Foreign Tax Credit Carryover

[RH1109]

Could someone please help me understand why when importing my TurboTax information from 2022 into my 2023 return, carryover foreign tax credit from 2022 was pulled into IRS Form 1116 (Copy 1) for 2023, but there was no Sched B Form 116 generated, rather the carryovers eligible for carryover to next year were automatically calculated in the "Foreign Tax Credit Carryovers to 2024" section rather than being utilized as a credit in 2023? I am getting $1 credit (Form 1116 - Copy 2) from passive income from a mutual fund, but my unused carryover from previous years (2018 & 2022) is $6,811.00 of general category income. So it seems as though I have not reached the IRS limit for credit this year, and I don't understand why TurboTax doesn't use some of the $6,811.00 of general category income as a credit toward this year's 2023 taxes. Is there any explanation other than a software glitch?

[SusanY1 · Accepted solution]

Do you have foreign income to take the credit against?  It can't be used against US-source income. 

If you do have foreign income, it sounds like TurboTax doesn't yet know that.  Navigate to the foreign tax credit section in Deductions & Credits, then Foreign Taxes to identify the income on your return against which the credit should be applied.  

Foreign "general category" income would typically be wages or other compensation and not passive income like dividends or interest.  If you don't have any of that type of income to report in 2023, then the credit moves forward until you do (or it expires).  

[RH1109]

Oh, my goodness. I had no idea. No, I have no foreign income this year, and probably never will again. But you have certainly answered the question. I have been reading instructions and publications until my eyes bugged out, but somehow never found that explanation. Thank you very much.

[GBAYER]

The foreign tax credit in any year is limited to a pro rata share of taxes paid on foreign income. Therefore, if your effective tax rate on all income (taxes owed/ taxable income) is less than the tax rate paid on your foreign income (foreign taxes paid /foreign income(also adjusted for a pro rata share of deductions ) your foreign tax credit will be limited to the the effective rate on all income times your foreign adjusted income.

[RH1109]

Thank you. What you've might be true and correct, I do not understand it at all. I had no foreign income this year which seems to be a key factor in why TurboTax didn't calculate a foreign tax credit for me this year. TurboTax carried it over to next.year.

[DaveF1006]

Yes. You would need to report foreign income for this year to be able utilize the credit carryover. Unfortunately, any part of the past amount of general category income cannot be used to claim future foreign tax credits.

@RH1109