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richard's_tax
Level 3

Foreign tax credit adjustment

If your only foreign income is cap gains and div., how does the credit adjustment work from a tax planning perspective.   Does it make sense to keep your dividends below the $20,000 threshold?  Can you be in a situation where you get more credit at $19,000 div than $21,000 div all else being equal?

5 Replies
pk
Level 12
Level 12

Foreign tax credit adjustment

@richard's_tax , I am not sure I understand what "US$20,000 threshold" you are referring to.   Generally, once you are above the $400 foreign tax credit range, you have to file a form 1116 for the recognition of the credit.   In such a case, the  foreign taxes paid is recognized essentially dollar for dollar.  However, the allowed credit for the year is based on a ratio of  foreign income to world income -- thus higher the foreign income, more of the  recognized  foreign tax credit is allowed for the year.  The  residual amount of foreign tax credit can be carried back or forward -- but cam only be used when there is a foreign income .   Please can you elucidate  a little bit more on your situation ?

sam14
Level 2

Foreign tax credit adjustment

Its difficult to see if Turbotax is treating this correctly or if I have entered something incorrectly.

 

My actual foreign taxes from the 1099 are $675.  The allowed credit is 268, with 407 suspended for carryback or carryforward, due to the form 1116 calculation.  I don't see a way in Turbotax to opt out of the 1116 calculation. 

 

If I test the program with a foreign tax credit of $600 instead of $675, all of the $600 is allowed. 

 

How can this make sense?? Is TT handling this correctly or have a made some input error?

 

What if I just entered a lower claim (600 instead of 675)?  Would it be a flag in an audit program? Would this be ok?

pk
Level 12
Level 12

Foreign tax credit adjustment

@sam14 , TurboTax is working correctly ---- (a) there is a safe harbor ( in not having to use the form 1116 and the limitation it places on the amount of allowable credit ) --- it is $300 for filing single and $600 for Married Filing Joint. Thus  when you enter $600 foreign  tax, TurboTax uses the safe harbor  and not use the form 1116..  If you enter over $600 then form 1116 kicks in and the available credit is based on a ratio of foreign income to world income  to allocate the foreign tax credit.

(b) you can also claim the foreign tax paid as a deduction , if you itemize ( but the SALT limits may kick-in )

(c) It may be simpler , especially  if your foreign income is not going to increase year after year ( because you need foreign income to use up the foreign tax credit in future years ) to just enter the $600 as the foreign taxes paid -- there is nothing against  not-recognizing some or all of the foreign tax.

 

That is my view

 

 

richard's_tax
Level 3

Foreign tax credit adjustment

Sorry for the slow response.  One page 7 of the form 1116 instructions the IRS makes reference to an adjustment exception that you are eligible for if your income is low enough and your div+cap.gains from foreign sources is below $20,000.  I'm trying to figure out the impact it has on the credit if you do/don't qualify?

LinaJ2020
Expert Alumni

Foreign tax credit adjustment

Tax planning topics are out of scope for our advice.  You would need to consult a professional who is specialized in it.  

 

@richard's_tax

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