Foreign tax credit - how do I make sure to have the full amount credited

[peric_danijela]

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.

[Mike9241]

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

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Turbotax is doing the calculation correctly. Your real issue is the US tax laws. 

marginal US tax rate 32% so you end up paying