Why i dont get the full foreign tax credit

[Rick9464]

Couple of things:

1.  I generally get a 1099div that reflects (in addition to other things) foreign income and foreign taxes paid from a Corporation and Mutual fund.  They combined are more than the $300 used for single filer, but the company is located in Germany and is generally around $500 and the Mutual is generally about $50 in Foreign taxes.  However when I compute thru turbo tax the form 1116 only takes a percentage of that $550 and applies as a credit and the balance to a carryover column.  I presume this is because I am over the limit as a single filer but wanted to know if I am right or is there another reason??

2. AS explained above, I know to follow the special rules by doing the largest income/tax entry first followed by others.  Mine is all passive income in dividends. So I do the company first followed by the Mutual which I label as "RIC".  I tried to follow TT prompts and got form 1116 to show both as titles in column A and B.  Problem I had is that after completing for Column A (largest) TT did not ask me any questions to continue making entries.  When I tried to redo the process, it actually started over again for just the company (column A) and in the end TT never allowed me to follow their prompts to enter info for the RIC or column B.  So I had to go to the worksheet to manually enter that information.  Does anyone know what I might have been doing wrong?

3.  The foreign income is listed as ordinary income on the form.  Should it be listed on the next line as "qualified"?  For my own purposes, I moved the income information to that line and it did not change any of my data.  Essentially I deleted it from Ordinary and listed it as Qualified.  Is there a reason TT automatically puts the foreign income in the Ordinary Line vs the next line as Qualified?  Again when I made the change, it did not change my return any.

4.  Lastly, for the last 3 years now, I have accumulated a "carryover" because of the single limit.  Previously, I was Married which gave a 600 limit, but she passed putting me into single status.  This carryover never seems to be incorporated into my return and used.  I tried to read and find out how to use it cause I've now accumulated $800 over the 3 years now.  Does anyone know how I can use them as they give you 10 years to use them?  Can it only be used in the event I have a balance due?  and  Is there any information I can read or copy that will cover how to use up these credits.  That's a lot of money that I paid in foreign taxes that just sits in the carryover column in TT.  Any ideas?

I apologize for the length, but TT did not follow the process they detailed in all their Help information as to how the program would handle this category,  So for the last 2 years I have had to go into the worksheets to make the RIC adjustments.  So I would appreciate anyone's' understanding of how TT works or tell me what I am doing wrong.

[rogge1722 · Accepted solution]

In the past, you were making use of the exemption.   TT will by default use the exemption if it is feasible.  That is $300 single, $600 married filing jointly. No f1116 was required to be filled out and filed.

TT can only serve one country per 1099-div. for the FTC interview. If 2 or more countries have foreign taxes in box 7, then you have to create a fictitious payer to use the step by step interview.   However, you can in Forms Mode do it yourself for the 2nd payer as you have done.

The order you are referring to only applies to 2 or more copies of the f1116. There is no order with regard to the columns within a f1116.

The qualified dividends  & LTCG in line 1h of the f1116 wks. is rarely used. It requires an entry for 2 possible reasons. 
1. If the foreign dividends and LTCG are $20,000.00 or more.
2. If on the 1099-DIV, box 1a is less than the sum of box 1b +7d.

Having carryovers is very common.  It is because the foreign taxes paid are greater than the FTC limit.
In order to reduce carryovers, the following strategy can be used.

This is an extreme case, but it shows what can be done.
You purchase dividend paying stocks from those countries that do not withhold taxes. There are about 20 of them such as the U.K., and Hong Kong.  These dividends are foreign income and as such will create a FTC limit amount. Since there are no foreign taxes for the present year, TT will draw from the carryovers to max out the FTC limit. This can be repeated yearly until the carryovers are eliminated.

Foreign tax credits like any other credits are subtracted from the tax owed up to the point where the tax owed equals zero. So be aware of that limitation.  What can’t be used would be carried over.

[Rick9464]

so Rogge, if at the end of my taxes, I would have had a bal due, the program would have used those Foreign credits up to the point of satisfying that balance that would have been owed.

Would like to ask you something else.  This year I had to file pg 1 of 2210 underpayment of est. taxes. Don't know what the difference is because I've been filing this way for a while now with no problem.  I know there is a penalty if you don't pay at least equal to last years taxes or 90% of  this years.  I have withholding from my pension and p/t job, but not from SSA.  I appropriate that every quarter thru the estimated tax payments.  Also in this process, I pay a percentage (that I have done the same for years) toward higher value savings accts and my p/t paycheck.  Basically, I appropriate quarterly estimated taxes on most of my funds.  The exception is div and interest for my brokerage acct.  However that being said, every Dec end of the current year I tabulate all the actual div and interest thru Nov and pay the percentage I apply to all my quarterly payments.  Currently I appropriate 13%.  Then I estimate Dec based upon the previous years broker statement because in Dec, that is when everyone declares their capital gains in that acct.  So basically, I calculate actual div and interest thru Nov and estimate Dec and pay 13% of that amount before the end of the current year.  Been doing this for years and never had TT generate the form 2210.  In fact this year, the amount I calculated was within 500.00 of the actual and I paid 13% on it.  Now I saw for this year there was some type of waiver using 85% that was checked off.  So now I am wondering if I am gonna be taxed the penalty.  With my withholding and the estimated payments, I actually overpaid by 1100.00.  So I am confused why I would even see a underpayment form.  I got a refund.  Admittedly my 4th quarter payment is the highest because of how I calculate (waiting to make 1 payment for that broker acct for all my div, int and cap gains, but I pay the tax.  AGain, I am getting a refund.  So I am worried about getting a penalty for 2018 and now wonder about '19.  What am I doing wrong that a form was generated this year (after never having the underpayment form generated in any other year despite using the same process)?  If I am doing something wrong, what might you suggest I do differently for '19 to avoid this form being processed again.  Confused because if I actually appropriated the necessary funds to the IRS for the year and am getting a refund, why at all would this form ever be generated.  I would not have underpaid my taxes so I would not expect a penalty.  Hope you can help clarify this for me as well.

[rogge1722]

I am not familiar with the issue of estimated payments and form 2210.  I suggest you submit this as a new posting.