Does Foreign Tax taken as a Deduction Reduce AGI?

[egoldrich]

If I enter Foreign Taxes paid as a deduction rather than a credit, does it lower Modified Adjusted Gross Income? Or line 11 on the 1040?

If so, how do I enter it as Foreign taxes paid for this rather than a credit?

Thank you!

[RalphH1 · Accepted solution]

The deduction for foreign taxes paid does not reduce “Adjusted Gross Income” (or any version of “Modified Adjusted Gross Income“). As you can see on the 1040 (here), the “Itemized Deduction” total (which includes the foreign tax deduction) appears on line 12, right below Adjusted Gross Income, so it’s subtracted after AGI is calculated.

There are actually different “Modified AGIs” for different purposes in the tax code, but they always involve adding some deductions back into the regular AGI, so that answer would be true regardless of which version you’re dealing with. (And although some are added back, the deductions which are subtracted before AGI is calculated can be seen in Part II of Schedule 1, here.)

[egoldrich]

@RalphH1 

Thank you very much! I was hoping I was missing something. The Foreign Tax Credit is baffling since they do not allow the entire amount at least in the initial year. Does that mean that I must now use an AMT? Or would that start next year in order to recapture the amount of foreign tax paid that I cannot use as credit for 2022? Or is there another way to capture the full amount?

[RalphH1]

Your “Foreign Tax Credit Carryover” is actually something separate from AMT, although if you otherwise have “Alternative Minimum Tax” going on, it’s certainly relevant. Assuming you do not, it’s just a matter of carrying the unused (extra) part of your foreign tax credit amount (see this discussion) forward through the years (assuming it couldn’t be used last year).

Egoldrich, we always like to give our more pleasant customers some info that improves their tax bottom line, but in this case that may not be possible, at least in this specific area(!). One reason they allow you to carry the Foreign Tax Credit forward so many years is that it’s difficult to use, and many people never do. Since it results from paying tax to a country with higher rates than the U.S. (and only getting to use the part equal to what the U.S. tax would be on that amount of income), continuing to earn income from the same high-taxed country normally only increases your carryover from year to year, with it never rendering an actual tax benefit.

But as long as you continue to use TurboTax (and we certainly hope you do!), the program will be tracking your carryover and applying it in the event that you eventually have foreign tax paid to a country with a lower rate than the U.S. I hope this was clear, egoldrich, and thank you also!

[egoldrich]

Thanks so much! Very clear.