Additional Foreign Tax Credit on U.S. Income worksheet Publication 514

[mdsaronson]

Hi there.  I am a US citizen tax resident in the UK.  I am taxed in the UK on my US source income, subject to the taxing rights assigned to the US under the US-UK tax treaty.  Under the treaty, the US agrees to provide a US tax credit to US citizens in respect of UK tax in excess of what the US may tax a UK resident non-US citizen (0% on interest, 15% on dividends).  Any otherwise US source interest and divdend yielding US tax in excess of that amount is resourced.  IRS Publication 514 provides a worksheet to calculate the additional foreign tax credit permitted and instructs the taxpayer to "Add this amount to line 12 of Part III and line 32 of Part IV of Form 1116".

How do I do this in turbo tax without override values?

Thank you in advance

[pk]

@mdsaronson , 

(a) in general , when the US is limited by treaty to specific tax rates, it is usually achieved by "adjustment" to the  "foreign source" income.    TurboTax has a screen for this. And IRS instruction for  form 1116  provides the adjustment amount to be used.  Should not use  "over-ride" as this may  ( not always ) disallow e-filing.

( b)  If you are talking about 2024 tax year, many screens  associated with Foreign source income / taxation  are not  operational yet --- think they are targeting for Jan 18th ( or thereabout ) to effective.

Does this help or am I  in the total left field ?

[mdsaronson]

Thanks @pk .  I think my issue is slightly different.  The instructions to Form 1116 for 2023 include the following paragraph at the bottom right of page 2:

U.S. citizens living in certain treaty countries may be able
to take an additional foreign tax credit for foreign tax imposed
on certain items of income from the United States. See Tax
Treaties in Pub. 514 for details. If this applies to you, use the
worksheet near the end of Pub. 514 to help you figure this
additional credit.

The instructions for the worksheet in Publication 514 contain the following instructions (for the third step in the calculations) link here - Pub 514 (worksheet is on p.43, instructions on p.44):

There does not seem to be a place in TurboTax where I can add the Line 21 amount to the reduction in foreign taxes on Part III, line 12 or where I can add that amount to Part IV, line 32.

Very much appreciate your time and assistance!

[mdsaronson]

One more quick addition here.  There actually is a space for one to enter this information on the TurboTax Foreign Tax Credit Computation Worksheet, snippet below, but the field is not active.  The text instructs one to see tax help, but I cannot find instructions in the help section.

[pk]

@mdsaronson  while I generally agree with your position of   using adjustments to the income to  achieve  the  taxing rates  , it is much more complicated method.  If the intent is to  reduce the burden of "double taxation" i.e.  same  income being taxed by both the  source country and the resident country ( arises when each country  is using  "world income"  of the resident ),  then the easier path is  to  get foreign tax credit   for taxes paid to the other taxing authority.  Thus for dividends and interest income  from, US sources  that are taxed by both the UK and US on a beneficial owner  whom is  a  UK resident  ( e.g.  US citizen/ GreenCard ) , one can use   "Resourced by Treaty on form 1116 to essentially  reduce the US tax on this doubly taxed income.

By using the  adjustment mechanism ( allowed max tax by treaty ) and depending on exact facts and circumstances,  may not be useful.

My reference here is  US-UK Tax treaty and explanatory notes -- >   United Kingdom (UK) - Tax treaty documents | Internal Revenue Service

Is there more I can do for you ?

pk

[juinnder]

Hello, I am really stuck on what to put on the form Foreign Tax Credit Computation Worksheet lines 12a1 and 12a2. Can someone please direct me to where I can read clearly written instructions on what to put there? I'm using the desktop version where I can check the forms and these 2 lines indicated I need to enter something. Thanks.

[pk]

@juinnder 

what it is trying to here is compute the ratio of  excluded   foreign active income to  total foreign active source income.  It then uses this to allocate   US tax liability  to the unexcluded income.

When in forms mode , click the  "help-center " at the top right. Then ask for  help on form 1116. This should open up a very large document explaining how TurboTax goes about filling up form 1116 and the entries it expects from the user.  Below I have appended  the  notes for the  relevant entries:

Lines 12a1 through 12a5:

If you excluded some or all of your foreign income on Form 2555, Foreign Earned Income Exclusion, the foreign taxes you paid must be reduced by the amount of taxes that relate to the foreign earned income that has been excluded on Form 2555. Lines 12a1 through 12a5 are used to determine the allocation ratio to be used in apportioning the amount of taxes applicable to excluded income.

The program performs the computations on lines 12a3, 12a4, 12a5 only for the General category of foreign income (i.e., if box b is checked at the top of this worksheet). Lines 12a1 and 12a2 must be entered when applicable.

If you excluded foreign income on Form 2555, enter on line 12a1 the amount of foreign earned income excluded (Form 2555, line 45) reduced by any itemized deductions that relate to the foreign income excluded.

Enter your total foreign earned income for the year on line 12a2. This is the total foreign earned income from Form 2555 (both copies), line 26, reduced by deductible expenses allocable to that foreign earned income.

NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.

Hope this helps.

Is there more I can do for you ?