When should you elect to use the Simplified AMT Foreign Tax Credit Limitation? This is my first year claiming FTC and I don't understand how I should answer this.

Forum|Forum|7 years ago
June 7, 2019
3 replies
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pk_

Level 15

if your foreign income is of general category ( wages, interest income etc. ) then you are correct in using the simplified method. If you have incomes from many categoreis, including trusts, complicated investment portfolios etc. and / or multi category carry over credits, do not choose simplied method.

momtoisabelle

Level 2

What about income from the sale of a rental property?

zellgrotto

Level 3

How can I determine if I've used this method on a past return?

linaj20201

Level 14

If this is the first year you claim the foreign tax credit, you would check the box for "First year I am eligible for the election".

The other two options are for if you have claimed the foreign tax credit and made the election in the past. Please continue to read:

For foreign tax credit, there seem to be 2 elections that can be made:

If the amount is less than $300 (or $600 for married filing jointly) then you can claim FTC without filing Form 1116. [1]. This amount can also be used directly as FTC for AMT purposes. [2]
If you have both AMT and FTC, then you can elect for "Simplified Limitation" which lets you use the same foreign source income for AMT as for regular taxes.

The second election has the condition that you have to make the choice the first time you have the option and that applies for all later tax years

You may elect to use a simplified section 904 limitation to figure your AMTFTC. If you do, when figuring your AMTFTC, you will use the same net foreign source income for AMT that you used for regular tax. (The amount on line 17 of your AMT Form 1116 will be the same as the amount on line 17 of your regular tax Form 1116.) You must make the election for the first tax year after 1997 for which you claim an AMTFTC. If you don’t make the election for that year, you may not make it for a later year. Once made, the election applies to all later tax years and may be revoked only with IRS consent. [3]

@zellgrotto

taimeng

Level 2

I have rental income from Canada. I already pay taxes for that income in Canada so I'm eligible for foreign tax credit.

This is the second year that I am claiming a foreign tax credit. Last year Deloitte (accountant) did my taxes and they did not use the simplified method. I'm doing my taxes using TurboTax this year and out of courtesy, my former accountant told me that he believes I should select "First year I am eligible for the election."

My first question is, does it matter if the choice I make is incorrect?

My second question is, if I select "first year I am eligible for the election", does that mean the simplified method will be used?

Because I see the same "Foreign Tax Credit" form, form 1116, both on the 2018 tax return, and on the 2019 tax return. It doesn't seem to me that a simplified method was applied. For tax year 2019, I chose "First year I am eligible for the election" in TurboTax.

DaveF1006

Level 15

it depends. Please read this article by Super Turbo Tax Agent LinaJ2020. In summarizing what she said, if you have not taken the simplified election in the past, you cannot make it now. Whatever election you made in the beginning is the election you will make this year.

Besides as you said, you can run into issues later on where the simplified election would not be applicable in your case. For example, if you have income that is of more than one category type, the simplified election simply will not work amongst multiple income categories.

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nikki20201

Level 4

@DaveF1006 please see above PB11 is saying though he has been doing FTC for many years THIS is the first year he is dealing with AMT. So What do you mean by saying - If you have taken Simplified EARLIER ? Please clarify. How can PB11 have opted for AMT Simplified or NOT Simplified when THIS is the first year he is dealing with AMT? What is your logic?

Thanks

DaveF1006

Level 15

it depends. I should have worded this a little better to clarify my decision. He asked if it was alright to elect to take the simplified election. My point is that yes it is OK but only if you have one type of income category to report. If there are several types though, you cannot make the simplified election.

The rules state that if you make the simplified this year and then try to change your mind next year, then this is not allowed unless you obtain IRS consent. My point is, if you choose the simplified method this year and then you find next year you have several categories of income, then do not pick the simplified method. I hope this clears up the confusion.

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