October 11, 2021 1:42 am

Foreign Tax Credit Can’t Offset NII Tax

Individuals with investment income may be subject to an additional Medicare tax called the net investment income (NII) tax. One couple living in France wanted to use their foreign tax credit carryover to offset their NII tax, but the Tax Court said no (Toulouse, 157 TC No. 4 (2021)). The Tax Code specifically says that tax credits may be used to offset tax liability arising under Chapter A. However, the NII tax is in Chapter A2. As a result, the NII tax, which happens to be the only provision in Chapter A2, is not subject to a foreign tax credit offset.

The taxpayer in this case, who was living in France, argued that the France-U.S. treaty allowed for the use of a foreign tax credit despite the court’s interpretation. However, the treaty specifically says any foreign tax credit is allowed “in accordance with the Code.”

Tax Glossary

Legally separated

A husband and wife who are required to live apart from each other by the terms of a decree of separate maintenance. Payments under the decree are deductible by the payor and taxable to the payee as alimony.

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