Foreign Tax Credit

[Kram BergGold]

Can a US citizen, who is a bona fide resident of Canada claim a FTC on income earned in the US and taxed by Canada?

[Kram BergGold]

1/2 of the answer

I checked pub 514 and it is clear the FTC can only be claimed on foreign source income.
However, if Canandian taxes are paid on US income can a Schedule A dedcution be claimed?

[Bees Knees]

IRS Pub 514 says:

"If you paid or accrued foreign taxes to a foreign
country on foreign source income and are sub-
ject to U.S. tax on the same income, you may be
able to take either a credit or an itemized deduc-
tion for those taxes."

When the pub talks about foreign source income, it is referring to income other than US source income. The income a Canadian resident earns in Canada is foreign source income on a US tax return. So if you are a Canadian resident, subject to US tax because you are a US citizen, then any tax paid to Canada on the same income taxed by the US would qualify for either the foreign tax credit or deduction on Schedule A.

This does not take into consideration any reciprocal agreements, if any, that may exist between Canada and the US. You would need to check to see if any exist.

[Kram BergGold]

Bees?

Let's be sure we are on the same page. My client, a US citizen in a bona fide resident of Cananda. In 2006 he will have income from 2 sources, Canadian wages and US royalties.
On his US return he will claim the 2555 exclusion for the wages. The royalties are not eligible for exclusion as they were earned in US (he wrote the book while living in the US). You seem to be saying that since Canada is taxing the royalties they become foreign sourced and not US sourced and eligible for the credit or the Schedule A taxes deduction. Am I reading you correctly?
My thinking was since the income was US sourced it did not qualify for the credit but might qualify as a Schedule A deduction as taxes paid.

[Bees Knees]

You are correct. I mis-understood your point. It has to be foreign source income, taxed by a foreign country to get the credit. US source income taxed by Canada would not qualify. I thought you were talking about Canadian source income taxed by Canada that is also being taxed by the US.

I think the same is true for the deduction because the Pub lists both the credit and the deduction in the same paragraph.