Hello experts,
For the 2023 tax year I was liable to pay income taxes in another country (Denmark) on a portion of my income, even though all my income comes from a US company. This is due to how Denmark taxes stock awards that are granted while working in Denmark, but vesting after leaving.
This resulted in around $10.000 of my income being subject to income taxes in Denmark, which translated to $4.300 in income taxes paid in Denmark.
However, this income was also fully included in my W-2, and therefore in principle taxable in the US as well.
When claiming this credit on my US taxes through form 1116, the limit up to which I could claim a credit was only around $2.000, as this was only a small portion of my total income. My total gross income puts me in the 32% bracket, so this effectively feels like I paid taxes on this portion of income twice - once at the 43% income tax rate in Denmark, and then additionally another 12% in the US (as only 20% was credited).
I will be in a similar situation the next couple of years, but the income portion taxable in Denmark will be gradually decreasing.
How can I ensure I fully utilize the foreign tax credit and not pay an effective tax rate of over 50% on this income?
As I understand it, the foreign tax credit can be rolled over to next year, but I don't understand what good that will do as I will still have to pay the tax in Denmark, and will still not receive a full tax credit for this in the US as this income will be an even smaller portion of my total income.
Thank you in advance for your opionions and advice.
You'll need to sign in or create an account to connect with an expert.
the long and short of it is, that in the US you only get credit based on the average, not marginal/effective taxes you paid on that foreign income. So while that foreign income might be taxed a 32% in the US when added to all your other income; if on average you paid only 25% in US taxes on your income. you are only going to get a less than a 25% credit on form 1116 because first some of your itemized or standard deduction is used to reduce the foreign income - line 6 of form 1116. Please review it. The rest becomes a carryover. There is also a 1-year carryback if you have foreign income of the same category (general) in the prior year provided you have not already maxed out the FTC in 2022. I have worked on many clients that have huge FTC carryovers because of how the US FTC is calculated.
a made up example
Denmark you paid $4300
US $10000 foreign income is reduced by $500 for standard or itemized deduction net $9500 (form 1116 line 7)
average us tax rate 24% (form 1116 line 20 divided by line 18) times $9500 = about $2300 in FTC
US marginal tax rate 32% on $10000 = $3200
so net US taxes $3200-2300 = $900 + Denmark $4300 = $5200 with a FTC c/o of $2000
***
Turbotax is doing the calculation correctly. Your real issue is the US tax laws.
marginal US tax rate 32% so you end up paying
Still have questions?
Make a postAsk questions and learn more about your taxes and finances.
tabismith
New Member
Jax02
Level 1
msbjenks
Level 1
Terra
Level 3
basherd
New Member
Did the information on this page answer your question?
You have clicked a link to a site outside of the TurboTax Community. By clicking "Continue", you will leave the Community and be taken to that site instead.