Do I enter the taxes paid to Canada in the box for "reduction in Taxes" on form 1116
Thanks for the question! No, you do not directly enter the taxes paid to Canada in the box for "Reduction in Foreign Taxes" on Form 1116.
Here's why and where you do enter those taxes:
Line 9 of Form 1116: Foreign Taxes Paid or Accrued: This is where you will enter the total amount of foreign taxes you paid or accrued to Canada (converted to U.S. dollars). You will do this for each category of income for which you are claiming the credit.
Line 12 of Form 1116: Reduction in Foreign Taxes: This line is for specific reductions in the amount of foreign taxes you are claiming as a credit. These reductions are typically due to:
Taxes that are refunded to you by the foreign country.
Taxes that will be refunded to you.
Taxes related to income excluded under certain provisions (though this is complex and often handled differently).
In general, the taxes you paid to Canada are the starting point for calculating your foreign tax credit on Form 1116, and they are entered on line 9, not as a reduction.
ow to Report Canadian Taxes on Form 1116:
Identify the Category of Income: Determine the category of your Canadian-source income (e.g., general category for wages, passive category for interest or dividends). You may need to file a separate Form 1116 for each category.
Calculate Foreign Source Taxable Income (Part I): Determine the amount of your taxable income from Canadian sources within that income category.
Enter Foreign Taxes Paid or Accrued (Part II, Line 9): Enter the amount of income tax you paid to Canada in U.S. dollars. You'll need to convert the Canadian dollars to U.S. dollars using the appropriate exchange rate. The IRS generally prefers the exchange rate in effect on the date you paid or accrued the tax.
Complete the Remaining Parts of Form 1116 (Part III and IV): These sections calculate the allowable foreign tax credit based on your foreign source taxable income and your overall U.S. tax liability.
Important Considerations:
Currency Conversion: Ensure you use the correct exchange rate to convert Canadian dollars to U.S. dollars.
Documentation: Keep records of the taxes you paid to Canada, such as tax slips or other official documentation.
Tax Treaty: The U.S.-Canada tax treaty might have specific provisions that could affect how you claim the foreign tax credit.
TurboTax Software: If you are using TurboTax, it will guide you through the process of entering your foreign income and taxes and will likely handle the Form 1116 calculations for you. Follow the prompts carefully when entering your Canadian tax information.
In summary, enter the amount of taxes paid to Canada on line 9 of Form 1116. Line 12 is for actual reductions in those taxes, not the initial amount paid. If you are unsure about your specific situation, it's always best to consult the official IRS instructions for Form 1116 or a qualified tax professional.
How do I enter taxes paid to canada in TurboTax
To enter taxes paid to Canada in TurboTax, you'll generally follow these steps. Keep in mind that the exact screens and wording might vary slightly depending on the TurboTax version you are using (online, desktop, or mobile).
Here's a general guide:
Navigate to the Foreign Tax Credit Section:
Go to the Federal Taxes or Personal section.
Look for Deductions & Credits or Tax Credits.
Find the category Estimates and Other Taxes Paid.
Select Foreign Tax Credit and click Start or Revisit.
Answer Introductory Questions:
TurboTax will ask you some initial questions to determine if you are eligible for the foreign tax credit. Answer these questions accurately.
Tell TurboTax About Your Foreign Income and Taxes:
You'll likely see a screen asking if you paid taxes to a foreign country. Answer Yes.
You might be asked if all your foreign income was reported on Form 1099-DIV or 1099-INT. If you have other types of income (like wages or pension), you'll likely answer No.
Enter Details for Canada:
You will be prompted to add a country. Select Canada.
Income Category: You'll need to select the category of income for which you paid taxes to Canada. Common categories include:
Passive Income: This includes interest, dividends, etc.
General Category Income: This includes wages, salaries, business income, pensions, etc.
Choose the category that best fits your situation. You may need to report different types of income under different categories and potentially fill out separate Form 1116 sections.
Foreign Income Amount: TurboTax will ask for the gross amount of income you earned in Canada that is subject to U.S. tax. It's important to enter the income amount here. This income will be used to calculate the limit on your foreign tax credit.
Foreign Taxes Paid: This is where you will enter the amount of income tax you actually paid to the Canadian government. Make sure this amount is in U.S. dollars. You will need to convert the Canadian dollars to U.S. dollars using the appropriate exchange rate (usually the rate in effect when you paid the tax).
Complete Form 1116 (If Necessary):
Depending on the complexity of your situation and the amount of foreign taxes paid, TurboTax may automatically fill out Form 1116, Foreign Tax Credit. You might need to review this form in the "Forms" section of TurboTax to ensure all information is accurate.
If your foreign tax situation is simple (e.g., small amounts of passive income), TurboTax might allow you to claim the credit without explicitly filling out Form 1116.
