Foreign Tax Credits - 2020 Retuen
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Level 1

Foreign Tax Credits - 2020 Retuen

My tax returns are usually simple.  My wife and I are retired and have only Social Security and 401K income.  We own our home so have no mortgage and consequently we take the standard deduction.  We haven't bought or sold stocks in years and we have no other investments.

 

Last year we sold a piece of land in Canada and that has complicated things!  I know I can take a Foreign Tax Credit on the capital gains tax we paid to Canada on closing so I've been filling in the Form F1116 using Turbotax Premier.  The only documentation I have is the statement I received from my Canadian attorney.  Stepping through TT's instructions I have entered the Income type from the capital gain as Passive income.  What I don't understand is the page where I can enter "Definitely Related Expenses".  If I enter things like the Canadian realtor's and attorney's fees here my Federal Tax Due increases.  I would have expected those expenses to have been deducted from my Gross Income from Canada and therefore decreased my US Federal Tax due.  What am I missing here?

 

Thanks for any insights.

4 Replies
Employee Tax Expert

Foreign Tax Credits - 2020 Retuen

Because your foreign taxes paid was based on a certain income level. if you report these deductions, that certain income level will drop and reduce your tax liability on that income. As a result, your foreign tax credit would be reduced thus increasing your federal tax due.

 

Those deductions would come in handy if this was foreign earned income because it would produce less taxable income but capital gains are considered passive income thus none of these expenses can be applied.

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Level 1

Foreign Tax Credits - 2020 Retuen

Thanks for your reply but the foreign taxes I paid to Canada weren't based on my income.  Canada assesses a 25% tax on the gain from a real estate sale like this.

 

I'm probably still missing something!

Employee Tax Expert

Foreign Tax Credits - 2020 Retuen

What I suggest is to add this as a selling expense when you report your proceeds.  What it will do is reduce the proceeds thus reduce the capital gains on the sale of the land.

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Level 1

Foreign Tax Credits - 2020 Retuen

Thanks again but that's what I've been doing.  Stepping through the TT instructions I enter my capital gain as "Other Gross Income - Canada".  The next page lets me add "Definitely Related Expenses - Canada" and when I make an entry amount there my Federal Tax Due goes from $626 to $1217.  This is what I don't understand.

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