Solved: Can you take a foreign tax credit on passive investments (dividends) and a schedule A deduction for foreign taxes paid from an active partnership in the same year?
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Can you take a foreign tax credit on passive investments (dividends) and a schedule A deduction for foreign taxes paid from an active partnership in the same year?

The foreign tax credit from the K-1 would not be allowed as it was limited.  Therefore, I put it as a schedule A deduction.  The foreign tax credit was put for the passive (dividends) on a form 1116.  Turbo tax allowed this treatment (deducting the foreign taxes on the general K-1 taxes on schedule A and a credit on 1116 for the dividend related foreign taxes).  Are the two types of foreign taxes treated as separate pools (passive vs general)?  I thought that if you selected a credit, it was applied to all foreign taxes and if you selected a deduction (schedule A) that it was applied to all foreign taxes.  Turbo allowed them to be applied separately. Can you let me know this answer.

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Level 12

Can you take a foreign tax credit on passive investments (dividends) and a schedule A deduction for foreign taxes paid from an active partnership in the same year?

The answer is almost certainly "No, you can't take both a credit and a deduction in the same year."

Here's what the IRS has to say:

-------------------------------------------------------------

You can choose each tax year to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.

As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.

If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.

-------------------------------------------------------------

There are exceptions to the general rule, but it doesn't sound like you fall into one of them:

Exceptions for foreign taxes not allowed as a credit.   Even if you claim a credit for other foreign taxes, you can deduct any foreign tax that is not allowed as a credit if:

  • You paid the tax to a country for which a credit is not allowed because it provides support for acts of international terrorism, or because the United States does not have or does not conduct diplomatic relations with it or recognize its government,
  • You paid withholding tax on dividends from foreign corporations whose stock you did not hold for the required period of time,
  • You paid withholding tax on income or gain (other than dividends) from property you did not hold for the required period of time,
  • You paid withholding tax on income or gain to the extent you had to make related payments on positions in substantially similar or related property,
  • You participated in or cooperated with an international boycott,
  • You paid taxes in connection with the purchase or sale of oil or gas, or
  • You paid or accrued taxes on income or gain in connection with a covered asset acquisition. Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U.S. tax purposes. For more information, see Internal Revenue Code section 901(m). The IRS intends to issue guidance that will explain this provision in greater detail.

Tom Young

View solution in original post

1 Reply
Level 12

Can you take a foreign tax credit on passive investments (dividends) and a schedule A deduction for foreign taxes paid from an active partnership in the same year?

The answer is almost certainly "No, you can't take both a credit and a deduction in the same year."

Here's what the IRS has to say:

-------------------------------------------------------------

You can choose each tax year to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.

As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.

If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.

-------------------------------------------------------------

There are exceptions to the general rule, but it doesn't sound like you fall into one of them:

Exceptions for foreign taxes not allowed as a credit.   Even if you claim a credit for other foreign taxes, you can deduct any foreign tax that is not allowed as a credit if:

  • You paid the tax to a country for which a credit is not allowed because it provides support for acts of international terrorism, or because the United States does not have or does not conduct diplomatic relations with it or recognize its government,
  • You paid withholding tax on dividends from foreign corporations whose stock you did not hold for the required period of time,
  • You paid withholding tax on income or gain (other than dividends) from property you did not hold for the required period of time,
  • You paid withholding tax on income or gain to the extent you had to make related payments on positions in substantially similar or related property,
  • You participated in or cooperated with an international boycott,
  • You paid taxes in connection with the purchase or sale of oil or gas, or
  • You paid or accrued taxes on income or gain in connection with a covered asset acquisition. Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U.S. tax purposes. For more information, see Internal Revenue Code section 901(m). The IRS intends to issue guidance that will explain this provision in greater detail.

Tom Young

View solution in original post

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