I recently moved from Canada to the US and am currently a resident of California; as a result, I have to pay Canadian taxes for part of my 2022 income due to multi-year compensation.
Trying to file Form 1116 with the IRS but found the instructions around "Non-exempt state income taxes" to be very confusing, specifically, the IRS Publication #514 states the following:
- You must allocate and apportion your interest expense and state income taxes under the special rules...
- If state income tax is imposed in part on foreign source income, the part of your state tax imposed on the foreign source income is definitely related and allocable to foreign source income.... If the total income taxed by the state is greater than the amount of U.S. source income for federal tax purposes, then the state tax is allocable to both U.S. source and foreign source income.
The document then went on to give an example:
- Your total income for federal tax purposes, before deducting state tax, is $100,000. Of this amount, $25,000 is foreign source income and $75,000 is U.S. source income. Your total income for state tax purposes is $90,000, on which you pay state income tax of $6,000. The state does not specifically exempt foreign source income from tax. The total state income of $90,000 is greater than the U.S. source income for federal tax purposes. Therefore, the $6,000 is definitely related and allocable to both U.S. and foreign source income.
Assuming that $15,000 ($90,000 − $75,000) is the foreign source income taxed by the state, $1,000 of state income tax is apportioned to foreign source income.
Since California taxes foreign income, I figured this rule applies to my case; but it's unclear where the amount of the state income tax apportioned to foreign sourced income should go on Form 1116; my best guess is it should be added to Line 1a to be part of the foreign-source gross income, but it's counterintuitive.
Does anyone know how this case should be handled?
