Claiming FTC for taxes paid on interest income

[momochi214]

I have a 1099-INT from a U.S. Bank for 2024, and no US taxes have been withheld. I have reported a portion of the 1099-INT income to Japan for 2024 and paid taxes on that as I moved to the country during 2024.  Now I am preparing the US tax filing and having a difficult time claiming the FTC in Turbotax. 

The 1099-INT doesn't appear as an option for me to choose to claim the FTC as the 1099-INT itself doesn't show any taxes I paid to Japan. How can include the actual taxes I paid to Japan relating to the U.S. bank deposit as a FTC in the U.S.? I saw some discussions on adding a mock 1099 and filling in the boxes 1 and 6 but not sure if that would erroneously increase my total taxable income.

I would appreciate your help on this!

[gbriel]

I have a very similar issue, as I moved to Italy in 2024 and as a resident there will owe Italian income tax on all worldwide income.  My ONLY income is interest earned in the USA and Canada that I have always reported on my USA tax return.  I know that I need to report all of that interest from 1099-INT forms on my 2024 tax return like always because I am a USA citizen, but I too cannot figure out how (as in where specifically to do it via Turbo tax online) to get the applicable tax credit for the taxes on that same interest income that I will pay to Italy and that will be far greater in amount then the taxes I would pay in the USA.  The interest income was not SOURCED in Italy, but will be re-sourced by tax treaty and considered Italian sourced income since they have first taxing rights to the interest earned.  Using tax form 1116 does not seem to work, UNLESS I plug into box 6 for every 1099 the amount of tax I will pay to Italy (but have not yet paid).  This may be the solution, but it is technically incorrect since I have not paid any foreign tax on those USA and Canada 1099 interest amounts reported on my USA return.  The only other thing that I can think of is to go into the Less Common Income section (Miscellaneous Income) and enter a negative number that exactly equals the total interest reported as Interest income when entering all 1099's, thereby eliminating that income entirely because it is being taxed in Italy under the USA/Italy tax treaty.  Not sure if a form 8833 needs to be filed explaining this.  Maybe the reality is that Turbotax does not work in a situation like this one and it's software in unable to accommodate what needs to be done here.

[ThomasM125]

To apply for a credit for foreign taxes paid or accrued during the year:

1. From the Federal section of TurboTax, go to the Deductions and Credits section

2. Find Estimates and Other Taxes Paid

3. Choose Foreign Taxes

4. Indicate that you paid foreign taxes or have credits from prior years

5. Work through the section until you see an option to take a deduction or credit, the credit is usually better

6. Complete the rest of the section

On the screen that says Before we Begin, indicate that you have reported all foreign income and taxes paid on your 1099 forms to allow you to advance further:

On the screen that says Other Gross Income - Various enter the income earned by country:

On the screen that says Foreign Taxes Paid enter your foreign taxes paid:

 You probably don't need to enter much else on the rest of the screens but you can enter anything that you think applies to you. You will see your foreign tax credit listed on line 1 of Schedule 3 Additional Credits and Payments.

You will only get a credit to the extent you have taxes on foreign income in the current year. Any unused credit can be carried back one year or forward ten years.

[gbriel]

As a USA citizen with only USA sourced income (just interest reported on 1099’s re the USA and Canada interest reported on similar ax slips), my understanding is that the only way that you can reduce or eliminate your USA tax obligation is to re-source that interest income by completing form 1116 so that you can then get the foreign tax credit due and necessary to reduce or eliminate the USA tax liability on that very same interest income.  The questions I had above were more focused on HOW this is properly recorded using the TurboTax software.  To be specific, in my case, I have the 1099 interest forms from both Canada and the USA (my only sources of income).  I am a USA citizen, but reside in Italy where I am also now a citizen.  I will therefore owe tax in Italy on my worldwide income.  As a USA citizen, I of course have a filing obligation, but to avoid being double taxed on that income, need to use FTC’s and the only way to do that is to re-source that USA and Canada sourced income to be Italy sourced on form 1116.  The issue is that I do NOT have any foreign tax showing in box 6 on any of the tax slips, so am not sure how to reflect the tax that I WILL pay to Italy on that interest income.  Do I plug a tax paid number into box 6 on each 1099 and say it was/will be paid to Italy?  That would populate form 1116 with the foreign tax that will be paid to Italy and then also show the applicable FTC for the income that was re-sourced.  Kindly advise step by step as I use TurboTax online and have for many years now but just moved to Italy in 2024.

…I should have clarified that the USA-Italy tax treaty allows for the re-sourcing of the USA and Canada sourced income to be considered Italy sourced interest income, thereby allowing the FTC to be calculated in removing the USA tax obligation on that same interest income.  I am asking about the mechanics of getting all of that information input using the TurboTax online software program, as it is confusing.  As I said, I can “force” the foreign tax by inputing a number in box 6 on each form 1099 entered in the income section, with that number being the 26% of the 1099 interest number that will be paid to Italy, but there isn’t a number in box 6 on any of the 1099’s as issued.

[gbriel]

Your step by step instructions noted above appear to work, although I must say that the Other Gross Income - Italy sheet is quite confusing (even for someone like me with a bit of tax experience), since it specifically says that you should NOT enter any income already reported on Form 1099.  I have, of course, already entered all of the tax slips for interest earned in both the USA and Canada under the applicable income section.  I do believe that even though the language on that sheet is unclear and confusing, what the6 really mean is to add the interest income as Other Gross Income because it in this particular section has been re-sourced under the USA-Italy tax treaty so that it is now being considered as having been our ex in Italy and therefore now eligible for the FTC against USA tax that is due on that very same income.  Please let me know if you concur with my thinking here.  Also, could you kindly advise if a Form 8833 needs to be included when filing the return, regarding the application of the tax treaty related provisions?  I do not believe that form is warranted and that would be good for you to confirm since I reside overseas and will file online and I do not believe that Form 8833 is supported by TurboTax and if it were required it would need to be completed and mailed in.

[DaveF1006]

Yes, form 8833 should be prepared and sent in with your tax return because you are declaring a treaty-based position. I agree, your approach is also correct in reporting the interest income as other gross income if it hasn't been already reported in the Foreign Tax Credit section.

You are also correct that form 8833 is not supported by Turbo Tax so your return will need to be mailed.

[gbriel]

Living overseas now, mailing in the return; and not being able to file it online using TurboTax or other software that does support form 8833 wouldn’t be ideal of course.  That being said, I know that there are exceptions to the requirement to include a form 8833 and I believe that my situation would fall into that category.  As a USA citizen who has to file a return, but who is re-sourcing their USA and Canada interest income (only income I have) to be able to utilize the provisions of form 1116 to provide FTC’s necessary to offset the income tax that would be due in the USA (because tax is due in Italy where I now reside and where I a: also now a citizen), wouldn’t that situation in fact meet the exceptions and avoid any need to file a separate form 8833?

[DaveF1006]

It may but I suggest filing form 8833 as a cautionary note. If I were your tax preparer and we were meeting live, this would be my advice as we are required to take a conservative approach to our tax positions as part of our code of ethics training.