Foreign Tax Credit and Simplified Foreign Limitation Election

[ebmarch]

I have poured over other comments about this topic but am still confused as it seems like it is tied up with AMT in my TT return.

Context: Filing status as MFJ. I have a 1099-DIV for my wife and one for me, both with foreign tax credits shown (all passive income).  Her's are only from an RIC; mine are both RIC and a number of countries. My 1099-DIV shows the amount of earnings and taxes in each of these countries.

I have taken the FTC in previous years using TT but never had to file 1116 as the amount in 2023 and 2024 was less than $600 and  I met all of the other requirements. This year our combined FT payments were $775. I have also not been subject to AMT in either year per TT. 

1) When  I claim the credit this year, TT asks me to tie the 1099-DIVs to one of country offerings. For her 1099-DIV I  just use RIC. But for mine, should I just tie the 1099-DIV to VARIOUS, even though some it is from RICs? I read elsewhere that to report it by country I would have to make a 1099-DIV for each country, and I do not have enough  financial info to do that even if I really wanted to.

2) I am asked the question about using the simplified foreign tax limitation election FOR AMT PURPOSES. Not sure if this is the same a the limitation for 1116.  Since I have claimed FTC before without filing 1116 using TT (I met all the requirements for this per the IRS) can/should I  claim the simplified method this year?  TT is asking me if I want to do a carryback to 2024, but I am not sure I am eligible for this based on IRS information : 

https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-how-to-figure-the-credit 

which says: 

"You will not be subject to the foreign tax credit limit and will be able to claim the foreign tax credit without using Form 1116 if the following requirements are met.

1. Your only foreign source gross income for the tax year is passive income, as defined in Publication 514 under Separate Limit Income.
2. Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return).
3. All of your gross foreign income and the foreign taxes are reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).
4. You elect this procedure for the tax year.

If you make this election, you cannot carry back or carry over any unused foreign tax to or from this tax year."

If you can clarify this for me, I would appreciate it so much!

[DaveF1006 · Accepted solution]

When you are over the $600 threshold, you are technically required to report income and taxes by country. However, for a 1099-DIV from a brokerage, there is a widely accepted practical approach:

1. For her 1099-DIV: Since it only contains mutual funds/ETFs (RICs), continue to use RIC as the country.
2. For your 1099-DIV: If the individual countries are listed but the amounts are small, many taxpayers use the "VARIOUS" or "RIC" designation for the entire form to avoid creating 20 different 1099-DIV entries.

Yes, you should choose the Simplified Election because it lets you use your regular tax numbers for the AMT calculation. This saves you a lot of paperwork in the long run. 

TurboTax asks about a carryback because you are now over the $600 limit.

1. In previous years (under $600): You were prohibited from carrying over any unused credit. 
2. This year (over $600): You are now subject to the "Limit." If your $775 in taxes paid is more than the limit calculated on Form 1116, you can carry that "extra" money back to last year or forward to next year. 
3. You aren't eligible for a carryback to 2024 because in 2024 you used the "under $600" election, which explicitly forbids bringing carryovers into that year. You should focus on the carry-forward (saving the extra credit for 2026). This illustrates the concept of FTC limitations.

In answer to your previous question, The AMT simplified election is not the same as the FTC limitation that you illustrated. Selecting the simplified election will not prevent you from using a FTC carryover for ten years, starting with the 2026 tax year.

[ebmarch]

Thanks very much, Dave! Your explanation was very clear, and I appreciate your time to educate me.

I see that this my initial confusion from the TT question was regarding the limit for the AMT question. After I submitted this question, I found some other TT information about the carry back as well. But your explanation is far clearer regardless. 

I find it odd that last year I received the full amount of my foreign taxes paid as a credit (I squeaked in at $599) when 1116 was not required, but this year, with essentially the same 1099DIV dividends,  I get less of a credit. I will have to investigate that tax code some more with the 1116 instructions. Ah, the logic of the tax code!😂

Thank you again for your reply!

Ed