Foreign Tax Carryover - Greater Amount Utilized than Amount Incurred

[Sky Mile]

Yes, I spoke to TurboTax life help and they said do this: if in any year your foreign tax is zero and your utilized is non-zero, you are in fact utilizing the foreign tax credit from the latest year it was created, so manually update the “utilized” from that year to reflect it

[melkmelk]

@Sky Mile :
Thank you! That's very helpful to learn such confirmation. Thank you for sharing!

[antx2022]

Thanks.

I understand the  following -

 Put the tax used in 2020 back in utilized for 2019 and effectively adding utilized for 2020 and 2019 in row for 2019 (like you have shown in your case few hours back)

However, is this done only to get pass the error or is it fine if we submit the return in this format ?

We don t need to add any row in 2020 in final submission by manually adding it / moving the used credits back from 2019 to row in 2020 ?

Please clarify.

Thanks

[melkmelk]

Thanks for the question.

In my own opinion (disclaimer: I am not tax professionals), this both pass the errors and making everything right to e-file. 

Yes, if there is no new credit generated in that year, then leave that year's row blank.

If you check the backend forms in Form 1116, Form 1116 schedule B, 1116 Comp wks, they all make sense now.

[antx2022]

In my case, i had some foreign tax credit generated new as well for 2020 but i was able to use the newly generated tax credit in 2020 itself along with some carryover from 2019. Shall i report it in 2021 as well ?

Thanks

[Sky Mile]

From what I heard from TurboTax the principle to apply is:

- Treat the carryover forms as a schedule to firstly record years where you recorded a foreign tax expense 

- Utilize those credits chronologically, ie if you had 10,000 in 2018, and utilized 8,000 in 2018 and 1,000 in 2019 and 1,000 in 2020 - you’ve really just utilized all of the 10,000 from 2018. So update the table to show that 

- If you then generate another credit in 2019 of 2,000. Don’t mark that as utilized until you’ve fully utilized the 10,000 in 2018

This makes sense when you realise that your credits last 10 years, so you want to utilize your earliest ones first before starting to utilize your more recent ones. Hence on the carryover worksheet, record them such that you utilize your earliest ones first fully, before utilizing your more recent ones 

[Anonymous]

Delete. Accidental duplicate post.

[Anonymous]

Delete. Accidental duplicate post.

[Anonymous]

@victor29 - you were right. You can't e-file without addressing the error.

@MarilynG1 - FWIW, your statement, "Yes, it looks like the Carryover Amount for 2016 should not be -3,561, but rather 59,756" doesn't strike me as correct. Except for the last line of that table ("Carryover to [year]"), the Carryover column in the screenshot that @Sky Mile shared is not a running total, but rather just a calculation for each individual year (specifically, "Foreign Taxes" minus "Utilized"). Hence it makes sense that a value of -3,561 is reported in 2016 since 0 minus 3,561 = -3,561.

It's a shame that the approaches to fix this issue that were suggested by TT support to @victor29  and @Sky Mile are slightly different. With the former approach, you are only making an adjustment for the amount in excess of amount utilized (i.e., 26, in my case), whereas with the latter approach you are making an adjustment for the total amount utilized (i.e., 91, in my case). Obviously, the latter approach is more advantageous for the tax payer. Since both approaches involve reallocating money between years, I figure may as well go with the approach that is more advantageous. If anyone knows anything to suggest this is not "legal", please advise.

@antx2022 - I don't quite understand what you mean by, "Shall i report it in 2021 as well ?," but if I am understanding your situation correctly, based on the procedure that @Sky Mile shared, you would adjust things as follows on your 2021 return. All numbers are examples. Hope that helps!

[Anonymous]

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@Sky Mile wrote:

From what I heard from TurboTax the principle to apply is:

- Treat the carryover forms as a schedule to firstly record years where you recorded a foreign tax expense 

- Utilize those credits chronologically, ie if you had 10,000 in 2018, and utilized 8,000 in 2018 and 1,000 in 2019 and 1,000 in 2020 - you’ve really just utilized all of the 10,000 from 2018. So update the table to show that 

- If you then generate another credit in 2019 of 2,000. Don’t mark that as utilized until you’ve fully utilized the 10,000 in 2018

This makes sense when you realise that your credits last 10 years, so you want to utilize your earliest ones first before starting to utilize your more recent ones. Hence on the carryover worksheet, record them such that you utilize your earliest ones first fully, before utilizing your more recent ones 

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I would like to take this approach on my 2022 tax return. However, I noticed that TT2022 does the following:

1. It first utilizes all of the foreign taxes incurred in the current year.
2. It then utilizes the earliest unutilized foreign taxes.

Case in point, I incurred $119 in foreign taxes in 2022. Meanwhile, my foreign tax credit in 2022 is $187. With that in mind, TT2022 did the following:

1. Utilized $119 in 2022.
2. Utilized $68 (the remainder: $187-$119) spread across foreign taxes that had not yet been utilized in 2013 and 2014.

For the taxpayer, it would of course be more advantageous if TT didn't do step 1 and instead allocated all of the current year's foreign tax credit to the earliest carryover amounts first. Looking at the IRS's Form 1116 instructions (https://www.irs.gov/pub/irs-prior/i1116--2022.pdf), it states:

"First, apply the excess to the earliest year to which it may be carried. Then, apply it to the next earliest year, and so on."

The only way I can see to do this in TT2022 is to manually override the amounts in the "Foreign Tax Credit Carryovers to 2023" table on the "1116 Comp Wks" form. This begs the question, why doesn't TT do that automatically? @AliciaP1 :)?