Form 1116 Comp Wks Foreign Tax Credit Carryovers

[stikey]

In the section Carryovers from 2022, when I utilize a carryover in any particular year, Smart Check flags an error "Incoming C/O utilized should not reduce the foreign taxes below 0." This is not a problem in the next section "Foreign Tax Credit Credit Carryovers to 2024" where in any given year the amount utilized can be greater, thus creating a negative carryover. Nor is it a problem with form Sch B Form 1116 where positive and negative carryovers are okay. So in order to file my taxes, I have to "fake it" in the "Carryovers from 2022" by overriding the amount utilized, which destroys the history of my carryovers. 

This is an error in the software. The problem is that the software compares the "Utilized" to the "Foreign Taxes" in each year individually.  Since in some years the Utilized will be less than the Foreign Taxes and in others it will be greater, the error is  generated whenever it's greater. Instead, what the software should do is compare the cumulative totals. That way the positive carryovers from previous years will offset the negative carryovers in following years, and the cumulative amount Utilized will never exceed the cumulative Foreign Taxes. Thus, no false error is generated by Smart Check and I can file my taxes accurately..

I believe this must be the way the software handles the section below "Foreign Tax Credit carryovers to 2024," where negative Carryovers are allowed. Please accept this recommendation to fix the software.

[DMarkM1]

The software appears to be working for the foreign tax credit carryover.  There can never be a number in the "Utilized" (U) column that exceeds the amount in the "Foreign Tax"(FT) column.  The way the carryovers work is the closest prior year that has not utilized all the foreign taxes available is depleted first and then the next and so on.  

Here's a scenario to help explain.

2021 you paid 600 in foreign taxes but were limited to a credit of $300 for whatever reason. 

In 2022 you paid 500 in foreign taxes but were limited to a credit of 400.

Your 2023 form 1116 Comp Wks would show :

                           FT            U           Carryover

          2021       600       300             300

          2022       500       400             100

total carryover to 2023           400

Keeping 2021 the same but changing 2022 so that you got a foreign tax credit of 550 the form 1116 Comp Wkst would show this instead:

                           FT            U           Carryover

          2021       600       350             250

          2022       500       500             0

Total carryover to 2023     250

The number in the Utilized column will never be higher than the foreign tax in the first column.  

TurboTax makes these updates automatically as you transfer in the prior year return information.  As you note you will see negative numbers on schedule B form 1116 which is where the calculations are done to adjust the column amounts on the 1116 Comp Wkst so that when each prior year carryover is used up the next year amount is reduced until it gets to zero.  

[Wallace_n_Gromit]

This is my scenario:  My CPA did this for 2021 and 2022. (Calculated both AMT and Non-AMT Form 1116) I'm using TurboTax Premium for 2023. In 2022 and 2023 doing very large ROTH conversions:

in 2021 $1712 in FT and $955 in U.   Carryover was $757.  My taxable income before ROTH conversion was about  $44,000 married filing jointly.

in 2022 $1713 in FT + $757 carryover from 2021 and $2192 in U.  Carryover was $278. Very large ROTH conversion.  Taxable income was at the top range of 24% rate married filing jointly.

in 2023 $1749 in FT + $278 carryover from 2022 and $2027 in U.  Carryover is now $0.  Very large ROTH conversion.  Taxable income was at the top range of 24% rate married filing jointly.

A key point must be that the Foreign tax credit allowed is income-based but cannot ever exceed the total of the prior 10 years of carryover correct?

Your math below suggests this.  That if you ever have a carryover, you will NEVER be able to use it. and each year you have a carry over it will only get larger and larger since you can NEVER utilize more than 100% of each year's foreign tax paid as a credit.  This does not make logical sense.

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Here's a scenario to help explain.

2021 you paid 600 in foreign taxes but were limited to a credit of $300 for whatever reason. 

In 2022 you paid 500 in foreign taxes but were limited to a credit of 400.

Your 2023 form 1116 Comp Wks would show :

                           FT            U           Carryover

          2021       600       300             300

          2022       500       400             100

total carryover to 2023           400

Keeping 2021 the same but changing 2022 so that you got a foreign tax credit of 550 the form 1116 Comp Wkst would show this instead:

                           FT            U           Carryover

          2021       600       350             250

          2022       500       500             0

Total carryover to 2023     250

The number in the Utilized column will never be higher than the foreign tax in the first column.  

[Wallace_n_Gromit]

Oops!  I now think I see what you are saying.  This way, to do this math, is sooooo confusing.

So this would be my scenario then.

Your 2021 form 1116 Comp Wks would show :

                           FT            U           Carryover

          2019             0            0                  0

          2020             0            0                  0     

          2021       1712       955             757       based upon income calculation  ($955 of $1712 is U)         

Your 2022 form 1116 Comp Wks would show :

                           FT            U           Carryover

          2020              0            0                 0

          2021       1712       1434           278    

          2022        1713     1713                        based upon income calculation ($2192 of $1713 is U)     

Your 2023 form 1116 Comp Wks would show :

                           FT            U           Carryover

          2021       1712       1713            0

          2022       1713       1713            0      

         2023        1749       1749            0        based upon income calculation ($2192 of $1749 is U but only have                                                                              $2027 to bring my Carryover to zero)

Have I got it right?  TIA