Can't claim foreign tax credit despite paying substantial foreign taxes

[maneli09]

I have a Schedule K-3 which reports foreign taxes paid but no foreign income. When I input the K-3 details into TT I get this error:

"Total foreign taxes paid (line P) or foreign tax accrued has an amount listed but no entry has been made for foreign gross income or foreign sourced income at the individual level on the K-1 Additional Information worksheet line 1."

This is preventing me from claiming a substantial foreign tax credit. I didn't have any foreign income last year so I'm expecting to carry over these credits for future use. From reviewing the instructions for Form 1116, I'm pretty sure I qualify. I've checked with the partnership that generated the K-3 and they agree.

Does anyone know how to get around this? Any advice is much appreciated.

[MelindaS1]

It sounds like you'll have to take these foreign taxes as a deduction, rather than a credit. Follow these FAQ instructions to enter the deduction:

Both the credit and the deduction are entered in the same place. Here's what you do:

1. Enter all your foreign income in the Wages & Income section if you haven't already
2. Navigate to the foreign tax credit section:
   • TurboTax Online/Mobile: Go to the foreign tax credit screen under Deductions & credits in the Federal section
   • TurboTax Desktop: Search for foreign tax credit and select the Jump to link or,
     • Go to Federal Taxes.
     • If asked, How do you want to enter your deductions and credits?, select I'll choose what I work on.
     • Under Estimates and Other Taxes Paid, select Start or Update next to Foreign Taxes.
3. When you reach the screen Do You Want the Deduction or the Credit? select the option you prefer for your situation
4. If you select Take a Credit:
   • Select Continue on the next screen, then select No to fill out Form 1116.
   • When you reach the screen Country Summary, add the applicable country.
   • Answer the questions about your foreign income, taxes, and expenses on the following screens.
   • When finished, you'll be taken back to the Country Summary screen. If you have income from other countries to enter, select Add a Country. Otherwise, select Done.
   • Answer the questions on the following screens until you reach your Foreign Tax Credit Summary. If you’re finished with this section, select Done.
5. If you select Itemized Deduction:
   • Enter your foreign taxes paid on the next screen. These should show up in the Deductions & Credits section of your tax return, under Other Deductible Expenses.

From IRS Publication 514, Foreign Tax Credit for Individuals:

The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country.

[...]

You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion or the foreign housing exclusion.

This logic helps explain why you are disqualified from claiming the Foreign Tax Credit without reporting associated foreign income. Foreign taxes that are non-income taxes (e.g. property tax) are always disqualified from the credit, and must be deducted. You will not be able to carry forward the foreign tax credit to future tax years, because carryforwards must be reported on Form 1116. See: IRS Topic no. 856, Foreign tax credit

[maneli09]

Hi @MelindaS1, thank you for your response.

The foreign tax paid was on "general category income - foreign". So it is an income tax, right?

From my understanding of the following sections, nothing disqualifies me from claiming the foreign tax credit (to carry forward). It seems like the block in TurboTax is inconsistent with IRS rules.

• Topic no. 856
  • Qualifying tests for a credit
  • Foreign taxes that don't qualify for a credit
• Instructions for Form 1116
  • Foreign Taxes Eligible for a Credit
  • Foreign Taxes Not Eligible for a Credit

[DaveF1006]

In your case, because of the K-3 entry, it's looking for foreign income so you can apply the credit. Try entering a "1" on the K-1/K-3 "Additional Information" worksheet (or the foreign tax section of the K-1 entry). Let us know if this clears the error. 

[maneli09]

Hi @DaveF1006, thanks for the suggestion. I've tried this and while it clears the error, TT doesn't generate Form 1116 for filing.

Through some fiddling in forms mode, I found that entering a larger foreign income (>$20 in my case) will make it generate Form 1116 and include it for filing.

So I'm stuck. I can't generate Form 1116 to report FTC for carryover if I use my actual K-3 numbers (zero foreign income, substantial foreign income tax paid). From all the material I've read on the topic, this seems to be a TT limitation and not an IRS one.

[MelindaS1]

Unfortunately, you are definitely disqualified from claiming the foreign tax credit, because it requires foreign income to be claimed. I prepared 2 alternative options below.

IRS Publication 514, Foreign Tax Credit for Individuals:

Who Can Take the Credit? U.S. citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U.S. tax on foreign source income may be able to take a foreign tax credit.

Since you don't have foreign income to include in your U.S. tax return to be double-taxed, it doesn't apply. 

1. An alternative would be trying to input your foreign tax expense as an itemized deduction instead (Note: not everyone will qualify to itemize their deductions, rather than taking the standard deduction).

2. Another option would be asking the partnership that issued your K-1 to review and amend it, if possible, for accurate K-3 reporting. You can extend your tax return in the meantime, pay your tax bill by tomorrow the 15th if needed, and then claim the foreign tax credit once you receive a revised K-1 (with your proportionate share of foreign-source income on the K-3).

Learn more about qualifying for the Foreign Tax Credit:

Foreign tax credit eligibility

Taxes paid to other countries qualify for the FTC when:

• you paid the tax on your income to a local or provincial government
• you were legally obligated to pay the tax
• you have already paid or accrued the tax
• you did not gain from paying the tax

There are also some taxes that cannot be included in the FTC:

• taxes on income excluded from your U.S. gross income (If you do not include wages earned in another country as part of your U.S. income, you cannot claim a credit for foreign taxes paid on those wages)
• taxes paid to a sanctioned country
• sales tax, value-added tax, real estate taxes, or luxury taxes paid to a foreign government
• taxes on foreign mineral, oil, and gas income
• taxes from international boycott operations
• taxes related to a foreign tax splitting event
• Social Security taxes paid or accrued to a foreign country with which the U.S. has a Social Security agreement

TurboTax - Claiming the Foreign Tax Credit with Form 1116