How to report retirement lump sum in Japan for US resident

[koguma]

hi , I moved to another company in 2022 in US, and finally received the vetted retirement lump sum from my previous company that has Japan branch I used to work for until 2014.   I saw similar questions and tried in Turbotax in foreign tax credit.   FYI, they deducted about 20% from the lump sum as non-resident tax in Japan.  

After I filled out form 1116 as per the direction, and I see the Foreign tax credit came out a lot. I think I must have done something wrong.    It may be because I chose 'General category income' instead of 'Lump-sum distributions' in Choose the income Type ?     But, if I choose 'Lump-sum distributions', smart check indicates that Form 1116 : line B lump sum distribution amount must be entered on smart worksheet.

[ThomasM125]

Most lump-sum distributions apply to individuals born before 1936 or a beneficiary of such an individual, so your distribution may not qualify as such. Here are the requirements, as listed in TurboTax: 

The foreign tax credit is basically calculated by dividing your foreign income by your total income to arrive at a percentage, that is then multiplied by your foreign tax. So, you get credit for a portion of the foreign tax based on the amount of foreign income being taxed on your US return. So, you may be able to do a quick calculation to determine if the foreign tax credit you see is reasonable.

[koguma]

Thanks for your reply.   

Actually, let me explain my situation in more details.  I worked in Japan for a US company that has a Japan branch.  Then, I was relocated to New York in 2014.  While I was in Japan, the company accumulate my retirement lump sum pension every month from my paychecks.  When I was relocated to US in 2014, the company didn't pay the retirement lump sum for my Japan time yet because they do only when I leave the company .  Last year, I resigned and moved to another company in US, then the pending retirement lump sum was paid to my Japan bank account in Japanese yen after deducting around 20% of tax for non-residents to Japanese gov.     I am still confused how I should report this income , and in this case, normally I should get tax credit or need to pay more tax to IRA ?      Please advise . Thank you . 

[DianeW777]

It's not clear what you might mean about your 'IRA' unless you meant IRS.  Under the US Internal Revenue Code, most foreign pensions are not considered a “qualified trust.” That makes them ineligible to be rolled over.  Assuming you did not rollover your retirement distribution you will pay tax on the full amount and then receive credit.

As indicated by @ThomasM125 the credit will be based on the lesser of the US tax on the distribution or the tax paid to Japan, whichever is less.

Follow the steps in the link below to enter your foreign tax credit.

• Where do I enter my foreign tax credit (Form 1116)?
• IRS Publication 514
• Form 1116 Instructions (lump sum worksheet if you qualify and check the categories of income)

[koguma]

Sorry, I meant IRS.  

I am still not clear on what to choose in "Income Type".  Is "Lump-Sum Distribution" correct ?  As it is retirement lump-sum from the Japan company, it was not rolled over and just deposited into my Japan bank account.  

My another question is that I didn't include the amount in my "Wage&Income" but add it in Form 1116 only.   Do I actually need to add the income in my "Wage&Income" too ?  I tried to add it in Less Common Income/Miscellaneous income/Other reportable income, but it increases my state tax as well, though this income was generated in Japan only.  I thought it would increase federal tax and I could use foreign tax credit against it.  

When I skip adding the income in "Wage&Income" but only add in form 1116 as lump-sump distribution, my tax has no change from when I did it without this foreign income at all.    I tried it with "general category income" in form 1116, it gives a lot of foreign income credit that doesn't seem right.  Any cases I explained here didn't get caught in smart check at all.   

I hope my explanation makes sense.  Please advise. 

[MarilynG1]

Yes, you can report your Japan retirement distribution as 'Other Reportable Income'.

• Under Wages & Income, scroll all the way down to Miscellaneous Income, 1099-A...
• Then scroll all the way down to Other Reportable Income, Other Taxable Income,
• Enter a Description and Amount

Then in the Foreign Tax Credit section, if you reported Foreign Tax paid on 1099-Div, 1099-Int, etc., continue until you can choose 'General Category Income' in this section. 

Add Country Japan and enter/description and amount in USD.

Continue to screen where you can enter the amount of tax you paid to Japan in USD.  You will get a large amount of Foreign Tax Credit, since you are adding a large amount of income as well.

@koguma 

[koguma]

Thank you . but, is it normal that my state tax increases too by adding the foreign income ?

[MarilynG1]

Yes, if you are adding income to your Federal return, your state tax normally increases also.  Go through your state interview carefully, there may be an 'adjustment' for foreign tax paid in your state.

@koguma 

[koguma]

It looks much better now. 

I have 1 more question regarding the foreign tax credit I would get.   I understand that the tax credit is not the same amount as I paid in Japan, but it seems much lower than the actual amount that I paid.  Even I tried to simulate much bigger amount ( I put big number in paid foreign tax ) , the foreign tax credit seems capped. 

For example, I put $30,000 or $19,000 in paid tax, but the tax credit came out as 16,000 all the time.    Am I doing anything wrong ?

Thanks again for your help. 

[MarilynG1 · Accepted solution]

Look at Form 1116 to review the calculations for the credit.  It takes factors into consideration, such as your other income, taxes, deductions.

@koguma 

[koguma]

Thank you so much. It has been very helpful.