How do I proceed on the question of Simplified Limitation Election for AMT?

[3686707]

It would be greatly appreciated if someone could help and guide me on the following...

I am filing my 2023 federal tax return and while trying to work on my deductions & credits, specifically for Foreign Tax Credit, I am being asked about Simplified Limitation Election for AMT when I am trying to take tax credits. Meanwhile, this is the first year I am taking tax credits as previous years, though I had foreign earned income but the entire amount could be excluded resulting in not having the need to take the tax credits. 

Every year I will have mainly two income categories to report in Form 1116 and for 2023 I have the following categories : 1) Foreign Earned Income as General category income which I have excluded under FEIE and 2) Interest earned from foregin bank accounts as Passive catergory income.

In this case, how should I proceed with the following questions regarding AMT?:

- Again I have not been asked this question in previous years, so I believe it's the first year I am eligible for the election but I would like to get some feedback on this.

- After selecting first year eligibility, I am asked the following question: "Elect Simplified Calculation" vs. "Other Calculations". Frankly I am lost here as both answers take me to Form 1116 and I can still take credit and resulting in no difference in my tax amount due.

I hope my inquiry makes sense, in case of any clarification needs, please let me know in the comments.

Thanks,

[3686707]

Thanks for the referral, and hope to hear back from @Mike9241 soon!

Enjoy your day!

[Mike9241 · Accepted solution]

can't tell you in your particular situation whether the Simplified AMT FTC calc or more complex AMTFTC is better for you. the simplified method results in the same FTC for AMT purposes as for regular income tax purposes so there is only 1 form 1116 in your return. the AMTFTC is calculated by figuring the FTC limit considering only income and deductions allowed for AMY if so elected there will be two 1116s in your return

the simplified method must be elected for the first year the taxpayer claim an AMTFTC. The lection cannot be changed in future years without IRS consent.  

[3686707]

Hi @Mike9241 thanks for the input despite your busy schedule.

As I am not an expert, I may not have understood your answer completely but allow me to ask whether my understanding is correct:

1. Electing the "Simplified Method" for the AMTFTC uses the same calculation as the regular FTC for the AMT, meaning I will have only one form 1116 in my return.

2. The "Other Method" which is the more complex method calculated the AMTFTC separately by consdering only income and deductions allowed for AMT purposes and if I choose this I will have two 1116 forms in my return?

3. Just to clarify, since this is the first year that I am claiming the Foreign Tax Credit (FTC), I am eligible to make an election between, "Simplified" vs. "Other" and although you are indicating whether one of the other would be better for my situation, but I must elect the simplified method as it is the first year I am clamining the AMT FTC? Sorry that I am bit confused here...

4. Since the decision on election can not be reserved unless an IRS consent is given allow me to ask the following question:

- It is very likely that my income situation may not change for the coming years. Again, I confidently expect that there will be two sources of income - General/Passive. 1) General - which will be the main source of income in the form of a foreign income which I pay/accrue income tax since I work and reside in a foreign country and 2) Passive - interests gained from foreign bank accounts which again I pay taxes on. These are the sources for taking the foreign tax credits in the first place.

- As mentioned in my original post, the reason I am claiming FTC this year is due to Foreign Earned Income Exclusion (FEIE) not fully covering my foreign income. But I am curious to know whether if I have gained lower general and passive income in 2024 and expect that it would be fully excluded under FEIE, how will AMT and its reporting work? Is AMT only relevant when I have foreign tax credtis to claim? So if in 2024 I have no foreign tax credits as the FEIE covered to exclude all my foreign income, I would like to be required to report anything related to AMT?

Sorry for the rather long message and I hope the queries make sense, if not, please do not hesitate to ask for clarifications.

In addition, one side question: I am being asked to provide a detailed explanation on "foreign tax reduction" as below screenshot:

Could you shed a bit more light on your experience on this explanation? Can I just say "None"?

Thanks again for you or anyone's support.

[Mike9241]

Just to clarify, since this is the first year that I am claiming the Foreign Tax Credit (FTC), I am eligible to make an election between, "Simplified" vs. "Other"

YES your choice the first year

and although you are indicating whether one of the other would be better for my situation

I don't know which is better. You have to determine this by first selecting one method and then going back and selecting the other method. Turbotax should do the calculations automatically. once the basis FTC info is entered. if you are due are refund, the method that produces the highest amount on line 34 or if you now owe the lowest amount on line 37 of your 1040 is best for the current year. If you are not in AMT the method doesn't matter. The issue with selecting either method is you are now locked in.  While you can be certain the first year. After that it's really a guess as to which will be better in the future.

[3686707]

Thanks for the swift and candid feedback, @Mike9241 

I believe I will not have any refund, and it seems that both options (Simplified vs. Other) show same taxable amount, hence will most likely select simplified method.

By chance, would you or anyone in the community be able to share any insight on the inquiry regarding detailed explanation "foreign tax reduction" for form 1116?

Thank you.

[3686707]

@Mike9241 nevermind the above question as I was able to better understand that if I did not receive any reduction in my foreign taxes - which is the case for both the foreign taxes I paid/accrued on my foreign income and foreign interests earned so I will just state something along the lines of, "No reduction in foreign taxes" or "All foreign taxes paid were at the standard rate with no reduction".

I hope this is the right case, but feel free to comment, if any.

Thanks.