Form 1116 Foreign Tax Credit Form - Worksheet Bug - Unable to E-File

[ParkNYC]

Hi,

I earned foreign interest income in 2020, which I reported on Schedule B and on Form 1116. In 2020 I did not pay any foreign taxes on my interest income though, but when I'm trying to file Form 1116 Turbo Tax asks me to check a box in Part II Foreign Taxes Paid or Accrued in computation worksheet, even if didn't pay any foreign taxes. It doesn't make sense to mark taxes paid if I didn't pay them, it wont let me E-File without checking one of those boxes. I do believe it started to happen with the latest update. I'm using TT Deluxe Desktop edition. I think the worksheet has a bug.  Am I right here and what should I do?

Thanks,

[rogge1722]

If you didn't pay the foreign tax in TY2020 but still owe the tax, you can select the "accrued" basis. But once you make that selection, you must credit foreign taxes in the year they accrue on all future returns.
If there is no tax paid or owed, then there is no need to fill out form 1116.

[ParkNYC]

This is a little bit confusing, I don't think you understood my question.

I didn't pay or owe foreign tax in 2020, but I paid foreign tax in previous years, so I have carryover tax credit, which some of it (small amount $5) I'm allowed to deduct on my 2020 tax return.

The foreign tax credit shows on my 2020 Form 1040 Schedule 3 and Form 1116 Part IV Line 35. Part II on form 1116 should be left blank because I didn't pay or owed foreign tax in 2020.

My 2020 foreign interest income is $75, which I show on Schedule B and Form 1116, but there was NO foreign tax paid or owed in 2020. Do I still have to mark any box for Paid or Accrued on form 1116 even if foreign tax was not paid or owed? If I left it blank, it would show an error and wouldn't let me E File. I have to file form 1116 because I'm taking credit for taxes paid in previous years and I'm showing 2020 foreign interest income. Thanks.

[rogge1722]

The reason  you have no foreign tax credit is because you paid no foreign taxes for TY2020.

From Pub 514:

"You cannot claim a credit for unused foreign taxes in a year to which you carry them unless you also claim a credit for foreign taxes actually paid or accrued in that year."

[rogge1722]

The reason  you have no foreign tax credit is because you paid no foreign taxes for TY2020.

From Pub 514:

"You cannot claim a credit for unused foreign taxes in a year to which you carry them unless you also claim a credit for foreign taxes actually paid or accrued in that year."

[ParkNYC]

According to my 1040 tax return I can deduct $5 foreign tax credit because in 2020 I had earned passive category income (Part 1, Line 7 calculation) outside the US. I paid no taxes in foreign country on my foreign income because I didn't have to. The Form 1116 shows and calculates $5 foreign tax credit which goes to schedule 3 (Form 1040) Line 1 and 7 and can be deducted on Form 1040, Line 20.

Form 1116, Part 2 Line 8 is blank so is Part 3 Line 9, but line 10 (carryover) shows my previously paid taxes and calculates my Foreign Tax Credit ($5) in Part 3 Line 24 which flows to part 4 line 35 ($5). If I cannot deduct my tax credit, why Turbo Tax Form 1116 shows that I can do that even if I did not pay foreign taxes on my foreign income in 2020 and uses my foreign taxes paid in previous years? It also attaches Foreign Tax Credit Carryover Statement to my Form 1040. I'm a little lost here.

[rogge1722]

It appears that TT is not aware of the disallowance of utilizing carryovers when there is no foreign tax paid for the current year.  But as you mentioned,  since neither paid or accrued is selected, there is no way to circumvent that error which is blocking e-filing.  If you want to use that credit, the only way is to paper file.

[ParkNYC]

Thanks for your replies. Do you think this is a bug, I think there is an issue with the 1116 worksheet itself. I've noticed this issue after the latest update, before the update I was able to leave Part 2 all blank, including the boxes unchecked and I was ready to file the Form 1116 and deduct the credit. I'm still not sure if the passive income carryover cannot be applied even if foreign tax was not paid in 2020. My old CPA warned me about complicity and issues with foreign tax credits. To be honest, I still could leave Part 2 blank and check one of those boxes and then E File, it should not affect my taxes. I think Intuit should investigate this.

[lesedelman]

I think you have misunderstood that language from Pub 514.

This language is taken out of context, the full context being:

Taxes All Credited or All Deducted

In a given year, you must either claim a credit for all foreign taxes that qualify for the credit or claim a deduction for all of them. This rule is applied with the carryback and carryover procedure, as follows.

• You cannot claim a credit carryback or carryover from a year in which you deducted qualified foreign taxes.

• You cannot deduct unused foreign taxes in any year to which you carry them, even if you deduct qualified foreign taxes actually paid in that year.

• You cannot claim a credit for unused foreign taxes in a year to which you carry them unless you also claim a credit for foreign taxes actually paid or accrued in that year.

• You cannot carry back or carry over any unused foreign taxes to or from a year for which you elect not to be subject to the foreign tax credit limit. See Exemption from foreign tax credit limit under How To Figure the Credit, earlier.

What IRS is saying is not that you must claim some amount of FTC in the year in which you would also like to use carryovers, but rather that you cannot elect to DEDUCT foreign taxes in a year and also to use foreign tax credit carryovers in the same year. It is completely appropriate in a given tax year to not have any "new" foreign taxes paid/accrued for that year, and to use FTC carryovers from a prior year. What you can't do is deduct "new" taxes paid/accrued for the current year and ALSO use foreign tax CREDIT carryovers from a prior year.

[ParkNYC]

I think I agree with you, If you received a foreign income and have carryover from previous years, you should file Form 1116, even if taxes were not paid or accrued in that year. I still think there is a bug and my original question hasn't been answered. My solution to the problem is: to mark "paid" box in part 2 Form 1116 and input $0,00 or $1,00 (if there was not tax paid) in Foreign taxes paid or accrued (Taxes withheld at source on Interest-Line 8). This would let people E File the return. As I said, this bug is rare and appears in my case, where foreign income was received, but taxes were not paid or accrued. This should be fixed.

[ReneeM7122]

You are correct.  You can't do both a foreign tax credit and a carryover deduction in the same year.

We'll help you decide which one's best for you.

If you choose to take the credit (most people do), we'll attach Form 1116, Foreign Tax Credit if your situation requires it.

https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit

Here's how to get to Form 1116 for 2020:

1. Make sure you've entered all your foreign income.
2. From within your return, search for foreign tax credit and select the Jump to link in the search results.
3. Answer Yes to Did you pay foreign taxes in 2020 or have credits to use from a prior year?
4. Follow the instructions to get the credit or deduction.

@lesedelman

[dreyer0730]

I have something similar: I've been a TT user for a long time and haven't had it where it is insisting that on the Foreign Tax Credit Computation Worksheet it is specified whether taxes are Paid or Accrued in Part II.   In 2011, I had income in Canada and a Foreign Tax Credit Carryover.  Each year TT has carried this over and it's never required the Paid/Accrued to be specified.  Is there any reason why it would now need to be?  Thanks

[Clairezhuzhu]

i think it is a defect, got the same rejected error and talked to online tax expert, i was told this is very common and suggested to wait for a week, then try to e-file again. 

The tax expert went through all the sections again and confirmed there is nothing wrong i did. so waiting on software updates which he said it happens every day. 

[dreyer0730]

Latest updated did nothing for this; any suggestions?

[KP96]

Hi - all.  I am also experiencing this error for the first time and unable to e-file.   The specific error I get from TT is the following:

Return/ReturnData/IRS1116/ForeignTaxCreditSource/ForeignTaxesPaidOrAccruedDt - We encountered an issue processing your e-filed return. Please review the "ForeignTaxesPaidOrAccruedDt" on Form "1116" in the section "ForeignTaxCreditSource

I have reviewed this detail with TT CPA and all my tax forms and this DOES appear to be a bug issue for this years version.   We also compared my prior years return and everything was exactly the same.  Note I did not in prior years claim a deduction and have also claimed a CREDIT.     Note in IRS rules you cannot switch between deductions or credits and you have to select one or another.   

Will continue to escalate this issue with TT for resolution.   I live overseas and do not want to mail a return during COVID times.   

[drofpsych]

I also have the error. I did not get the error before the most recent update but am getting it now. Too many bugs and errors in Turbotax. This needs fixed now.