Just received Canadian refund after claiming foreign tax credit in prior year

[golfperfect1]

I am a U.S. citizen living in the U.S.. In 2017, I performed some W-2 work in Canada for which I was paid, and the income was included on my U.S. W-2, but Canadian withholding taxes of $2,000 CDN ($1,500 USD) were taken out of my pay.

I claimed a $2,000 USD (my mistake for not converting CDN to USD, see below) foreign tax credit on my 2017 U.S. 1040 return, and did not file a Canadian tax return. About 6 months ago, Canada contacted me to file a 2017 Canadian return, which I did, and I then received a full $2,000 CDN refund, plus some refund interest.

A similar situation occurred in 2018, the sole difference being that on my 2017 U.S. return, I would have owed a small amount of additional tax on my U.S. return if I had not claimed a foreign tax credit. In 2018, I would have received a small U.S. refund, even without the foreign tax credit being claimed.

My questions are as follows:

1. In claiming a foreign tax credit on both my 2017 and 2018  U.S. 1040, I mistakenly used the $2,000 CDN instead of converting It to $1,500 USD for purposes of the credit. Should I file a 1040-X amended return to reflect the corrected $1,500 USD credit and pay the $500 USD credit overstatement with the 1040-X?

1. Because the Canadian refund I just received (plus the correction of the CND to USD above), reduces my correct foreign tax credit for each year to zero, should I file a 1040-X amended return reflecting the correct zero credit, plus also send the IRS the full amount of the Canadian refunds sent to me?

1. Finally, does it matter whether I would have originally been entitled to a refund or owed additional tax without taking into account the foreign tax credit?

[tagteam]

@pk

[SusanY1 · Accepted solution]

Prepare an amended return for each year, but only file the return(s) that show a balance due.  This is the most accurate way to see whether or not it is necessary to amend the return. 

Pay any balance due when you file your amended return.   

For any balance due, you will also receive a bill for penalties and interest from the IRS at a later date.  It can take many months for the IRS to process an amended return, so it may be a while before you see that bill.  The refunds from Canada are yours to keep, you don't send them to the IRS.  

You can learn more about filing amended returns here: How To File an Amended Tax Return.

[Mike9241]

other years might be affected if you had a foreign tax carryover arise in 2017 or 2018 that resulted in a carryover to 2019 and future years.

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[pk]

@golfperfect1 , while absolutely agreeing with @SusanY1  and @Mike9241 , just let me add one more point --- the interest  that Canada paid you on the returned amounts  are recognizable  as income ( for US tax purposes ) in the year in which you received the  income not the  amended year.  Generally any refunds  due is lost  after a period ( three years past the tax return due year  ) , but tax due  is always payble/ collectible by IRS and State no matter how late  ( even though in practice they follow up to six years mostly , esp. if the amount is small ).

Hope  this  and the comments by my colleagues help you

pk