carry foreign tax credit back versus forward, do i have a choice?

[tuxedorose]

Im confused on the way the unused foreign tax credit works.   

am I required to first try to carry it backwards one year?  does that mean having to file an amended return?

OR can i just push it into next year?  and if i do this.. the downside is you can only keep pushing it forward up to 10 years.  and that means 2019 carry fwd amt can be used up to 2029 but if i have  2020 unused, that amt can be used up to 2030  ?

thx

[Anonymous]

yes you must carryback 1 year. however, if you have carryforward from 2018, a CB would be meaningless.  

you could prepare an amended return to see how much FTC would be used if you can carry it back and then reduce the FTC carryforward by this amount and not file the amended return if the amount is small enough. the IRS shouldn't question the reduction without an amended return.    it is common to find that the c/f is never used. under the rules for FTC the current year is used first and then the c/f.    

Carryback
and Carryover
If, because of the limit on the credit, you cannot
use the full amount of qualified foreign taxes
paid or accrued in the tax year, you are allowed
a 1-year carryback and then a 10-year carryover of the unused foreign taxes.
This means that you can treat the unused
foreign tax of a tax year as though the tax were
paid or accrued in your first preceding and 10
succeeding tax years up to the amount of any
excess limit in those years. A period of less
than 12 months for which you make a return is
considered a tax year.
The unused foreign tax in each category is
the amount by which the qualified taxes paid or
accrued are more than the limit for that category. The excess limit in each category is the
amount by which the limit is more than the
qualified taxes paid or accrued for that category.
Figure your carrybacks or carryovers separately for each separate limit income category.
The 1-year carryback and 10-year carryover
do not apply to unused taxes in the GILTI category.
The mechanics of the carryback and carryover are illustrated by the following examples.

Example 1. All of your foreign income is
general category income for 2018 and 2019.
The limit on your credit and the qualified foreign
taxes paid on the income are as follows.
Your
limit
Tax
paid
Unused foreign tax (+)
or excess limit (−)
2018 $200 $100 −100
2019 $300 $500 +200
In 2019, you had unused foreign tax of $200
to carry to other years. You are considered to
have paid this unused foreign tax first in 2018
(the first preceding tax year) up to the excess
limit in that year of $100. You can then carry forward the remaining $100 of unused tax.
Example 2. All your foreign income is general category income for 2015 through 2020. In
2015, all of your foreign income was general
category income, and you had an unused foreign tax of $200. Because you had no foreign
income in 2014, you cannot carry back the unused foreign tax to that year. However, you may
be able to carry forward the unused tax to the
next 10 years. The limit on your credit and the
qualified foreign taxes paid on general category
income for 2015–2020 are as follows.
Your
limit
Tax
paid
Unused foreign tax (+)
or excess limit (−)
2015 $600 $800 +200
2016 $600 $700 +100
2017 $500 $700 +200
2018 $550 $400 −150
2019 $800 $700 −100
2020 $500 $550 + 50
You cannot carry the $200 of unused foreign
tax from 2015 to 2016 or 2017 because you
have no excess limit in any of those years.
Therefore, you carry the tax forward to 2018, up
to the excess limit of $150. The carryover reduces your excess limit in that year to zero. The
remaining unused foreign tax of $50 from 2015
can be carried to 2019. At this point, you have
fully absorbed the unused foreign tax from 2015
and can carry it no further. You can also carry
forward the unused foreign tax from 2016 and
2017.

[tuxedorose]

thanks for the detailed explanation.  I find this  particular topic of cb/cf very difficult to understand.

if I may ask clarifying questions (sorry if im just rephrasing what you already said)...

1 for TY2019, if i have excess FTP (foreign taxes paid), I MUST first try to do carry back  but if in TY2018 I used up the full allowance or if had carry-fwd , then this option is obviously impossible

2. however, if I still had 'unused capacity' in that TY2018, but I dont want the hassle of filing an ammended ty2018 return... can i voluntarily lose that 'unused capacity' and just subtract it from my TY2019 excess and carry fwd that lowered amt into TY2020?

3. why do you say that   c/f  rarely used ? is it because once you start generating passive dividends year after year that create foreign taxes paid that go over the limit... that you never get a chance to use them in the carry fwd years?

Thx!

[Anonymous · Accepted solution]

2. however, if I still had 'unused capacity' in that TY2018, but I dont want the hassle of filing an ammended ty2018 return... can i voluntarily lose that 'unused capacity' and just subtract it from my TY2019 excess and carry fwd that lowered amt into TY2020?

to not file an amended return means that you don't get the refund you are entitled to.  however, if it's small you may not want to bother.  I've seen where the IRS never questioned a reduced carryforward where no amended return was filed.

3. why do you say that c/f rarely used ? is it because once you start generating passive dividends year after year that create foreign taxes paid that go over the limit... that you never get a chance to use them in the carry fwd years?

that's exactly what I'm saying.  the issue is that the effective rate of foreign taxes on net foreign income is generally higher than the US effective tax rate on the same income which generates the carryover.  I have had some rich clients that literally lost $ 000's in FTC because the c/o period expired. the current year FTC is used before the c/o. 

note the Simplified Method for FTC which allows a single individual to take $300 of FTC on passive income (dividends interest rents royalties) without filing form 1116. if there is another category form 1116 must be filed for each category.   

as to foreign passive income, you are allowed to include even amounts on which you pay no foreign taxes.   say you got a foreign dividend from xyz but there were no foreign taxes. you can include the xyz income as foreign income for purposes of the FTC. 

generally, when there are foreign dividends and foreign taxes from various companies I lump them together and use "various" for the country. 

another way to explain the carryover is it's the effective foreign tax rate on net foreign income less the effective federal income tax rate on taxable income.  then the net difference is multiplied by net foreign income. so even a 1% higher ft rate on $3000 of net foreign income will generate a $30 carryover.

even net foreign income is somewhat of a misnomer. it's gross foreign income reduced by certain direct expenses + a portion of your standard or itemized deductions and adjustments to income 

[tuxedorose]

@Anonymous excellent clarification. thanks

another way to explain the carryover is it's the effective foreign tax rate on net foreign income less the effective federal income tax rate on taxable income.  then the net difference is multiplied by net foreign income. so even a 1% higher ft rate on $3000 of net foreign income will generate a $30 carryover

THIS MAKE SENSE. Its very difficult to try to understand the 'intent of the tax' by reverse engineering the calculations on the form ... they should explain the formula better rather than just saying "add line b to line c and divide by c".

basically you are not being penalized for paying a higher tax rate on the foreign income than you would have paid in the US.. so its kind of like a tax equalization to give you that net credit

even net foreign income is somewhat of a misnomer. it's gross foreign income reduced by certain direct expenses + a portion of your standard or itemized deductions and adjustments to income 

This completely confused me ... what is the logic of screwing the taxpayer a bit by artificially reducing the foreign income by things like your itemized deductions and charitable contributions??? its relating apples to oranges!