Questions on Foreign Tax Credit

[sese]

Hi,

Tried to read up information on "Foreign Tax Credit" but still unclear on a few things:

1. Can you only "Carry back" or "Carry forward" the credits if you have filed Form 1116?
2. Can the "Carry back"/"Carry forward" credit only be used to decrease tax on Foreign income?
3. Carry back will require an amendment to the previous tax return? (curious what drives the decision of carry back or forward? Is it based on which year may have excess & uncredited Foreign income tax?)

Thanks!

[Mike9241]

1. Can you only "Carry back" or "Carry forward" the credits if you have filed Form 1116?

yes failure to use form 1116 in the year the FTC arises results in the loss of any carryforward or carryback

1. Can the "Carry back"/"Carry forward" credit only be used to decrease tax on Foreign income?

you need foreign income in the year of the c/b or c/f to be able to use it. if you're already at the max FTC allowed, c/b won't benefit you. 

1. Carry back will require an amendment to the previous tax return? (curious what drives the decision of carry back or forward? Is it based on which year may have excess & uncredited Foreign income tax?)

the amount that you would get back vs the time, trouble, and cost of amending. 

[sese]

Thanks Mike! Quick follow up- what is the max FTC allowed?

[JulieS]

There is not a specific cut off amount for Foreign Tax Credit, but rather a formula for limitation based on your overall income. 

You can claim the lesser of 100% of the foreign tax you paid or your Foreign Tax Credit limit.

Your  Foreign Tax Credit limit is your foreign income divided by your total income. This figure is multiplied by your federal tax amount to determine the limit.

For example, say your total income is $100,000 and your foreign income is $5625. Your federal tax amount is $18,700.

Foreign income $5,625 / total income $100,000 = .05625

Federal tax $18,700 X .05625 = $1,051.87 is your  Foreign Tax Credit limit.

If your foreign tax is all reported on US tax forms and is less than $300, you don't have to file Form 1116 or figure your Foreign Tax Credit limit, but the allowed amount still can't be more than your federal tax on line 18 of Form 1040.

In addition, the foreign tax credit is not refundable, so it can never be more than your federal tax on line 18 of Form 1040.

If your foreign income is passive, you are subject to passive income limits also. 

Click here to learn more.

[sese]

Thanks this is super helpful!

If my Foreign Tax Paid is just slightly over $300, do you know whether I have the option to choose just get $300 FTC and avoid Form 1116 OR must I report the actual exact amount and go through Form 1116? Thanks!!

[Vanessa A]

You would need to report the actual exact amount and go through form 1116.  The IRS does not allow partial reporting.

[sese]

Is the Passive Income Limit related to adjusting the amount of foreign source qualified dividends?

The instruction says: "To adjust your foreign source qualified dividends or capital gain distributions, multiply your foreign source qualified dividends or capital gain distributions in each separate category by 0.4054 if the foreign source qualified dividends or capital gain distributions are taxed at a rate of 15%, and by 0.5405 if they are taxed at a 20% rate. Include the results on line 1a of the applicable Form 1116."

How do I know what rate the foreign source qualified dividends were taxed at? Does here mean % taxed in US or % taxed by foreign countries? If I use "Box 7 - Foreign Tax Paid" divided by Box 1b "Qualified Dividends", the number is greater than 20%.