My co-workers and I are in a complicated tax situation, and hoping you guys might be able to shed some light on an idea floating around. Here's the facts:
- I am an american living in the U.S. but working internationally
- I pay income tax to a foreign country at a tax rate that is higher than would be in the U.S.
- Every year when I file taxes we have a foreign income tax credit that puts our U.S. income tax liability to $0. The credit can not go below 0, so excess foreign tax credits have been accumulating for several years. As of now I have around 50k in foreign tax credits.
- The 2020 cares act allows for a distribution of up to 100k from 401k if affected by covid-19. No penalty applies in this case, but taxes must be paid within 3 years.
My question is can I use my outstanding accumulated 50k in foreign tax credits to pay the taxes associated with this distribution? As I understand the foreign tax credit can be applied to any foreign income. As I have been contributing to 401(k) over the years pre-tax from foreign income can I assume that this is also foreign income?
If the whole thing works out it would net me ~20% of the 100k. I feel like it would be silly to not take the distribution and maximize my foreign tax credits that probably can't be used any other way. Even if I just invest the 100k into a taxable account and envelope it as retirement funds the principle will have the benefit of being post tax, as opposed to pre-tax like it would be in a 401(k) account.
Other notes: I live in a state with no income tax. It's probable to likely I get laid off later this year and would be my reason for the distribution as being affected by covid-19.
Submitted May 31, 2020 at 10:02PM by Phat_J9410 https://ift.tt/2yP6ddx
