topic Additional Foreign Tax Credit on U.S. Income worksheet Publication 514 in Deductions & credits

Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

mdsaronson — Mon, 23 Dec 2024 16:48:10 GMT

Hi there. I am a US citizen tax resident in the UK. I am taxed in the UK on my US source income, subject to the taxing rights assigned to the US under the US-UK tax treaty. Under the treaty, the US agrees to provide a US tax credit to US citizens in respect of UK tax in excess of what the US may tax a UK resident non-US citizen (0% on interest, 15% on dividends). Any otherwise US source interest and divdend yielding US tax in excess of that amount is resourced. IRS Publication 514 provides a worksheet to calculate the additional foreign tax credit permitted and instructs the taxpayer to "Add this amount to line 12 of Part III and line 32 of Part IV of Form 1116".

How do I do this in turbo tax without override values?

Thank you in advance

Re: Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

pk — Mon, 23 Dec 2024 20:25:39 GMT

@mdsaronson ,

(a) in general , when the US is limited by treaty to specific tax rates, it is usually achieved by "adjustment" to the "foreign source" income. TurboTax has a screen for this. And IRS instruction for form 1116 provides the adjustment amount to be used. Should not use "over-ride" as this may ( not always ) disallow e-filing.

( b) If you are talking about 2024 tax year, many screens associated with Foreign source income / taxation are not operational yet --- think they are targeting for Jan 18th ( or thereabout ) to effective.

Does this help or am I in the total left field ?

Re: Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

mdsaronson — Tue, 24 Dec 2024 21:34:08 GMT

Thanks @pk . I think my issue is slightly different. The instructions to Form 1116 for 2023 include the following paragraph at the bottom right of page 2:

U.S. citizens living in certain treaty countries may be able
to take an additional foreign tax credit for foreign tax imposed
on certain items of income from the United States. See Tax
Treaties in Pub. 514 for details. If this applies to you, use the
worksheet near the end of Pub. 514 to help you figure this
additional credit.

The instructions for the worksheet in Publication 514 contain the following instructions (for the third step in the calculations) link here - Pub 514 (worksheet is on p.43, instructions on p.44):

There does not seem to be a place in TurboTax where I can add the Line 21 amount to the reduction in foreign taxes on Part III, line 12 or where I can add that amount to Part IV, line 32.

Very much appreciate your time and assistance!

Re: Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

mdsaronson — Fri, 27 Dec 2024 12:38:28 GMT

One more quick addition here. There actually is a space for one to enter this information on the TurboTax Foreign Tax Credit Computation Worksheet, snippet below, but the field is not active. The text instructs one to see tax help, but I cannot find instructions in the help section.

Re: Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

pk — Sat, 28 Dec 2024 18:45:51 GMT

@mdsaronson while I generally agree with your position of using adjustments to the income to achieve the taxing rates , it is much more complicated method. If the intent is to reduce the burden of "double taxation" i.e. same income being taxed by both the source country and the resident country ( arises when each country is using "world income" of the resident ), then the easier path is to get foreign tax credit for taxes paid to the other taxing authority. Thus for dividends and interest income from, US sources that are taxed by both the UK and US on a beneficial owner whom is a UK resident ( e.g. US citizen/ GreenCard ) , one can use "Resourced by Treaty on form 1116 to essentially reduce the US tax on this doubly taxed income.

By using the adjustment mechanism ( allowed max tax by treaty ) and depending on exact facts and circumstances, may not be useful.

My reference here is US-UK Tax treaty and explanatory notes -- > United Kingdom (UK) - Tax treaty documents | Internal Revenue Service

Is there more I can do for you ?

Re: Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

juinnder — Sun, 09 Mar 2025 03:43:03 GMT

Hello, I am really stuck on what to put on the form Foreign Tax Credit Computation Worksheet lines 12a1 and 12a2. Can someone please direct me to where I can read clearly written instructions on what to put there? I'm using the desktop version where I can check the forms and these 2 lines indicated I need to enter something. Thanks.

Re: Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

pk — Sun, 09 Mar 2025 16:21:27 GMT

@juinnder

what it is trying to here is compute the ratio of excluded foreign active income to total foreign active source income. It then uses this to allocate US tax liability to the unexcluded income.

When in forms mode , click the "help-center " at the top right. Then ask for help on form 1116. This should open up a very large document explaining how TurboTax goes about filling up form 1116 and the entries it expects from the user. Below I have appended the notes for the relevant entries:

Lines 12a1 through 12a5:

If you excluded some or all of your foreign income on Form 2555, Foreign Earned Income Exclusion, the foreign taxes you paid must be reduced by the amount of taxes that relate to the foreign earned income that has been excluded on Form 2555. Lines 12a1 through 12a5 are used to determine the allocation ratio to be used in apportioning the amount of taxes applicable to excluded income.

The program performs the computations on lines 12a3, 12a4, 12a5 only for the General category of foreign income (i.e., if box b is checked at the top of this worksheet). Lines 12a1 and 12a2 must be entered when applicable.

If you excluded foreign income on Form 2555, enter on line 12a1 the amount of foreign earned income excluded (Form 2555, line 45) reduced by any itemized deductions that relate to the foreign income excluded.

Enter your total foreign earned income for the year on line 12a2. This is the total foreign earned income from Form 2555 (both copies), line 26, reduced by deductible expenses allocable to that foreign earned income.

NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.

Hope this helps.

Is there more I can do for you ?

Re: Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

nstuhr — Sat, 31 May 2025 16:29:17 GMT

Hi,

I came across this question because I'm dealing with a similar issue as the original poster. I live in Germany, and while the specific details may vary, I believe the tax treaties are comparable.

I tried using Form 1116 with the "Income Re-sourced by Treaty" option. However, according to the Form 1116 instructions, my foreign income is adjusted by multiplying it by 0.4504. As a result, the amount of foreign tax credit I can claim is reduced, and I end up with a U.S. tax bill that exceeds 15% of my dividend income — even though the treaty should cap the U.S. tax on dividends at 15%.

I’ve been trying to understand the reasoning behind this 0.4504 factor. It seems intended to account for the difference between the 15% treaty rate on dividends and the top marginal rate of 37% on ordinary income. But this adjustment seems flawed if you’re not actually in the 37% tax bracket.

Thanks!