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karenkailua
Level 3

Is it better to get a larger refund now or carry over a larger foreign tax credit?

I tested two methods of reporting foreign pension that is not taxable in the US (by Treaty). Method 1: I did a substitute 1099R (4852) and reported the income but indicated taxable amount as zero. My refund would be $1254. Method 2: I reported the foreign income as Misc income and also reported the taxes paid and took a credit. My refund went down to $383 but I got a $2077 credit. I already have about $7000 foreign tax credit carryover from last year. I'm wondering how I'd ever be able to use it? (Would it offset future capital gains tax, or interest/dividends I earn?) I'm trying to decide whether to take the larger refund or continue to accrue foreign tax credit and hope I use it before the 10 years.
2 Replies
pk
Level 13
Level 13

Is it better to get a larger refund now or carry over a larger foreign tax credit?

I am not sure that I understand your situation  fully. What I get from your post is that you have pension from  a foreign source ( Which country) and you want the know the best way to report this .

Please could you tell more about your situation?  Are you a US citizen/resident/resident for tax purposes? 

karenkailua
Level 3

Is it better to get a larger refund now or carry over a larger foreign tax credit?

It's my husband's pension (Swedish social security) and he is a permanent resident Green card holder. Yes, I am trying to figure out the best way to report it. Substitute 1099R/4852 is easy, and I report the income and also report that zero is taxable. This is because the US-Sweden tax treaty states that it's only taxable by Sweden. So... I can simply report it, pay no US tax and do not claim foreign tax credit. Using this method my refund is $1254. And, a drawback is that I have to print and mail file, which is a giant pain because I file in three states (I have some rental properties). The other way to handle it is to report the income under "other reportable income." Here I report it as taxable and claim the foreign tax credit. I think that gives us a dollar for dollar credit up to the amount of what the US tax would be. It's less than the Swedish tax but whatever. If it nullifies the US tax then that makes it essentially untaxed income in the US, and the difference is accrued as a credit that carries over. Using that method my refund is only $383, but the TT summary shows a $2000 credit was used. (I cannot see how much is used this year and how much is carried over to next year as I'm using TT online.) The problem I am trying to work through is if I report the income and claim it as non-taxable by treaty, I get a bigger refund but am I missing out on a credit that carries over for 10 years and may be worth a lot more if I can actually use it? If I use the other method and accrue a bunch of credit, that might be a lot more money -- if I can actually apply it in future years. I'm not sure how exactly it would be applied (to offset what kind of taxes -- and do I have that kind?) so I cannot figure it out. In the future I will sell off rental properties, cash in investments, start drawing my IRA, etc -- all incurring taxes, I suppose? that could be offset by my carried over foreign tax credit. I have $7000 from last year (husband sold a lot of Swedish stuff and had a big tax bill) and if it's going to be a few thousand annually from his pension then that seems like a lot of credit and worth more than getting a bigger (~$900) refund this year. I just don't know if my facts are straight about how the credit works!
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