How to enter IRA distributions as Foreign Source Income by Tax Treaty to take credit for foreign taxes paid

[kmdharan]

I have retired and moved to Portugal. I became a tax resident of Portugal in October of 2023. Now by the Tax Treaty between the US and Portugal, my IRA distributions are taxed in Portugal. These distributions are from US accounts and are reported on 1099-R. How do I enter this income and reclassify it as "foreign source by treaty" and claim my foreign tax credit? I also have a carryover of foreign tax credit from previous years when I lived in India of $6000 in the Passive Income category that I would like to use. Please advise.

[CPANY]

Claiming Tax Treaty Benefits

1. From the Federal menu in TurboTax find Wages and Income.
2. Find Less Common Income.
3. Choose Miscellaneous Income, 1099-A, 1099-C.
4. Choose Other Reportable Income.
5. Enter a description of the treaty and the adjustment as a negative number.

[CPANY]

Since you have to report the 1099R as income, you would follow the above steps to "adjust" the income to zero.

As for the foreign tax credit carryover, those credits will be used when you pay US tax on foreign income.  If you don't pay any US tax on foreign income, you don't get to use those credits.  https://www.irs.gov/pub/irs-pdf/p514.pdf

[kmdharan]

CPANY, thank you for your replies. I am aware that you only get foreign tax credit if you owe US taxes on foreign income. In the case of IRA distributions (1099-R income), of course I would owe US taxes. But since these get re-classified as foreign income due to my tax residency in Portugal, I will owe Portuguese taxes as well. According to the tax treaty, Portugal will have the primary right to tax this income per the private pension clause. At the moment this tax is calculated as a flat 10% rate due to a special tax status (NHR) awarded for 10 years. So, depending on how much I withdraw from my IRA, I could owe additional taxes in the US. Hence my question. If I enter the IRA distributions as negative income per your instructions, will TurboTax be triggered to generate a Form 1116? To me it seems that if I enter a negative amount in Other Misc Income section to match the 1099-R income, then TurboTax will simply deduct that from my total income to calculate my US tax liability. Am I correct? If not, please explain what I am missing. The second part of my question is, assuming TurboTax will correctly classify this as Foreign Income, what category of foreign income will this be classified as, because as I understand, you can only take advantage of foreign tax credits within the same category (e.g. passive category income, general category income, lump sum distributions, etc.).