@Sky Mile wrote:
From what I heard from TurboTax the principle to apply is:
- Treat the carryover forms as a schedule to firstly record years where you recorded a foreign tax expense
- Utilize those credits chronologically, ie if you had 10,000 in 2018, and utilized 8,000 in 2018 and 1,000 in 2019 and 1,000 in 2020 - you’ve really just utilized all of the 10,000 from 2018. So update the table to show that
- If you then generate another credit in 2019 of 2,000. Don’t mark that as utilized until you’ve fully utilized the 10,000 in 2018
This makes sense when you realise that your credits last 10 years, so you want to utilize your earliest ones first before starting to utilize your more recent ones. Hence on the carryover worksheet, record them such that you utilize your earliest ones first fully, before utilizing your more recent ones
I would like to take this approach on my 2022 tax return. However, I noticed that TT2022 does the following:
- It first utilizes all of the foreign taxes incurred in the current year.
- It then utilizes the earliest unutilized foreign taxes.
Case in point, I incurred $119 in foreign taxes in 2022. Meanwhile, my foreign tax credit in 2022 is $187. With that in mind, TT2022 did the following:
- Utilized $119 in 2022.
- Utilized $68 (the remainder: $187-$119) spread across foreign taxes that had not yet been utilized in 2013 and 2014.
For the taxpayer, it would of course be more advantageous if TT didn't do step 1 and instead allocated all of the current year's foreign tax credit to the earliest carryover amounts first. Looking at the IRS's Form 1116 instructions (https://www.irs.gov/pub/irs-prior/i1116--2022.pdf), it states:
"First, apply the excess to the earliest year to which it may be carried. Then, apply it to the next earliest year, and so on."
The only way I can see to do this in TT2022 is to manually override the amounts in the "Foreign Tax Credit Carryovers to 2023" table on the "1116 Comp Wks" form. This begs the question, why doesn't TT do that automatically? @AliciaP1 :)?
