Foreign wages and foreign tax credit calculation

[stmichael6]

I have been living and working outside the US for almost a year which is why I'm seeking to use the FTC instead of the FEIE. After figuring out entering info in the FTC section TurboTax finishes the section by stating that my FTC is a certain amount. What is this amount? it is significantly less than the actual taxes I paid in the country I live in. It's a few hundred dollars and I paid close to 12k in taxes. This is my first year at this job and have never had significant foreign income before. I was under the impression that FTC was a dollar for dollar credit, so why isn't my credit higher?  

Is it important to enter foreign income in TT's "wages & income" section? It seems like foreign income can't be entered was wages unless you elect the FEIE. I have only entered my foreign income in the FTC section.

[DaveF1006]

No, it isn't a dollar for dollar credit. It sounds like you were given a small credit and the rest is a carryover or carryback. Here is how the credit is calculated.

The IRS limits the foreign tax credit you can claim to the lesser of the amount of foreign taxes paid or the U.S. tax liability on the foreign income. The excess limit is created when the U.S. taxes on that foreign income are greater than the foreign taxes paid.

To describe more in detail, Now, you would like to know the reason why you weren't given full foreign tax credit. According to the IRS, Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources. Here is an example on how this works.

If your tax liability on Line 24 of your 1040 is $5000, your foreign income is $11,728, and your total income, foreign and US income, is $50,000. The foreign tax that can be claimed for this year is ($5000)($11,728/$50,000)=$1173. This is the maximum amount of credit that can be claimed this year. Any excess foreign tax credit can either be carried back to a previous year or carried forward for 10 years to offset any past or future foreign tax credit paid on foreign income. So if you had a $5000 credit, $1173 will be credited this year while $3827 will be a carryback or carryforward, or both.

Hopefully, this may give you insight way you weren't given the full amount of the credit. You might try claiming the FEIE to see which will give you a better return. 

[stmichael6]

Thanks @DaveF1006 , this is a really helpful response! 

Does it make any sense that line 24 is currently $0?  Turbotax does not include my foreign income (as entered in form 1116 for FTC) as part of my AGI. Additionally, TT is calculating my refund as the exact amount of taxes I paid on my US income. Seems like I have done something completely wrong here...

It looks like what is happening is that I’m being refunded all the taxes I paid and turbotax is then calculating my tax responsibility based on my taxable US income, which after the standard deduction, is around 18K. Perhaps this is why my FTC is so low. Shouldn’t turbotax be somehow combining my foreign and US income and then calculating what my tax responsibility would be in the US based on a total income then comparing it to what I paid in taxes (both to the US and to the foreign country which has a double taxation agreement with the US)?

I worked 3 months in the US (with tax deducted from my paycheck as usual) then took a job abroad and worked the remainder of 2023 in that country so I don't qualify for either physical presence (I took too many trips) or bonafide residence.

[DaveF1006]

Yes, there are a couple of things to address here.

1. It sounds like you did not enter your foreign income correctly.  Entering the foreign gross income amount on Form 1116 does not report the income as income. That amount is only placed on Form 1116 to calculate the credit. You still need to report your foreign income as taxable income.

• Go to federal
• Wages and income
• Less Common Income
• Foreign income and Exclusion

       2. If you haven't recorded your foreign income in this manner, you need to report it.

       3. This may be the reason why Line 24 is zero.

Check to to see if this makes a difference in your return.

@stmichael6 

[stmichael6]

Thanks again @DaveF1006 ! 

Solved one problem, but caused another, maybe. My refund has flipped to me owing $1800 including a late penalty of $65. This also seems incorrect. I did the calculation from your previous msg as I now have a number in line 24. The outcome of that calculation suggests I would only be credited around $2500, but Turbotax shows ~$6600 on line 20. My tax on line 16 is $10400, I paid $2000 already to the US and over $12000 to the country I live in, but can only get credited $6600. Unfortunately, I think I misunderstood how this tax credit works (assuming the point was to avoid double taxation) and now am stuck with a bill. My bad, most websites comparing the FTC and FEIE say the FTC is a dollar for dollar credit, none of them mention that there's a limitation to the credit.

Will this same thing happen next year where I won't be able to use enough credit to cover my US tax liability? I guess I will pass the FEIE tests by then but still curious...

[SusanY1]

I want to add another viewpoint here, regarding the Foreign Earned Income Exclusion (FEIE) since you state that you've been working for "almost a year" and I don't want you to miss out on the potential to save some tax dollars!

You become eligible for FEIE once you are in the other country (or countries) for 330 days out of a consecutive 365 day period.   Those days don't have to all be in the same calendar or tax year, and you can qualify for a pro-rated portion of the exclusion by filing for an extension, if it helps.  

The exclusion itself is what's prorated (not the income) so that, for example, you moved to your foreign tax home on June 1,2023 you would be eligible to file for the FEIE after April 26, 2024 and you would be eligible to exclude around $49,800 (appx) as long as you wait to file on or after April 26th.  In this case an extension wouldn't be necessary as your filing deadline is June 15 while you are residing overseas. 

If you moved November 1, 2023, you would want to file an extension of time to file to exclude around $20,000.

If the exclusion doesn't cover the full amount of your income earned abroad, you can then use a foreign tax credit for the income that isn't excluded.  

Depending on exactly when you arrived in a foreign country, you may benefit from  waiting to file and using a partial FEIE.

[stmichael6]

Thank you @SusanY1. 

This is very helpful information. Based on the way you enter trips in TT and some things I read I had thought I needed to be physically present in the foreign country I live in for 330 days, but if I'm understanding correctly, it is 330 days outside the US? 

Now, I keep getting an error related to form 1116 12a2. Where in TT do I find my total FEI less related deductions? My draft print out doesn’t show anything in form 1116 line 2, which seems like where any related deductions would be shown…..

I also noticed that on form 1116 line 3d (gross foreign source income) shows exactly double my foreign income, where do I go to correct this?

[DaveF1006]

To discover what your FEI claimed for the year is, go to line 45 of Form 2555 page 3. As far as gross income, it may have been entered twice.

• It was entered automatically from Form 2555
• You may have entered again under gross income when working on the Foreign Tax Credit section. if this is the case, remove it.

As far as 330 days, this would be the time you spent outside the US.

@stmichael6 

[stmichael6]

@DaveF1006 Thanks again! I did have my income entered twice.

In the “see how your numbers are adding up” breakdown in the right hand column it shows that I’m not getting any credits. I’m assuming this means the foreign tax credit is not being applied. Which I guess is because I cannot get a credit for taxes paid on income that is excluded? I’m still confused how system this is supposed to be helpful for someone who made under 90K usd and has already paid more taxes to a foreign country (with which the US has a double taxation agreement) than I would have paid in the US. When I fix the double income issue TT now thinks I owe about $1000 in taxes to the US, but before TT thought I was getting a refund. Does this sound logical? I don't expect a refund, but I also did not expect to owe $1000.

Also what is an example of a deduction or expense definitely or not definitely related to foreign income (lines 2 and 3 on form 1116)? I can't find an explanation of what should be considered here.

[pk]

@stmichael6 , having read through ( though a bit cursorily ) and generally agreeing with both of colleagues (  @DaveF1006  and @SusanY1  ),  I am somewhat surprised at  your situation because  I need the following information  before   providing a reasonable answer  specific to your situation  ( and not necessarily  the question posed by you  ) ---   you are legally allowed to  test different paths   and choose the one that is  best for you  from tax liability  stand point )  :

(a)   assuming that you are US person  ( citizen / GreenCard ) when did you arrive at the  foreign country?

(b) are you working for a local entity or a whole-owned subsidiary of a US  corp ?

(c) Which country are you in  ?

Note   

    (1)  that the  FEIE  ( Foreign Earned Income Exclusion ) is the  best way to exclude US taxes  on foreign income.   It is better to wait and file when you meet the  requirements of form 2555   ( unless of course you entered the foreign country  in  Nov/Dec  of the Tax year.

     (2)    Foreign Tax Credit will at most give you credit for the  US taxes levied on the income tax was also taxed by the foreign taxing authority -- no more.   Any excess taxes  paid to a foreign taxing authority is bank as a credit for use  in future ( or one year back ) but with foreign income & tax.   US can ONLY forego  the tax it would have levied on the income and has nothing to do with what you paid to the foreign taxing authority ( kind of  ).

Please answer my questions 

Is there more one of us can do for you ?

[stmichael6]

@pk thanks for your explanation. I think I found my error. I thought my taxable income looked a little higher than I expected. That's because of some capital gains I received when an investment account was moved from one bank to another. This would be the only remaining income I haven't already paid taxes on. It's ~12.5k of capital gains. 

But to answer your questions anyway:

I'm a US citizen living in Norway. I arrived here in early April 2023. I work for a local company (no US affiliation). 

[pk]

@stmichael6  Thank you for your quick reply.

As I understand your situation ----  you should be able to exclude  your 2023  earned income  from  April 2023   ( starting from the first full day in Norway , assuming you  entered Norway  directly from US to Norway ) till 12/31/2023.  You will be eligible to file  post meeting the  Physical Presence Test  --- around  April 2024.  I would have expected that all your wages  up to the maximum allowed for the tax year 2023 would be eligible for exclusion.

As I mentioned before if your spouse ( an NRA ) joins you in  filing jointly --- yes you have to  enter a dummy Tax ID for her during the preparation phase, choose file by mail,  print the forms, replace the dummy TaxID with NRA. Then  download and fill out  W-7  ( requesting a ITIN for p[ruposes of filing your return ) include all the documents required for the W-7  ( see instructions at www.irs.gov ).

Then  if your spouse has income, you have to prepare , both sign and date a request  that you both want her to be treated as a resident for the tax year.  She is married to a citizen.

On the subject of capital gain, please look at  article 10 ( I think  ) of the US-Norway tax treaty to determine  if only Norway or both get to tax  the  capital gain passive income.  This is based on source of the  income.  Cannot give you more guidance on this till you tell me more about the capital gain and the assets involved. 

However, if  both Norway and US tax the same income ( whether unexcluded earned income or passive income), under the double taxation clause  US will allow a credit for the taxes paid ( but is indeed limited as I mentioned above .

Is there more I can help you with ?

pk

[stmichael6]

@pk thanks for the info. 

At this point I feel it is this capitol gains income that is leading to the missing tax payment. I was ready to pay and submit my taxes but when TT performs a review I have an issue with one of my form 1116s. I need to provide a detailed explanation. 

It is helpful that TT finds these errors, but this interface is confusing to me. I don't know where to go in the TT questionnaire to find out the context of this question. What is a detailed explanation here and how does it show the foreign tax reduction computation for line 12?

 

[pk]

@stmichael6 , on going over this thread  and your latest post , I am totally flummoxed --- why are you having  adjustments/reduction  in  foreign  tax  ( i.e. line 12 ) -- you have to share a lot more of the situation before any one of us can help -- we cannot see your screen.   Please more about what foreign tax are you talking about --- the more you tell , the more we can understand and help.  If you are worried about privacy then you can always PM me  and  thus it will be out side the view of others.

pk