Americans Living in France: Say Goodbye to a Foreign Tax Credit Limitation

Expats in France: Foreign Tax Credit Limitation

Tax treaties can be difficult to understand. Expats know that, and in June, the IRS admitted it, too – in US tax court. Recently, the IRS was found to have been improperly over-collecting tax dollars and unjustly applying a Foreign Tax Credit limitation. If you’re an American living in France, where great tax news is rare, you’re going to want to catch up on exactly what is going on because you may be due money from the IRS!

What Happened, Exactly?

In 2008, an announcement from the American embassy in France stated that certain French taxes would not be credited – via the Foreign Tax Credit – against US taxes. The taxes in question were considered social taxes rather than income taxes, and thus, the IRS did not consider them eligible for use with the Foreign Tax Credit. These so-called social taxes – the CSG (Contribution sociale généralisée) and the CRDS (Contribution au Remboursement de la Dette Sociate) – are taxes are covered by the tax treaty, and two French-American dual-citizens contested the application of this Foreign Tax Credit limitation. They won.

The CSG was a 7.5% tax on income; the CRDS was .5% tax on income. However, note that the tax affects retirement and disability pensions, annuities, investments, and capital gains at different rates. So, potentially, expats faced more tax (8% of wages) than was lawful, as this tax should have been taken as a dollar-for-dollar credit against US taxes paid via the Foreign Tax Credit.

Adding to the complexity is that France moved to a Pay As You Earn (PAYE) system on January 1, 2019. Before this, in 2018, they had the “White Year,” where a French program effectively eliminated 2018 income taxes, leaving expats without a Foreign Tax Credit. The problem this creates is that, in 2019, expats pay American taxes for 2018 income without the benefit of a Foreign Tax Credit, and they are required to pay French tax for 2019 income as well, since it’s now a PAYE system. What does this mean for expats? There’s an additional reason to submit for a refund. Because expats in France do not get a 2018 Foreign Tax Credit, they likely are relying more heavily on carryovers from prior years to reduce the tax burden for this year.

Who Is Affected by the Foreign Tax Credit Limitation Removal?

The Foreign Tax Credit limitation removal affects just about every American expat living in France. Anyone whose Foreign Tax Credit did not fully offset their US tax liability at any point in the last ten years could see a benefit from amending their returns by filing for a refund. Additionally, expats who believe future Foreign Tax Credits (including carryover) will not fully offset their US tax liability may wish to submit an amendment to increase carryovers for future use.

This revelation impacts so many Americans living in France that the IRS could expect to dole out millions of dollars in refunds for the wrongfully collected taxes.

Want to find out if you’re eligible to receive a refund? Get started now and Greenback’s US expat tax experts will help you navigate the documents and information you’ll need to submit for a refund.

How Can I Get My Taxes Adjusted?

Expats have ten years to file for a refund – and the ten year period begins the day after the regular due date for those taxes, and it does not include extensions. So, if you’re an expat in France, the sooner you act, the better!

Greenback Can Help You File an Amended Return

Greenback accountants understand the many nuances that affect Foreign Tax Credits, Foreign Tax Credit limitation, and the specific issues that are currently facing expats in France. Get started with Greenback today, and we’ll make this process as painless as possible.