Can I use my foreign tax credit to offset US income?

[mswongy]

I have $14k in tax credit from a home sale in Australia.  I don't have any other assets in Australia or outside the US.  How can I utilize the credit? 

[DaveF1006]

According to this link from IRS.gov, you can claim a foreign tax credit for income taxes you paid in Australia for the sale of your home because there is a tax treaty between the US and Australia. Now does this $14K represents the foreign taxes you paid or is it some other type of a credit? You can only report the foreign taxes paid in the transactions just to avoid being double taxed by both countries.,

[mswongy]

Thanks Dave,

I sold a home in australia and paid capital gains tax there of the equivalent of US$27k.  I reported the income on my US tax return but could only claim $13k of the $27k , and the $14k remainder was a carry forward credit.  TT does not automatically roll the credit over on Form 1116. I've read elsewhere that this is not an an issue per se, but I'm wondering under what circumstances I'll ever be able to use the $14k credit.  

Thanks,

Tracy

[LinaJ2020]

You only qualify for the foreign tax credit if with the same amount of income, you pay taxes to both the foreign and US government.  In your situation, if you paid taxes to Australia on your sale of home and you are reporting the same sale on your US return, you may qualify for the credit.  TurboTax program does not automatically transfer your information over to your foreign tax credit section.  You have to manually go through it.  Here are the steps:

• Open up your TurboTax account and select Pick up where you left off
• At the right upper corner, in the search box, type in "foreign tax credit" and Enter
• Select Jump to foreign tax credit
• Follow prompts

If you can't claim a credit for the full amount of qualified foreign income taxes you paid or accrued in the year, you're allowed a carryback and/or carryover of the unused foreign income tax, except that no carryback or carryover is allowed for foreign tax on income included under section 951A. You can carry back for one year and then carry forward for 10 years the unused foreign tax. To read more, click here:

https://www.irs.gov/taxtopics/tc856

[mswongy]

Thank you!  My specific question is how can I use the carry forward tax credit of $14k?  Is there any category of US income that this foreign tax credit can offset?

Tracy 

[DaveF1006]

Keep in mind, the foreign tax credit is a non-refundable credit. It will offset tax liability based off of taxable income reducing the tax close to zero but any unused portion of it will be a carry forward until the ten year carry forward period expires. It is possible not to be able use that big of a credit over the ten year timeline. 

[mswongy]

Thanks again Dave.  Can I use the tax credit to offset US income?  I realize I may not be able to use the full credit.  Thanks!

Tracy

[ReneeM7122]

No, The foreign tax credit cannot reduce U.S. taxes on U.S. source income. It can only reduce U.S. taxes on foreign source income.

See this link on the IRS website for more information.

@mswongy