Form 1116 worksheet - doesn't SALT limit apply?

[lescarrs]

I have >$10k property tax, exceeding the SALT limit.  Upon reviewing my 1116 Computation Worksheet, though, I see on its line 3(a)(2) that the full property tax is entered on the form.  This adversely affects the amount of allowed foreign tax credit.  This doesn't seem logical, since it is limited to $10k per rule.  Is this an error in the Turbotax software, or a glitch with IRS requirements?  

As an alternative, I removed the property tax paid (since I have $10k+ in state income tax as well to apply to the SALT limit), and this does improve the outcome of my Federal return by a bit.  But, this triggers a much greater adverse change to my California return since this deduction is then not rolled into my state return.

Any insights on this?  

[bteng]

I have the same problem.  We need to get TurboTax developer to change line 3(a)(2) on 1116 worksheet to be consistent with schedule A.  On my return, I ended up with an error on Form 1116 line 3a because that number is higher than my total itemized deduction on Schedule A.  

[Zbucklyo · Accepted solution]

I'm guessing - since this tax bill was rushed through without many people thinking through the consequences - that the SALT limit does not apply.  I'd make the decision based on which approach results in the lowest overall (federal and state) tax liability.  Alternatively, you could override line 3a on your federal tax return to adjust for the SALT limitation, and then file by mail.  The Form 1116 instructions do not indicate that an adjustment for the SALT limitations be made.

[pk]

Did you mean form 1116 --- foreign tax credit form ? or ?  SALT generally has nothing to do with form 1116

[ScruffyCurmudgeon]

@Zbucklyo @pk Unfortunately, ZBucklyo is on target that the Congress did a 1/2-vast job in implementing the changes.  The reason that this is detrimental to @lescarrs is that Form 1116 Part I lines 2-3 take into account the Deductions (Itemized or Standard) on 1040 and then calculate a ratio on line 3f that is used to determine the allowable basis for the credit then calculated from the foreign taxes paid.  Thus, SALT does blunder into the equation.

@lescarrs While the SALT limitation shows up in Form 1116, this does not inhibit you, as a California taxpayer.  See next answer.

[pk]

@Scruffy_Curmudgeon  you is right -- I did not allow for taxpayers whom are using itemized deduction on form 1040 -- yes that would then impact the allowable  & eligible FTC

[ScruffyCurmudgeon]

@lescarrs   Just checked on California FTB Schedule CA(540) Part II.

California does provide for the California resident to bypass the $10,000 limitation in calculating itemized deductions for purposes of California Income Tax.

[ScruffyCurmudgeon]

@bteng Unfortunately, the inconsistency is not TurboTax but instead the IRS detailed instructions which failed to take into account the specifics of this situation!  See earlier response on how to use an override if using Desktop software product.

Again, this is an IRS failure to properly define processing.