Foreign income tax paid on US income: how to get credit

Forum|Forum|1 year ago
February 25, 2025
2 replies
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I am a new tax resident of Portugal and pay Portuguese tax on parts on my US income. It's all passive income: Social Security, annuity, interest, dividends, and capital gains. I have no Portuguese income. How do I claim a tax credit? I have gone down numerous rabbit holes in TurboTax Deluxe. I know for 1116 is key, but how do I invoke it? Thanks.

gbriel

Level 4

I have a very similar issue, as I moved to Italy in 2024 and as a new citizen and resident there will owe Italian income tax on all worldwide income. My ONLY income is interest earned in the USA and Canada that I have always reported on my USA tax return as a USA citizen and previous resident. I know that I need to report all of that interest from 1099-INT forms on my 2024 tax return like always because I am a USA citizen, but I too cannot figure out how (as in where specifically to do it via Turbo tax online) to get the applicable tax credit for the taxes on that same interest income that I will pay to Italy and that will be far greater in amount then the taxes I would pay if I still resided in the USA. The interest income was not SOURCED in Italy, but will I believe be re-sourced by tax treaty and considered Italian sourced income since they have first taxing rights to the interest earned. Using tax form 1116 does not seem to work, UNLESS I plug into box 6 for every 1099 the amount of tax I will pay to Italy (but have not yet paid and is not reported on the 1099 generated by the USA or Canada). This may be the solution, but it is technically incorrect since I have not paid any foreign tax on those USA and Canada 1099 interest amounts reported on my USA return. The only other thing that I can think of is to go into the Less Common Income section (Miscellaneous Income) and enter a negative number that exactly equals the total interest reported as Interest income on my USA return when entering all 1099's, thereby eliminating that income entirely because it is being taxed in Italy under the USA/Italy tax treaty. Doing that would not however result in possible carry forward tax credits re the much higher tax amount I'll pay in Italy as compared to what will be necessary to eliminate the USA tax on that same income. Not sure if a form 8833 would also need to be filed explaining all of this. Maybe the reality is that Turbotax does not work in a situation like this one and it's software may well be unable to accommodate what needs to be done here. Surely Turbotax will want to opine on this matter to make it clear to users like you and I and I am confident many others who have similar issues!

gbriel

Level 4

...and it will require that a Turbotax expert take the time to explain this clearly and walk us thru it step by step (I use Turbotax online), as it is not something that can be addressed with a quick response that lacks specific detail. I trust that Turbotax wouldn't want it's users having to seek out other tax filing software providers that better handle these expat type situations and that they will want to quickly and capably assist to avoid losing business.

DaveF1006

Level 15

Yes, now I agree you are on the right track when you mention income resourced by treaty. Under this provision, U.S. source income is treated as foreign source income under an applicable income tax treaty. This can help prevent double taxation by allowing you to claim a foreign tax credit for taxes paid to a foreign country on that income. Since the US has a tax treaty with Portugal and Italy, you may use this provision. Here is how to report.

Go to Federal
Deductions and credits
Estimate and other taxes paid
Foreign Tax Credit>start or revisit
Now navigate through the screens until it says Tell us about your foreign taxes. Select none of these apply.
Then navigate two more screens indicating you wish to take the credit.
Then navigate to the screen where it says no other income and expenses, select no.
In two screens, it will ask the income type, here you will select income sourced by treaty
Next under country summary, select Portugal in the drop-down
Select edit next to Portugal or Italy
First screen will ask for gross income. Here total up all the income sources you were taxed on in Italy or Portugal. Don't be confused by the verbiage here because we have now resourced the income to Portugal or Italy.
Now skip screens until you have reached a screen to report foreign taxes. First say no. You have foreign taxes paid on rental, royalty or other income.
Now you will report the total of your foreign taxes paid on other income.
Now you are done with the country.
Now navigate through the Foreign Tax section and not make any more entries, except for the country of residence. Here you you will say Portugal or Italy.

Don't do anything like creating fictious foreign tax paid in 1099's. Just keep it simple and follow steps I have outlined. one thing i need to mention before i post. Your foreign tax credit is limited by the amount of your tax liability. This is done by taking your adjusted gross income for the year and subtracting your standard or itemized deduction. Your tax liability is based off of the taxable amount that is remaining. If the foreign taxes exceed the tax liability amount, then you will only receive credit up to the tax liability amount and the excess can be carried back one year, then carried forward for the next ten years.

For an example, if your adjusted gross income was $20,000 and your standard deduction is $16,200. Your taxable income is $3800 and the tax liability is $380. if your foreign tax is $1000, you will only receive credit for $380 and $620 would be a carryover. i only mention this in case if you receive a credit for less than the foreign taxes paid for the year.

[Edited 02/25/25|2:15 pm PST]

@retailboy99

@gbriel

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gbriel

Level 4

This is the exact opposite of what I believe is the correct method of handling based upon everything that I have read. As a USA citizen with only USA sourced income, the only way that you can reduce or eliminate your USA tax obligation is to re-source that income by completing form 1116 so that you can then get the foreign tax credit due and necessary to reduce or eliminate the USA tax liability on that very same income. The questions above were more focused on HOW this is properly recorded using the TurboTax software. To be specific, in my case, I have the 1099 interest forms from both Canada and the USA (my only sources of income). I am a USA citizen, but reside in Italy where I am also now a citizen. I will therefore owe tax in Italy on my worldwide income. As a USA citizen, I of course have a filing obligation, but to avoid being double taxed on that income, need to use FTC’s and the only way to do that is to resource that USA sourced income to be Italy sourced on form 1116. The issue is that I do NOT have any foreign tax showing in box 6 on any of the form 1099’s, so am not sure how to reflect the tax that I WILL pay to Italy on that 1099 income. Do I plug a tax paid number into box 6 on each 1099 and say it was/will be paid to Italy? That would populate form 1116 with the foreign tax that will be paid to Italy and then also show the applicable FTC for the income that was re-sourced. Kindly advise step by step as I use TurboTax online and have for many years now but just moved to Italy in 2024.

gbriel

Level 4

…I should have clarified that the USA-Italy tax treaty allows for the re-sourcing of the USA and Canada sourced income to be considered Italy sourced interest income, thereby allowing the FTC to be calculated in removing the USA tax obligation on that same interest income. I am asking about the mechanics of getting all of that information input using the TurboTax online software program, as it is confusing. As I said, I can “force” the foreign tax by inputing a number in box 6 on each form 1099 entered in the income section, with that number being the 26% of the 1099 interest number that will be paid to Italy, but there isn’t a number in box 6 o; any of the 1099’s as issued.