Foreign tax credit on dividends

[taxnovice15]

In each of the past two years, my wife and I (we file a joint return) have paid slightly more than $600 in foreign taxes on dividend income.  As a result, Turbotax has instructed us to file a Form 1116, with the result being that our allowable tax credit has been less than the amount we paid (and less than the $600 limit allowing one to report the credit directly on Form 1040 without filing the Form 1116).  This has produced a seemingly anamolous outcome, in that had we paid less in foreign taxes (say an amount slightly less than $600), we would actually have received a larger credit.  This year, our foreign taxes on dividend income was $560, but Turbotax is again directing us to file a Form 1116, presumably because we have a carryover of foreign taxes of $96, which again puts us in excess of the $600 limit that allows one to avoid filing a Form 1116.  The result is again anamolous, as our allowable credit is about two hundreed dollars less than we would have received if we could have simply claimed the $560 on Form 1040.  My question is (and I aplogize for taking so long to get here) whether we can ignore (or waive) the $96 carryover and simply claim the $560 we paid on Form 1040, and if so will we have to do an override to accomplish that and whether that will precude an e-filing by Turbotax.  

[RobertB4444]

You can over ride by deleting the 1116 with the carryover but by doing so you void the TurboTax guarantee on your return.  Unfortunately, the 1116 is on file at the IRS and whether this would cause a delay in processing your return or cause the IRS to adjust your credit I don't know.  But you should still be able to efile.

@taxnovice15 

[rogge1722]

If you qualify for the exemption but have carryovers, TT by default will not use the exemption. If after the calculations the credit on form 1116 line 35 is less than the exemption, you can elect to use the exemption in lieu of the calculation.

To do this, in Forms Mode, bring up the form 1116 worksheet. Scroll down to the header "Foreign Tax Credit Carryovers".  At the bottom of the box for "Carryovers from 2021” in the cell to the right of "Carryover to 2022", put the pointer over the cell and right click. On the popup box select click on "Override" and delete the entry. After that the cell will be yellow and blank. Now if you check form 1116 line 35, it will now display the exemption amount and to the left will be the statement "Do Not File Form." You are done.

[taxnovice15]

Thanks.  That's very helpful.

[taxnovice15]

Your answer unfortunately does not answer my basic question of whether I am legally entitled to forgo the carryover and simply claim the exemption.  By contrast, the other responder (rogge1722) seems to believe that is the case: "If after the calculations the credit on form 1116 line 35 is less than the exemption, you can elect to use the exemption in lieu of the calculation."  It would be very helpful to know whether turbotax agrees with that statement.  Similarly, I cannot see the fairness of turbotax voiding its guarantee if I exercise an option to which I am legally entitled but which the turbotax program fails to afford me.  In the final analysis, I am not trying to deprive the government of money to which it is entitled.  It's just that it strikes me as illogical and unfair that by using a $96 carryover I wind up with a tax credit that is $225 less than if I did not use it.  A more detailed response from you would be appreciated.  Thanks

[DMarkM1]

Yes, you make the election to claim the foreign tax without filing the form 1116 for the taxes paid/accrued in the tax year. In fact if you make the election to claim the FTC without filing form 1116, you cannot carryover any amounts into or out of that year.  This is assuming you meet the qualifications for the election. 

Click here for the form 1116 instructions.  See the topic "Election to claim the credit without filing a form 1116." 

In TurboTax in the step-by-step mode revisit the Foreign Tax Credit topic and click through to the "Carryover/Carryback" section.  Select "Yes" and delete/blank out all the boxes there and on the AMT carryover page.  Be sure to note the amounts and boxes you are blanking out as those carryover amounts can be used for other future years should you not make the election in those future years.  The 10-year clock is still ticking and unchanged for the carryover amount.  

In the "Forms mode" you can also delete/blank out the carryover tables on the Foreign Tax Comp Worksheet.  The entries/changes on these tables are user inputs and not overrides that void the guarantee.

[RWReiterJr2]

My situation (for TY2023) is similar to that described (for TY2022) in the original posting by taxnovice15 on March 2, 2023.  That is, required in a prior year to file Form 1116 (resulting in a foreign tax carryover), but qualifying in the current year for the Form-1116-filing exemption, TT defaulted to not using the exemption and filing Form 1116 (although none of the carryover was utilized!), resulting in being limited to claiming a smaller (by about $200) foreign tax credit for the current year than if I had made the appropriate "adjustments" within TT (as described in the reply posting by DMarkM1 on March 8, 2023) to effectively exercise the exemption election and not file Form 1116  (and also be prevented from applying/creating any carryover to/from  this year, which wasn't useful anyway!).  In a rush to file on time, I didn't notice this situation until later careful review and only then discovered this pertinent thread in the Turbo Tax Community forum. 

My motivation in posting this reply is to (hopefully) warn other users of a situation that seems potentially widely applicable and to suggest that Intuit be encouraged to enhance their TT product's step-by-step mode for future years in order to detect this situation proactively, bring it to the user's attention, and offer a clear choice whether to exercise the exemption election or to file Form 1116.