If you pay tax in another jurisdiction and are on the ‘paid’ basis of accounting for foreign tax credits, it’s important that you consider paying your local tax liability by 31 December 2022, even if the tax on the income is not due until a later date. This will ensure that a corresponding foreign tax credit may be taken against any federal tax due on non-US income realised in 2022 and reported on your 2022 US tax return. This is especially true for self-employed individuals and partners with rising profits or income irregularities.
Experience tells us that making payments before the festive season avoids last-minute problems and ensures you have the available tax credit. However, you should note that it’s not always possible to make payments early so it will depend on how tax is assessed in the local jurisdiction.
Conversely, if you have plenty of excess foreign tax credits carried forward from the previous 10 years, you may want to consider utilising these by deferring a foreign tax payment to next year, if it is possible to do so without incurring penalties for late payment. This is because after 10 years, unused foreign tax credits are wasted. Rolled over foreign tax credits are utilised in a year with a shortfall of foreign tax credits on a first in first out basis, so intentionally creating a shortfall in 2022 may allow you to utilise credits going back to 2012.
What should you do?
If your income that is not taxed at source has increased, consider making a prepayment of foreign (non-US) personal or corporation tax before 31 December 2022.
If you have large carried forward unused credits and can delay a payment that is due without incurring penalties, consider paying it in January 2023.
Alternatively, if you are an accruals basis taxpayer, realising any irregular items of income or gain that will be taxed in your local jurisdiction in quarter one of 2023 will align the US tax with the foreign tax accruing in the same year. This will help you to avoid being short of credits to offset the US tax on this income.