyone would like his contact information, PM me and I will be happy to help.

My thanks again to all the people that participated and offered their advice and experience. This truly is an invaluable resource.
Post Reply