Foreign Tax Credit questions

[midwesterner2020]

Hello, and thanks in advance for any help you can provide!

My wife and I moved to Germany last year from the US. Since we don't qualify for the Foreign Earned Income Exclusion yet (haven't been here 330 days yet) I went through the sections in TT Windows for the Foreign Tax Credit.

Two questions:

1. It asked for country of residence in 2019. We moved during the year. Is Germany the correct entry?

2. I entered ~$2500 taxes paid to Germany for my wife's job here. But the tax credit TT showed at the end of the process was only $1351. There was a note that we qualifed for more than could be taken in one year. I did not enter any adjustments, further deducations etc - just her income and the taxes paid to Germany.

This seems strange though. Is the limit per year really as low as $1351? I was hoping the Double Taxation agreement would mean we weren't paying taxes twice, but for 2019, it appears we will pay 50% of them twice, in the hope that they can be claimed in future years.

Can anyone provide clarity on this?

[rogge1722]

With regard to the residency, I am not sure.

With regard to the 2nd issue, bring up the f1116 on the screen.  Does the $2500 appear on line 14?

What is the amount displayed on line 21?

Can you quote exactly what that "note" stated with regard to being qualified for more than could be taken?

[midwesterner2020]

Thank you so much for your response, and apologies I didn't see it until now. To answer your questions:

Line 14 does show the correct amount ($2566)

Line 21 shows $1,351, the tax credit amount I saw earlier

The message was

"You have an excess credit that can be carried forward for up to 10 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.

Your General category income tax credit exceeded your allowed credit. You may be able to carry forward or possibly carry back your excess credit to last year's return."

[rogge1722]

The wording of the message can be confusing.  I would have stated it as follows:

“You have unused foreign taxes paid that can be carried forward  up to 10 years……………………...

Your General category  foreign income tax paid exceeded your allowed credit.  You may be able ………………………"

The reasoning is that initially you owed the IRS $1351 in taxes for the same amount of income that you paid $2500 in taxes  to Germany.   At this point you are taxed twice on the same income.  After you completed f1116, the $1351 you owed the IRS is waived.  Now you are taxed only once to the German government.  This scenario is common because taxes in Europe tend to be greater than in the U.S.

The IRS uses what is called the “Overall FTC Limitation Formula” to calculate the credit to offset the  U.S. tax.

Below is the formula in algebraic form that is used in f1116.

[midwesterner2020]

Ah, that makes sense. The refund isn't for the same as the German tax amount, because the US taxes wouldn't have been as high to begin with. Thank you for the clear explanation!

[ahhlun]

Hi,

I am having the same problem of "Your general category income tax credit exceeded your allowed credit",

but my problem is, it is not giving me ANY foreign income credit at all.

I made ~40000 in Canada, and paid 6000 in tax.

I did not do the Foreign income exclusion fields.

So I expect when I finish entering the foreign tax section, the form 1116 would be generated but its not!

@rogge1722 @KarenJ2