Foreign Tax Credit

[kperlman01]

I live abroad in a country with a double taxation agreement.  All of my income is US sourced, but also taxed in my country of residence.  How do I claim these taxes paid as a Foreign Tax Credit using turbotax?

[DoninGA]

To enter Foreign taxes paid -

Click on Federal Taxes (Personal using Home and Business)
Click on Deductions and Credits
Click on I'll choose what I work on (if shown)
Scroll down to Estimates and Other Taxes Paid
On Foreign Taxes, click on the start or update button

Or enter foreign tax credit in the Search box located in the upper right of the online program screen. Click on Jump to foreign tax credit

[kperlman01]

This doesn't seem to work.  It seems be be only for taxes paid on foreign sourced income (FSI).  When I select that I have not received any FSI, it says that I am not eligible for the Foreign Tax Credit.  I also tried to select the option to itemize my foreign tax deductions, but that didn't work either.  To be clear, all of my income is US based, but I live in a country that has a double taxation agreement, and taxes paid here are a credit against my US taxes.  Maybe Turbotax doesn't support this situation?

[DoninGA]

@kperlman01 I will page one of our experts who may be able to assist in this type of situation.  

@pk do you have any suggestions?

[pk]

@kperlman01 , agreeing  with both my colleague @DoninGA  and with you on your observations.

 (a)  While you are at the  Foreign Tax Credit screen -- select / yes  and  select credit for foreign taxes paid. 

(b) When its for "Category" of  Foreign Source income  ( at the top of the form 1116 , if you are using one to follow along ) , select  " Resourced by Treaty " -- do not select any other category box.

(c) Enter the total  US source Income  that has been taxed both by USA and the Foreign Taxing authority.

(d) Enter the Taxes paid  ( levied by)   the foreign Taxing authority.

Note that while the US does recognize  all the foreign taxes paid, the allowable amount for the tax year  is limited to   lesser of (a) actual amount paid OR (b)  allocated amount of US taxes based on  the  ratio of Foreign Source income to World income.

 Also note because your resourcing is for the express of double taxation mitigation, there is no need to file a form 8833 along with your return.

Does this make sense ?   Is there more one of us can do for you ?

pk

[kperlman01]

Thanks- but that doesn't seem to work, either.  I was able to select income re-sourced by treaty.  The next step asks for income from sources w/in Portugal (country where I am a resident- and I don't have any income from w/in Portugal)).  Next field asks for expenses related to said income.  Next it asks for other foreign taxes paid on income from w/in Portugal that is not already reported on 1099's, K-1, etc.  

Then it takes me out of the screen as if I have completed the form.  No opportunity to list federal (Portugal) income taxes paid on US based income.  Am I still missing something?

Thanks!

[pk]

@kperlman01 , my apologies I should have  pointed out that because  "resourced by Treaty " is not very common , the screens and questions thereof  are  generally focused towards  actual foreign source income.  In your case you have to treat as if these resourced income(s)  actually  sourced  to foreign country ( Portugal ).  Please answer accordingly and it should all work.

My apologies again for  not pointing this aspect.

Is there more I can do for you ?

pk

[Inugasuki]

If the income consists of general income (e.g., wages) and passive income (interest/dividend) and both are re-sourced, can we use one basket for both?  Do we need two separate baskets for determining the credit limit: one for general income re-sourced and another for passive income re-sourced?  

[pk]

@Inugasuki , don't understand  how you can have general category ( wages ) as part of your resourced by treaty.  Please explain.  Because the general principle is the wages / active income are sourced where work is performed -- thus if you are working on-line or otherwise for an entity in the US but  living / tax-home in Portugal, that income is Portugal sourced.

Please explain the situation you are ref'rng.

pk

[Inugasuki]

I am no longer working and am now receiving deferred income from my old employer (with W-2).  I also have distribution from my IRA.  Can I combine them with my passive income in one basket?

Thanks!!!

[pk]

@Inugasuki , the answer depends on the actual tax treaty.

1. Where is your Tax home --- are you in the US or abroad ?   If abroad where ?

2.  W-2 is from US past employer ?

3. Are you also on Social Security ?

You are not giving me whole story --- Please answer as fully as you can --please .

If you are uncomfortable detailing information on this public board, you can always PM me  ( just no PII --- Personally Identifiable information).

pk