Foreign Tax Credit, Form 1116, and High Tax Income

[urban1960]

1. When filing form 1116, I notice a discrepancy in $ amount reported in Item A (Gross Income from All Sources Wksheet) and the amount reported in 1040 line 11b. The discrepancy is on the order of $700 approximately and I am not able to trace it to any worksheet.

1. I also notice that the software does not seem to be checking for high tax income kickout criteria and generating two form 1116s (one for passive income and another that spills over to general category) as stated in IRS guidelines. 

In my specific case, interest income was $ 1972 and tax was $464. I also had capital gains from sale of property of $71,802 and tax was $ 36,871. That tax rate on capital gains is far above the US rate.  My US taxes computed from all sources is $35,372.  All help appreciated.

[pk]

@urban1960 ,  So you are saying that the HTKO  ( general category addition ) did not come into effect --yes?  Or are you saying that there are other issues with the Foreign Tax  Credit computation ?

Please could you provide more details including the following:   ( not that I cannot see your  return -- I am a volunteer )

(a)  Your  sale of real asset -- which country,  the gain computed  by that country,  gain computed by the US under its  laws, any special situations, how did you acquire the asset ( buy, gift, inheritance etc. ), how did you use the prop. ( your home, rental income etc. )

(b)  Should one assume that you are a US person ( Citizen/ GreenCard /? ) and that your tax home for 2025 is US or what ?

(c) Generally  ( approx )  world  US income, Foreign source ( and categories) income , countries involved  or RICs or what ?

I am asking for all this info  ( you can add to this thread or PM me -- just NO PII -- Personally Identifiable Information ), because  absent something very obvious , I will need to simulate the case and see why Turbo is mis-behaving.   Please will you help ?

pk

[urban1960]

Thanks, PK.

Yes, I believe that the HTKO did not come into effect. I believe Turbotax needs to generate two Form 1116's fot this situation but I am seeing only one.

Country - India

My status – US Citizen; My tax home from 1995 – present is the US.

Country of sale– India

Capital gains (Passive income – is likely to be reclassified as high tax income and moved to General category based on my reading of Form 1116 instructions)

Property was used as residence by my mother who passed away in 2018.

I owned 50%.

(Gross proceeds – $ 170,100; original basis - $38,000, and adjustment in colum g 8949-$ 93,332). Original basis was as of 1995 for this portion.

I inherited another 16.67% on her death in 2018.

(Gross proceeds – $ 56,813 ; original basis - $23,779, and adjustment in column g 8949-)

Basis was as of 2018 for the inherited portion.

Totally, capital gain was 38,768+ 33,034 = $ 71802

Tax withheld - $36,871

Other foreign income (Passive Income Category)

Interest - $1972; Tax withheld - $464

Worldwide Income – $ 264,000;

Foreign: $ 73,774

My US tax liability without FTC - $35,732

Let me know if you need any other information

[pk]

@urban1960 , thank you for your response.  Please give me  a little time to digest your details, duplicate your scenario and come back to you by mid-day tomorrow  ( PDT).

pk

[pk]

@urban1960 , On going over your post, I am assuming the following ( please  confirm and/or edit :(

1. The asset was bought for US$38,000 and held by you and your mother ( NRA)  on a 50-50 basis.  Thus  the basis of your portion of asset US$19,000

2. On the passing of your mother, in 2018 , her basis  of US$19,000 was stepped up to  ( US$19,000 + 93,332 ) US$112,232.    Is this what you meant or am I mis-reading your figures.  See my assumption #1.

3. You are a 1/6the inheritor of your mother's asset  and so your basis  in that 50% is  US$112,232/6 = US$18,705.  Only the decedent's  portion gets a step up and only for US purposes.

4. The sales proceeds distribution  therefore would  be:        (a)  your 50%  gets US$170100 /2 = US$85,050       (b)  your  1/6th  portion gets  (85,050 / 6)   ----->  US$14,175. 

Does the  make sense  or what am I missing ?

Also note that TDS is not a good figure to go by --- you should wait till  IT return has been  filed and agreed to -- else you may have to file an amended return.  AS far as I am aware India still allows  a 20% tax  rate with indexation  or 12.5% with no indexation  ( Sitharaman's  last stance )  and most  CAs seem to be going for the 12.5%  without indexation, but your case may be different.   This also means that HTKO may not be applicable and in any case if all your Foreign Source income is  Passive , then moving to general category does not help.

Please respond and I will try and work on this  a bit more .

Namaste ji

pk

[urban1960]

Thanks PK.

You are right that the tax in India is yet to be finalized. All I have is the TDS withholding for now.

1. The final tax in India is expected to be $22,000 as per my CA in India. If I wait until the tax in India is finalized, can I still take the credit next year or a couple of years later? 

2. I have already adjusted the basis etc. So the numbers I gave you can be used as-is.

[pk]

@urban1960 , thank you for being so patient with me .  However, I am not sure we are on the same page -- see my  figures above.

I am ( and  you should also ) look at this transaction as two separate transaction --- like owning a duplex and then swelling the whole building.  What I see :

For US purposes :

For your portion of asset :

         1. An asset owned by you  with a basis of US$19,000  ( half of the building original basis of US$38,000 ).

          2. You sold this for US$85,000  ( half of  the selling price -- US$170,000 -- for the whole  property ).

         3. You US gain therefore is  US$66,000.

For inherited portion of the asset :

          4. The stepped up basis is   ( original 19,000 plus step-up 46,667 --- 1/2 of the step up show on your post -- only mother's portion gets step-up )  US$65,667.   Does this make sense  or am I mis-interpreting the situation.  Please give me the  best  FMV of the property at the time of passing of your mother and only her portion gets step-up.

            5.  The sale proceeds  attributable to this  is US$85,000. 

            6.  Thus total gain for all six of you is  85,000 - 65,667 = 19,333.  You share of the  gain ( 1/6th.) is  US$3223.

Does the above make sense ?

For Indian purposes and assuming NO INDEXING,  

          7.  You say the total Indian Tax is expected to be US$22,000 --- for which part .  AS I see it 

                      (a)   Using original basis of  US$38,000 and a sale price of US170,000--- total gain is  132,000. Therefore at 12.5%, the tax levy should be somewhere like  US$16,500.

                      (b) Assuming that is correct  your share of the  Indian tax  = US$8250 + US1375  ( for the  1/6th of the mother's portion )-- a total of  US$9625.

So my figures must be wrong -- it is too far from your figures -- what am I missing.

Please could you follow my method of dividing up the prop. into two sales as above.

In any case , I don't see why you need HTKO --- please can you help me with your understanding--please ?

Namaste ji

pk

[urban1960]

Thanks, PK for all your hard work. Apologies for the late reply. I was traveling.

I have decided to wait for the taxes to be filed and then file for FTC using an amended return, hopefully next year.

I have noted all your comments and will take them into consideration. You are right, this is not a HTKO situation.

Namaste ji.