UK Individual Savings Account

[Bill Tubbs]

US Citizen married to UK national, living in UK. US Citizen has been filing MFS for a few years now -- in 2008 she had income from her Individual Savings Account -- that income is tax free under UK law. She only has wages and this interest, no kids, and will not itemize. We were planning on claiming Foreign Tax Credit (Form 1116) for the taxes paid on her wages.

2 questions:
1) Is the interest on the ISA (Individual Savings Account) taxable on her US return? Any cite to the pertinent section of the tax treaty would be wonderful!
2) Can the Form 1116 for taxes paid on her wages also cover the interest on the ISA? Or can the taxes paid on her wages only cover her wage income on this form?

Thanks,
Bill

[Uncle Sam]

UK Income

As a U. S. citizen, she is taxed on her worldwide income, even if not taxable in a foreign country.
She is then able to claim a foreign tax credit for any foreign taxes paid. But she can't claim the credit for income that she DIDN'T pay taxes on in the foreign country.

As far as the wages go - see if she qualifies for the Foreign Earned Income Exclusion (Form 2555). There are strict rules pertaining to being eligible to claim the credit.

[JohnH]

And don't forget the TD F 90-22.1, if applicable. (I can't stand that form)

[Bill Tubbs]

Thanks

Thanks for your quick responses! I thought I read something in the treaty that if her account was a retirement account then the interest would be tax-deferred (or did I mis-read that?), but this account wasn't a retirement account so I didn't see anything that would benefit her.

FEIE is a possibility on timely-filed returns, but she just contacted me to get her 07 & 08 returns done, and they're both late already.

Thanks again,
Bill