Question about Form 8938

[vsundar]

Thanks Dave!

One other question:

I found this on the IRS website: https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-compliance-tips. Is this applicable to me? Do they mean report the income lower but include the taxes paid in NZ? Thanks!

Foreign source qualified dividends and gains

If you receive foreign source qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), line 1a.

How do I make the adjustment?

• Form 1116 Instructions - See the detailed instructions for "Foreign Qualified Dividends and Capital Gains (Losses)."
• Generally, if the foreign source income is taxed at the 0% rate, then you must exclude the income from your foreign source income (Form 1116, line 1a).
• Generally, if the foreign source income is taxed at the 15% rate, then you must multiply that foreign sourced income by 0.4054 and include only that amount in your foreign source income on Form 1116, line 1a.
• Generally, if the foreign source income is taxed at the 20% rate, then you must multiply that foreign source income by 0.5405 and include only that amount in your foreign source income on Form 1116, line 1a.
• Generally, if the foreign source income is taxed at the 25% rate, then you must multiply that foreign source income by 0.6757 and include only that amount in your foreign source income on Form 1116, line 1a.
• Generally, if the foreign source income is taxed at the 28% rate, then you must multiply that foreign source income by 0.7568 and include only that amount in your foreign source income on Form 1116, line 1a.
• See Publication 514, Foreign Tax Credit for Individuals, for more information on the rate differential adjustment for the applicable year. Note: The above rate differential factors are taken from the 2023 Publication 514.

[DaveF1006]

Yes, these adjustments are applicable to you, if you have qualified dividends or capital gains, under the following two conditions.

1. You have foreign qualifying dividends or long-term capital gains totaling more than $20,000, OR
2. Your total income exceeds certain thresholds based on your filing status. The thresholds are:

• $383,900 if married filing jointly or qualifying surviving spouse,
• $191,950 if married filing separately,
• $191,950 if single, or
• $191,950 if head of household

The link you provided me is for the 2024 Publication 514 so these percentage rates you quoted are applicable for 2024.

[Edited 02/21/25|5:15 am PST]

[vsundar]

Hi Dave,

Just to be clear:

Is this applicable only for Income from dividends & capital gains, not for income from interest, wages etc.?

My spouse doesn't have any income from dividends & capital gains. 

[DaveF1006]

Yes, this is applicable for qualified dividends and capital gains and not from interest and wages. 

@vsundar 

[vsundar]

Hi Dave,

One last thing I wanted to check:

Excess credit: is available for both foreign wages and Interest income. In the future, there would not be any foreign wages - so can I still apply this credit in the future? If not, how can I use it to the max this year?

[DaveF1006]

Yes. Any excess Foreign Tax Credit unused this year can be carried back one year and carried forward for ten years. Turbo Tax will keep a record of those carryovers to apply to past or future returns as long as there is foreign income to offset the credit in those future or past year.

If there is an excess credit this year, here is no way you can use it to the max this year.

@vsundar 

[vsundar]

Thanks Dave!

Question is do the excess income credits apply only to income and excess interest credits apply only to interest income in the future? Since there is no scope of future foreign income, where do I apply the excess income credit?

[DaveF1006]

When you carry over unused foreign tax credits, they must be applied to the same category of income in future years. For example, if you have a carryover from passive income, it can only be used to offset passive income in future years.

If you want more detailed information, you can check out the IRS instructions for Form 1116.

@vsundar 

[vsundar]

Thanks Dave!

Since I know there will be no passive foreign income (wages) in the next year onwards, how do I utilize the EXCESS foreign tax credit for this year itself? Is there a way to reduce the losses as I will be paying more taxes with no means to gain it in the next year or future? 

[DaveF1006]

No. If you are unable to use your full carryover this year, to claim your full allowable foreign tax credit for 2024 (up to the limit of your tax liability), the carryover will remain untouched until it expires. You need to have future passive income to be able to use the carryover, if the need arises. 

@vsundar