Avoid Form 1116 for less than 10% limited partners

[ilenearg]

Trying to get a Foreign Tax Credit in connection with two K-1/K-3s.  I'm a limited partner with less than 10% interest (actually, less than 1% interest) in each business entity.  Filing as married/joint.  Total Foreign Taxes paid is barely over the $600 threshold for automatically avoiding Form 1116 (total is $654 [$589 on one K-3 (Australia), $65 on the other (UK)].

If I let TurboTax prep the 1116, and include the $589 and $65, I get $17 as a Foreign Tax Credit.  If I leave off the $65 from the UK K-3, and only report the General Category Income listed on the UK K-3, TurboTax does NOT prepare Form 1116, and I get $589 as a Foreign Tax Credit.

SO... here's the question ... do I HAVE to claim the $65 Foreign Tax Credit on the UK K-3, or is it legit to just leave it off?  OR, since I'm less than 10% interest, must I report ALL of the income (the passive column c income as well as the general column b income) as passive, and, if I do the latter (all passive), will it still required the form 1116?

OR.... if I let TurboTax do its thing, and only get the $17 Credit, will it know to carry forward the remaining $637 each year up to 10 years until it falls under $600 and can ALL be claimed?  Not sure why it won't still give the $600 Foreign Tax Credit and just carry forward the $54 excess - unless there is a way to force that.

HOPE I'M NOT BEING TOO CONFUSING!

[pk]

@ilenearg , no you are not confusing -- what I understand from your  post:

(a)t you have  Foreign source incomes and   foreign taxes paid for the year 2023.  

(b) these are passive in nature 

(c) your total  foreign taxes paid is a small amount over the safe harbor amount of   US$600

(d)  the income sources are from UK and Australia, both have  Tax treaty with the US and  have "double taxation clause"  --- I am familiar with the US-UK tax treaty  but have to look up that with Australia 

(d) because the  total foreign taxes paid amount is slightly above the  safe harbor limit and  using a form 1116 will indeed result in a lesser  Foreign Tax Credit, there is now a question as to path forward.

The general requirement  and assuming that you  & your spouse  ( MFJ filing ) are US persons   ( citizen/ GreenCard ), is that you must recognize all income no matter the source and country i.e. world income.  IRFS gets  copies of all  information returns  ( 1065, K-1 and K-3 etc. ) . Thus  IRS knows  and looks for all  incomes  for federal tax purposes.

However, there is no requirement  for the tax payer to recognize each all taxes paid  to a foreign taxing authority ( either as a deduction or credit  against  US taxes ).  You get to choose what is most advantageous  to your situation.

Long story short, you do not have to recognize  all the taxes paid.   You are  quite within the tax laws  to recognize a total of  up to US$600 from the two constituent  K-1/K3s  of US$589 and US$65.  My suggestion would be recognize only one for US$589 and ignore the US$65 -- I say this  because  this way  you are within the perjury jurat   ( the  recognition of only part of the US$65 -- while legal, may -- still requires one to  replace the  US$65 to a different number and  claim to be true ).

That is my view.

Is there more I can do for you ?

[ilenearg]

Makes sense to me. I chatted with a TurboTax person and he felt that I'd have to report it, but maybe he misunderstood your suggestion of reporting everything on the form, but not claiming the $65. I'm not quite sure how to key that into TurboTax. Can't try right now as I'm recuperating from hip surgery and can't go up to work on my computer!  What WAS suggested is, sonce I have less than a 10% interest on the LP, to put everything in as Passove and don't breakout the general from passive. Does that makes sense?  As I recall, when I entered in for before and broke it into that column a and column c for line 16, it gave me an error and said to report as separate K-1/k-3. If I do as separate, what do I enter in for the second one? Would I put in the percentages and the other info from the left half of the K-1, or leave all but the entity and entity number blank except for the K-3, column b info?