Foreign Tax Credit - nothing is being credited

[TheresaSiev]

Hi,

I moved to Hawaii last year from Germany and am filing my taxes as a resident alien. I do still have a job in Germany that I payed taxes for (1,370). I did not file for an exclusion of this income. I have entered the income as foreign income, and the taxes payed under deductions and credits --> foreign tax credits and chose  general category income (it is an income from wages, and the taxes are already paid). I do indicate the taxes paid. and then I receive the message: 

Excess Foreign Tax Credit

You have an excess credit that can be carried forward for up to ten years to reduce your taxes. In some cases, you may also need to carry back this credit amount to last year by amending last year's return to claim an additional refund. Learn More

Your General category income tax credit exceeded your allowed credit by $1,370.

For Alternative Minimum Tax (AMT) purposes, your General category income tax credit exceeded your allowed credit by $1,370. and when I look at the amount I owe, it hasn't changed, and in the payment overview there is nothing being credited. Does anyone know what the problem might be? Thank you!

[AmyC]

You are clearly not getting the foreign tax credit so let's look at the rules.

The formula the IRS uses on Form 1116 is roughly:

Max Credit = (Foreign Taxable Income divided by Total Worldwide Taxable Income) times Total U.S. Income Tax

It doesn't sound like you are using treaty income to claim this. Simply foreign income and foreign tax. You could use the foreign earned income exclusion but not with the foreign tax credit. If you are working in the US, there are extra rules that may disallow the credit, see employee.

If you truly don't qualify this year, it will carry forward. However, you may want to look into the foreign earned income exclusion instead.

Don't forget about FATCA and FBAR while filing. Here is a comparison of the FATCA (Form 8938) and FBAR requirements.

Reference:

Pub 514

Form 1116

Form 1116 instructions

HI sch CR

Welcome!

[TheresaSiev]

Hi Amy,

thanks for your reply!

As my income falls under the 'wages/general income' category, it looks like it should apply, doesn't it?
I did indicate that Germany and the US have a tax treaty. What else could I do to 'use the treaty income to claim this'? It seems as though my foreign earned income and foreign paid taxes are not being linked.

I am mainly wondering because my tax liability increased after I reported the German income, but it doesn't decrease when I enter the taxes paid. The income from Germany is not high, so it seems like it should be taxed at a much lower rate here in the US, or even below a threshold. Alternatively, my taxes paid in Germany should at least be credited.

FEIE does not apply to me, as I lived in the US for more than half of last year.

Thank you so much for your help,

Theresa

[DaveF1006]

Putting this in perspective, here is what might be limiting your credit. Your Foreign Tax Credit is determined by multiplying the US tax rate by the ratio of Foreign income/total income from all sources.  With this in mind,  the standard deduction may have wiped out your US tax liability for this year.

If your total income (U.S. + Foreign) is relatively low, your Standard Deduction might have already reduced your U.S. tax liability to zero. Since the Foreign Tax Credit is a non-refundable credit, it can reduce your tax to zero, but it cannot give you a "refund" of money you never owed the IRS in the first place.

Even if you believe that your tax liability increased after you reported the German income, it may have been enough to break the income threshold where income exceeded the standard deduction. 

@TheresaSiev 

[TheresaSiev]

Thank you! But why would be my US tax liability be several thousand in that case?

Please excuse my confusion..

[DaveF1006]

I can't say for sure based on the information given. I would like to order a diagnostic file to look at your return to specifically see why your foreign tax credit is being limited. The file is a sanitized file that has only numbers and is stripped completely of your personal information. Here is how to send.

TurboTax Online

Sign in to your account and open your tax return (if you’ve already "filed," you may need to click "Add a State" just to force the return back open—don't worry, it won't actually add a state or charge you).

1. In the left-hand menu, select Tax Tools. 
2. Choose Tools from the dropdown menu.
3. In the pop-up window, select Share my file with agent.
4. Click OK to agree to the "sanitizing" process.
5. Important: A 7-digit Token Number will appear on your screen. Send this to us in this thread.

TurboTax Desktop (CD/Download)

1. Open your tax return file in the TurboTax software. 
2. Look at the very top of your screen in the black navigation bar and select the Online tab.
3. Choose Send Tax File to Agent.
4. A message will appear explaining that personal info will be removed. Click Send or OK.
5. Wait for the process to complete, and a 7-digit Token Number (e.g., 123-4567) will be displayed.
6. Let us know that number in this thread.