Foreign Tax Credit doesn't work on TurboTax!

[smith50]

I'm struggling to keep my temper.  I've spent about 16 hours trying to make the FTC work on TurboTax.  It doesn't.  You have a serious bug.  Moreover, judging by past chats, it's been going on for years, and you haven't bothered to fix it.  I have entered all the info correctly on TurboTax, and it still calculates my FTC as zero.  Thousands of dollars are at stake.  I have now wasted an amount of time that is much more valuable than the $ I paid, hoping to save time, to Intuit for this disgraceful system.  You must e-mail all your customers who have tried to use your non-functional version of Form 1116 to apologize, to offer compensation, and to give individual assistance to allow us to file our returns on time, without double-paying taxes to two governments.

[smith50]

And another problem: your system says "Your 2021 return shows that you previously decided to use your regular taxable income and deductions on the Form 1116 you filled out for AMT purposes. This is called using the Simplified Method. You must continue to use this method unless you have received written permission from the IRS to change." But that is false. I've never used Form 1116 before. Another system bug. Can anyone suggest some alternative tax-preparation software, suitable for overseas filers?

[rogge1722]

There is a reason for it.  Possible reasons are:

Is line 18 on form 1040 greater than zero?

On form 1116, are there amounts on line 14; is line 19 greater than zero: are there amounts in line 21 and 23?

[smith50]

A.  I don't know, because I can't see the amount on line 18 of form 1040 till I complete the return (unless Turbotax offers some kind of preview, which is not evident).

B.  Ditto, I can't see a preview of form 1116 filled in; Turbotax offers only the walk-through without IRS line numbers.  Looking at a blank specimen of 1116, my line 14 should have a positive amount, as I paid plenty in foreign taxes, and duly entered that on Turbotax's walk-through of form 1116.

Please offer further advice.  I'm at 20 hours now without success.  What a nightmare.

[smith50]

Doesn't TurboTax offer any kind of help line or real-time product support?  Especially during tax season ??

[smith50]

OK, I found the form view function.  My responses:

A.  Yes, form 1040 line 18 has a positive value.

B.  On form 1116, the amount on line 14 is zero, despite the amounts in line 11 and 12 being positive (and identical), and line 13 being zero.  This appears to be the bug.  Essentially it's reducing all of my foreign tax paid to zero.  I entered no data that would account for that. 

C.  Line 19 is indeed greater than zero.  There are indeed positive amounts on lines 21 and 23.

[MarilynG1]

Since we can't see your return in this forum, did you enter both your Foreign Income and your Foreign Tax Paid in the Foreign Tax Credit section? If the Foreign Tax you paid was on any income other than Interest or Dividends, you need to enter the type of income, amount of income, country, and amount of tax paid on that income as you go through the interview screens, even if you reported the income in another section in TurboTax. 

Here's more info on TurboTax Expert Help.

@smith50 

[smith50]

Yes, thanks, I did so.  I think the bug may actually be with the IRS, not completely TurboTax.  According to the IRS instructions for form 1116, you're supposed to fill in the foreign income that is taxed in the source country or country of residence – but, logically, exclude any foreign earned income that you've already reported on form 2555 (because the US won't tax you on that, so there should be no associated foreign tax credit).  However later on 1116, you report all the foreign taxes paid, including (though this is not obvious) on the US-excluded foreign earned income.  Then later still, you note the US-excluded FEI, so that you can subtract the foreign tax paid on it from your foreign tax credit.  Logical, but very roundabout.  The big problem occurs in the course of doing this, in the computation worksheet for line 12 (12a(1), 12a(2) etc.).  In 12a(1) you're supposed to enter your "current year FEI excluded amount," same as you put on form 2555.  But then in line 12a(2), you're instructed to put the "total FEI," combining the excluded and non-excluded (i.e. the total on which you've paid foreign taxes).  But there's a mismatch: part of the foreign income on which I (and many people) paid foreign taxes is neither earned nor passive – foreign pension, in my case.  So if you dutifully enter only your FEI here, it'll be the same as on the previous line, meaning your foreign tax credit will be reduced by 100%.  This cannot be the IRS' intention.  I think they erred in the instructions for line 12: line 12a(2) should be total foreign income on which you paid taxes (in this "general" category, i.e. excluding dividends etc.), not only the "earned" component.

The choices seem to be to go against the instruction and enter all this foreign-taxed foreign income, including the unearned, or to revoke one's FEI exclusion (i.e. delete form 2555) and put all the foreign-taxed income and foreign taxes paid on it onto form 1116.  Does anyone know the implications of revoking the FEIE – and/or whether the IRS would mind if one takes necessary liberties with the instruction for line 12a(2)?

[rogge1722]

The following is TT's special instructions for f1116  line 12 cells for reduction in foreign taxes.

Lines 12a1 through 12a5:

If you excluded some or all of your foreign income on Form 2555, Foreign Earned Income Exclusion, the foreign taxes you paid must be reduced by the amount of taxes that relate to the foreign earned income that has been excluded on Form 2555. Lines 12a1 through 12a5 are used to determine the allocation ratio to be used in apportioning the amount of taxes applicable to excluded income.

The program performs the computations on lines 12a3, 12a4, 12a5 only for the General category of foreign income (i.e., if box b is checked at the top of this worksheet). Lines 12a1 and 12a2 must be entered when applicable.

If you excluded foreign income on Form 2555, enter on line 12a1 the amount of foreign earned income excluded (Form 2555, line 45) reduced by any itemized deductions that relate to the foreign income excluded.

Enter your total foreign earned income for the year on line 12a2. This is the total foreign earned income from Form 2555 (both copies), line 26, reduced by deductible expenses allocable to that foreign earned income.

NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.

Line 12a6:

Enter the amount of any foreign taxes paid in the current year that related to a prior year's earned income in this category. The program will compute the reduction in taxes based on the prior year exclusion ratio, which is determined by the ratio on line 12a7a to line 12a7b. The reduction in current year taxes attributable to a prior year's excluded earned income will appear on line 12a8.

NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.

Line 12a7a:

Enter the amount of net foreign earned income excluded in the year the foreign earned income was earned for which the taxes shown on line 12a6 were paid. The program uses this number as the numerator of the reduction ratio for foreign taxes relating to income earned in a prior year.

Line 12a7b:

Enter the amount of total net foreign income earned in the year for which the taxes shown on line 12a6 were paid. The program uses this number as the denominator of the reduction ratio for foreign taxes relating to income earned in a prior year.

Line 12a7:

The ratio shown here represents the percentage of foreign earned income excluded in the prior year for which the taxes on line 12a6 were paid. This ratio is applied to the line 12a6 taxes to arrive at the total reduction for prior year foreign earned income on line 12a8.

Line 12a9, text line:

Enter an explanation for any adjustment to the calculation for reduction in foreign taxes allocable to excluded income.

Line 12a:

The amount shown here is the reduction in foreign taxes attributed to the foreign earned income excluded for 2022. This amount is added to the amount on lines 12b and 12c and the total is transferred to line 12 of the corresponding copy of Form 1116.

NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.

Line 12b:

Any reduction in foreign taxes entered on a Schedule K-1 will flow to the first amount field on line 12b. See Schedule K-1 reduction in foreign taxes for more information. If there are additional amounts to reduce foreign taxes, use the next two fields or Line 12c if the reduction is due to participation in international boycott operations.

Line 12b, description and amount:

Enter the description of any other reduction in foreign taxes available for credit and the amount of the reduction. See the Government Instructions for Form 1116, line 12, for additional examples of foreign tax reduction requirements.

NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.

Line 12c:

If the foreign taxes must be reduced due to participation in international boycott operations (other than any reductions reported on a Schedule K-1 which flow to line 12b), enter the reduction for this category of income here.