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