Is Turbotax incorrect in stating that the Foreign Tax Credit applies only if you have foreign income?

[luisemalloy550]

I am quite sure they are incorrect. I paid Portuguese taxes on my US income, and can take a credit for that.

[DaveF1006]

If your US-sourced income was earned in Portugal, you would need to first enter it in the following manner.

1. Click on Federal 
2. Click on Wages and Income  
3. Scroll down to Less Common Income
4. On Foreign Earned Income and Exclusion, click on the start or update button.
5. Answer the questions until you get to a screen that asks if you like to exclude your foreign-earned income. At this point, you can exclude your income up to a certain amount. if you choose to exclude your income, here will be more qualifying questions that will determine if you can exclude the income or not. 
6. If not excluded, then you can claim a foreign tax credit for the amount of income earned outside the US.

Note, you can't claim a foreign tax credit and foreign income exclusion for the same income.  Here is how to claim the foreign tax credit if you do not claim the Foreign income Tax Exclusion.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5. When it asks We just need to check if you have any uncommon situations indicate I paid foreign taxes on income I earned while working in another country. 
6. At some point in the interview, it will ask if you wish to take a deduction or a credit. If you are able to itemize deductions, you may consider taking the deduction.
7. There will be questions in the next screen asking you the description of the Foreign Taxes paid and the amount.
8. If you find that this has no effect on your tax return, you may circle-back and choose you wish to take a credit.
9. Navigate and record the entries that the program asks for and when you reach the page that mentions Foreign Tax Credit Worksheet, this is where you take notice.
10. The first that you will be asked is what category of income is it, you will say General Category Income.
11. Next screen will say Country Summary, select add a country 
12. When it says Other Gross Income - XXXX, Here you put in the Gross Amount you earned in that country. 
13. Then you will navigate through the screens until you come to a screen that says Foreign Taxes Paid - XXXX, here is where you record the amount paid under Foreign Taxes.
14. Finish out the section. 

if your income is other than wages, let us know so we can instruct you how to claim the foreign tax credit on that income.

@luisemalloy550 

[luisemalloy550]

Hi Dave, 

It was not earned in Portugal, it's just SSI and pension income. But I researched it some more, and the Instructions for Form 1116 Foreign Tax Credit does say you have to have foreign income. I did not realize that. Publication 514 Foreign Tax Credit for Individuals doesn't make that clear.  I guess that instead of deducting my Portuguese taxes from my US return, I will have to deduct my US taxes from the Portuguese return. But thanks anyway for your thoughtful response! 

[pk]

@luisemalloy550 , having read through this thread and acknowledging all the replies, I would like to address one  point.   

If you a US person ( citizen/ GreenCard ) and  have tax home abroad ( Portugal ) the pension / Social Security that you earn from US sources but also taxed in Portugal,  there being a tax treaty between these  two countries  mitigating the effects of double  taxation, you could

(a)   use "Resourced  by Treaty " for purposes of using  form 1116 .  This would / should  negate / mitigate  US tax bite.

OR

(b) alternatively  use  a similar  exclusion / credit  for your tax filing in Portugal .

You have work which gives you the better outcome.

Is there more I can do for you ?

[luisemalloy550]

Thank you so much for this reply. I saw this info elsewhere about an hour ago, and have been trying to read about it and understand it. If I want to claim a credit for tax paid in 2023, then I guess I put my 2023 income on Form 1116, though that tax was on 2022 income... but I'm afraid the IRS will think I had twice as much income in 2023 as I actually had!  and Turbotax is making it worse. So I'm also researching maybe just going the other way, and deducting my US tax payment from Portuguese taxes due this year.  Thanks again, I really appreciate it! 

[pk]

@luisemalloy550  since Portugal; uses a calendar year as tax year , I am confused as to what you mean by :

"claim a credit for tax paid in 2023, then I guess I put my 2023 income on Form 1116, though that tax was on 2022 income."

Your US tax is on 2023 income and  Portugal  tax is also on 2023 income.    Perhaps you have not completed the 2023 Portugal return.   Note that as a US person whom is abroad on the April 15th  ( US Tax Day ), yous filing date  is June 15th.  Although  the  Tax pay day still remains the 15th of April.

Hope this helps -- you can settle the Portugal return before you file the US return

Is there more I can do for you ?

[luisemalloy550]

Thanks, but I'm not sure what you mean. There is the option on Form 1116 of claiming tax accrued or tax paid. I want to deduct the tax paid to Portugal in 2023 on my US return for 2023.  (I can't do Portugal first without getting a US extension, which I don't want to do because I owe tax to the US.) 

[pk]

@luisemalloy550  sorry for not being clear ---   you CANNOT claim foreign taxes  for 2023 on taxes paid  ) to Portugal ) for 2022 tax year.  Each year stands on  its own.

As I see it  and assuming that you owe taxes to the USA, your options are :

(a)  Pay US taxes  ( along with your request for extension -- you do not need it though because you are abroad); Turbo will print out ab estimated tax  form;   this gives you time to complete the Portugal Tax filing , then you finalize the USA return and hopefully you are in a REFUND  position.

(b)  Prepare your US return based on NIL or estimated  Portugal tax, file the return  per usual;   then prepare Portugal return. Once everything is settled, you file an US amended return  with the correct Portugal foreign tax credit.

Does this make sense now or am I still being obtuse ?

Is there more I can help you with ?

pk

[luisemalloy550]

Hi pk, 

This is a critical piece of info, that I cannot claim foreign taxes for 2023 on taxes paid for the 2022 tax year.  I didn't see that anywhere in the IRS info.  Blurg. So if I want to use the FTC, I must find out what my Portuguese tax bill will be this year.

I still wonder about form 1116, declaring US income as re-sourced to Portugal under the treaty. So if my US return says $100K in US income, then I put that same $100K again on form 1116?  And it won't look like $200K in total income?  Not sure if you know the answer to this, but anyway, you are so kind to take the time to share all this information with me. Thank you very much! 

Luise 

[MarilynG1]

No, you are not declaring 200K in income.  If you report the 100K income as Foreign Pension Income under Other Reportable Income, that is where you are declaring your income on your tax return. 

In the Foreign Tax Credit section, you are just relating the amount of Foreign Tax you paid on this income to the 100K in 'general category income' you enter in this section.  It is not being taxed here again; Form 1116 is to calculate your credit.

Here's more info on Claiming the Foreign Tax Credit.

@luisemalloy550 

[pk]

@luisemalloy550 ,  while agreeing with my colleague @MarilynG1  on where and how to get credit for foreign taxes paid  for the current tax year, I would like to point out that  you  have already entered all your US income   on your US return in the appropriate boxes / line on form 1040.

Now when you go Foreign tax  credit ( under  the "Deductions and Credit tab", the  income that is resourced by treaty  would generally be equal to that being taxed by both tax administrations  (  US and Portugal ) and tax credit you are seeking  would be the amount  you paid to US ( at  most ). -- the form 1116 assures that is the case  ( even though you may put in  the actual amount paid to a foreign   tax authority).

Doesa this make sense ?

If this has  satisfied your query, please consider  as accepting the answer  and thereby the thread would be closed .   You can still add to this  and will be answered.

IIs there more I can do for you ?

pk

[luisemalloy550]

Hi, thanks for this.

I don't think I can report the 100K income, which is all SSI, US pensions, and US dividends as Foreign Pension Income under Other Reportable Income.  

And my understanding was that on Form 1116 I have to check 're-sourced' not 'general'. 

Am I misinformed?  Thanks. 

[luisemalloy550]

Yes, I think that is the answer I needed. Thanks again!!