Form 1116 does not result in full Foreign tax credit

[simona1]

First year (2023) having taking a small distribution from Canadian RRIF.  Got an NR4, indicating the amount, and the Canadian taxes withheld.

I assumed all of these taxes withheld could be used against our US income, due to the tax treaty.

But, after completing all the steps (several times), I am seeing this:

Entered the full amount taken in the Canadian Pension section under income.

Went throught the questionnaire for the foreign tax credit (Form 1116).

The taxes withheld were >$300, but the resulting tax credit is $66.  I don't understand why?

We have plenty of other income and US taxes paid to offset this, that is not the issue.  What am I doing wrong?

This will become a much bigger issue as we start taking more out of the RRIFs starting in 2024, so I need to figure this out.

Thank you for any help!

[MarilynG1]

You don't necessarily get a Foreign Tax Credit for the amount of foreign tax you paid.  The calculation is based on a variety of items in your return, but is designed to give you a credit equal to what the US Tax would be on your foreign income. The balance will be carried over to next year.

You can see the calculations on the Foreign Tax Credit Computation Worksheet, which takes amounts from various items on your return and assigns an allocation %. 

If you're in TurboTax Online, you need to pay for your return in order to see all the forms and worksheets in a PDF format.  You may want to consider using TurboTax Desktop next year, where you have access to all the forms and worksheets throughout.

Here's more info on Claiming the Foreign Tax Credit.

@simona1 

[simona1]

Thank you for taking the time to respond!

Yes, I have paid for my return, so I am able to view my "worksheet".  It looks a little different than your example - it looks like the Standard Deduction makes an appearance on it?  (I am using standard deduction).

But I am still not following the logic behind it.

I had a $1200 payment from Canada, which was net after 15% was withheld ($300).

My US overall tax rate is just over 10%.

But, including the $1500 in US income, and plugging it the $300 tax payment made in Canada, it gives me a measly $179 to use as credit for 2023 and the rest goes into Carryforward.  I would expect the whole $300 paid would be recognized as taxes paid.  Or am I thinking about it wrong?

[SusanY1]

The foreign tax credit is limited by what the tax would be in the US on the same type of income.  It is also reduced by deductions and other adjustments and pro-rated for the amount of US income vs foreign income as well.  It's not nearly as straightforward as we'd all like for it to be.

[rjd5]

Not straight forward is an understatement and the (desktop) Tubotax help does not explain it very well.  Currently down in the weeds of worksheets and raw forms.

But ... if I understand correctly from this thread the complication comes from the US only recognizing as much tax credit as would apply if it were US sourced income (or whatever fantasy the IRS invents somewhat towards the same). Supposedly this guards against the US subsidizing foreign tax rates. But ... as compensation you can carry the balance forward if useable in the next tax year. Left wondering if carried forward amounts can be accumulated, or just the year before? Thanks ... I understand this mess is not your fault, but appreciate the explanation! 😀

[KrisD15]

The unused credit can be carried back one year and carried forward up to ten years, both. 

So Yes, if additional credit are additionally unused, they would be added to the carry-over.

Each yearly amount of credit will be limited to ten years carry-forward.