Regarding Foreign Tax paid and foreign tax carryover

[vsun]

Hi,

My Spouse is a NZ citizen and has some money in banks there earning interest income. She is currently in the US.

For 2025, there was a interest income of $19984 and taxes paid amount to $5596. Turbo Tax has computed FTC of $3729 based on AMT methodology.

My questions are as follows:

1) During the FTC calculation, Turbo tax asks about carryover from previous years and has some value there (DETAILS below). How do I know if it's applied to the overall credits or not? There is no explanation on the turbo tax screen about that. 

Year   Foreign Taxes  Amount used 

2024 -  $4095         - $2777

AMT:

2024 -  $4095         - $2385

2) Since taxes paid were $5596, will I have a carryover for next year as well amounting to $5596 - $3729 ?

3) We were planning to move the money to US. If we move the full amount here, there would be no foreign interest income. Does it mean I cannot apply any of the carryover taxes? Should I plan to bring in 50-60% percent of the money in year 1 and plan for subsequent years so that I can apply the Carryover tax benefits?

[DaveF1006]

Yes, this can be confusing, but the carryover section reports prior years and not ‌necessarily just this year in 2025. You need to check the following. 

1. To check if your 2024 carryover is‌ reducing your 2025 taxes, you need to look at Form 1116, Part III, Line 10.
2. Line 9 shows the foreign taxes you paid this year ($5,596).
3. Line 10 shows the carryover amount being brought into 2025.
4. Line 14 is the total available.
5. If your Line 21 (Maximum Credit Limit) is higher than your Line 9 (Current Year Taxes), TurboTax will automatically use your carryovers from 2024 to fill that gap.

Since you are showing AMT,  TurboTax is calculating two separate credits. You have two different carryover balances (Regular Tax and AMT) that must be tracked separately for 10 years.

Yes, based on the information you provide, you are creating a carryover balance into next year. Based on your figures:

1. You paid $5,596 in foreign taxes, but your US tax liability on that specific $19,984 of interest only allowed you to take $3,729.
2. You will have approximately $1,867 ($5,596 - $3,729) in "unused" 2025 foreign taxes.
3. This $1,867 will be added to your 2024 carryover.

If you move the entire balance to a US Bank in 2026, then there is no more foreign-source income to report. Since your Form 1116, Line 17 will be zero., any number multiplied by zero is zero, meaning your available credit for 2026 will be $0. Your carryovers will remain unused. 

Moving your money gradually, as you suggest, is a better idea. You want just enough foreign interest income each year to create a "limit" on Form 1116 that exceeds the taxes you pay that year. This allows you to use the carryover from 2024 and 2025.

[vsun]

Thanks so much for the information.

A quick followup:

You want just enough foreign interest income each year to create a "limit" on Form 1116 that exceeds the taxes you pay that year. This allows you to use the carryover from 2024 and 2025 - How do I determine this amount? Is there a simple formula to figure this amount?

[DaveF1006]

Yes, here is a hypothetical example to use to determine this amount.

1. Let’s say you have $2,000 in carryovers from 2024/2025 that you want to use up this year. 
2. Assume you will pay $500 in foreign taxes in 2026.
3. Assume your average U.S. tax rate is 20% (0.20). (you need to decide what your tax rate is for this year.)

• Calculate the Total Credit Needed: You need a limit of $2,500 ($500 for this year + $2,000 carryover).

 Solve for Foreign Income:

.20/2500=$12,500  Here you take the effective US tax rate of .20 divide it by the limit that is described above. This is your formula.

In this scenario, you would need about $12,500 in foreign source income (consulting or interest) to create enough "room" to use that $2,000 carryover.