Foreign tax credit - Do not enter any income already reported on Form 1099-INT

[astral101]

I have a question regarding the foreign tax credit:

I am entering the amount for wages (roughly 30K) but there's also approximately 10K of interest income. If I only enter 30K for wages, I get "x" amount of foreign tax credit which lowers my tax due to the U.S. a certain amount. However, I also PAID taxes on the Canadian interest. If I also add the interest as a separate line item, I get a bigger tax credit which lowers my U.S. tax due even more. I feel like I should be able to add the interest income as well but the page says: Enter gross income you received from sources within Canada.  Do not enter any income already reported on Form 1099-INT, Form 1099-DIV, Form 2555, or Schedules K-1.

But again, if I don't enter the foreign interest, TurboTax calculates a lower foreign tax credit even though, again, I also paid taxes on the foreign interest. What am I missing?

[pk]

@astral101 , thought we had this discussion earlier ( may be my aging memory fails ) -- please forgive if I am wrong.

(a) Wages  of 30K --- is this earned  while in Canada ( i.e. tax home Canada ) or while  working at a location the USA.  If the latter, then you report your wages  earned  as  self-employed -- reported on Schedule-C.  Here to ameliorate the effects of double taxation ( and pre the US-Canada Tax Treaty ) you use form 1116   ( under  Deductions & Credits tab, near the bottom of the dropdown list ) by selecting Foreign Tax Credit.  Make sure you select  " General Category".  Now enter the  net foreign source income from Schedule-C and the taxes you paid to Canada on this income.   TubroTax will compute your FTC and transfer to Schedule-3 and onto Form 1040.  Note unless your tax home is Canada you CANNOT use Foreign Earned Income Exclusion on form 2555 -- you can only use Foreign Tax credit or Deduction ( with SALT limitation )

(b)  Interest/ Dividend  ---  note that if these are US sourced and also taxed by Canada, your form 1116 will be category "Resourced By Treaty" else  ( i.e. if these are foreign sourced), you use category "Passive".  In either case you have to make sure that  the "foreign Source income"  line reflects  the income  that is being taxed by both US and Canada.  The Foreign Tax for this  may have to be allocated if  the foreign country ( Canada in your case ) does not have a specific rate/ amount on this category of income.

Does this  help  you or am I confusing the situation more ?    If you want a more specific answer  ( not the generalities above )  then you need to provide me with specifics of your income, tax home etc.

Will circle back once I hear from you --yes ?

[astral101]

Hi,

The 30k gross wages are for employment work for a Canadian company (work is done remotely within the U.S. but I am technically an employee of the Canadian company since I began that job when I was in Canada before relocating to the U.S.). My concern with "self-employment" that this may subject me to self-employment tax, no? If so, then I am still being taxed in Canada as an employee and then in the U.S. as self-employed, correct?

You state below that I should enter the "net income" but form 1116 asks for the gross income, not net. Please explain.

The interest income is from Canadian banks. But TurboTax says on form 1116 "Do not enter any income already reported on Form 1099-INT" but I have also paid tax on this interest income. If I can't report it on form 1116, my foreign tax credit will be lower and I will be taxed again on this income in the U.S.

[astral101]

Also, let's assume I wanted to see if the "self-employment" income would yield a lower tax due in the U.S. I don't see where I can enter self-employment income in my version of TurboTax Premium online. I have a section for W2 income, Investments, and 1099 OID/Foreign Accounts. I don't see any section for self-employment income.

[pk]

@astral101  see my notes on your Qs;

The 30k gross wages are for employment work for a Canadian company (work is done remotely within the U.S. but I am technically an employee of the Canadian company since I began that job when I was in Canada before relocating to the U.S.). My concern with "self-employment" that this may subject me to self-employment tax, no? If so, then I am still being taxed in Canada as an employee and then in the U.S. as self-employed, correct? 

 Per IRS rules, the income is generally sourced to where the work is performed.  Thus  the income you get for your work performed in the USA for a Canadian entity ( & for US purposes ) is US sourced.  So for purposes of form 1116 ( to get  Foreign Tax Credit ) you have to use  form 1116  category  of "Resourced by Treaty ".  And YES it does expose you  SECA  ( 15.3 % of  Schedule-C Net income ) , but because US and Canada have a  Totalization agreement in place, you can choose to pay to ONE country only by providing a  "Certification of  Participation "  to the country where you do not pay SECA.  On Schedule-SE, you enter  the exclusion clause .

You state below that I should enter the "net income" but form 1116 asks for the gross income, not net. Please explain. 

I use the term Net because it is NET income on  Schedule-C  ( Schedule - C shows the gross income and also allowable  expenses/ deductions  and then computes the NET income ).  So it is compatible  with the instructions for  Form 1116  ( the  meaning of Gross  for this form assumes  income less expenses  and this is what is doubly taxed by Canada and the US ).

The interest income is from Canadian banks. But TurboTax says on form 1116 "Do not enter any income already reported on Form 1099-INT" but I have also paid tax on this interest income. If I can't report it on form 1116, my foreign tax credit will be lower and I will be taxed again on this income in the U.S.

Interest income from Foreign sources is reported as interest income  as part of your world income ( with NO 1099-INT ) -- you tell TurboTax that this is interest without a 1099-INT -- it will accept that data.  On form 1116 , you select category " Passive" and report this income again as foreign sourced income and the taxes you paid/allocated to this income.  Note that if this tax is equal or under the Safe Harbor threshold then you should use that rather than form 1116.

Does the above  make sense  ?

[astral101]

@pk This is helpful and I think I want to evaluate this approach (self-employment income). Question: let's assume I wanted to see if the "self-employment" income would yield a lower tax due in the U.S. I don't see where I can enter self-employment income in my version of TurboTax Premium online. I have a section for W2 income, Investments, and 1099 OID/Foreign Accounts. I don't see any section for self-employment income.

Question regarding this below: And YES it does expose you  SECA  ( 15.3 % of  Schedule-C Net income ) , but because US and Canada have a  Totalization agreement in place, you can choose to pay to ONE country only by providing a  "Certification of  Participation "  to the country where you do not pay SECA.  On Schedule-SE, you enter  the exclusion clause . 

Question: Is this to say that if I were to provide the U.S. a "Certification of  Participation"  then that I don't need to pay the U.S. any SECA because I am already being taxed by Canada as an employee? How do I go about providing said certificate? And if I don't need to pay the IRS any SECA, would I need to then pay Canada also SECA or not necessarily because they are already taxing me as a full time employee? Thanks in advance!

[astral101]

@pk Hi. Just a gentle follow up on this.

[pk]

@astral101  I do not have sufficient knowledge of the on-line product to answer  " why there is NO Schedule-C on your package-- perhaps  you can tell TubroTax that you have a 1099-NEC -- that should trigger TurboTax to determine if you need to upgrade to a different level for that feature.  That is my general reason for sticking with Windows download/CD version of  Home & Business -- it has all the forms and all the "step-by-step" Qs for most complicated situation ( of course it is also the most expensive ).  If you want I can always ask another "Champ"/ Expert to help ( whom is familiar with the screens etc. of the on-line versions.  Please let me know if you need  this help.

 On SECA  , all you have to do  is to get a certificate of  participation from Canada Social Security Equivalent and include that on your return along with  Schedule-SE  ( where you claim immune from  SECA taxes ).

Here is more on this from IRS:

Totalization Agreements | Internal Revenue Service (irs.gov)

2023 Instructions for Schedule SE (irs.gov)  ------ look at page 2 and also visit the SSA website referred here

[VolvoGirl]

Will this help?  How to enter income from Self Employment
https://ttlc.intuit.com/community/self-employed/help/how-do-i-report-income-from-self-employment/00/...

[astral101]

@pk  I was able to figure out how to add the self-employment income. Great! I feel like we're making progress.

A couple of follow up questions.

 On SECA  , all you have to do  is to get a certificate of  participation from Canada Social Security Equivalent and include that on your return along with  Schedule-SE  ( where you claim immune from  SECA taxes ).

Here is more on this from IRS:

Totalization Agreements | Internal Revenue Service (irs.gov)

2023 Instructions for Schedule SE (irs.gov)  ------ look at page 2 and also visit the SSA website referred

Question 1: Assuming I can get the certificate of participation from Canada, how do I tell TurboTax not to compute/add self-employment tax to its estimated tax due amount, and to include the certificate of participation along with Schedule-SE when I file online? Right now TT is showing approximately $3,500 of self-employment tax.

Question 2: For the foreign tax credit, when it asks to enter the income, do I enter the gross income from self-employment (roughly 41k or just the net income, approx 21k)? The TT pages says to enter 'gross income' but I want to be sure.

[pk]

@astral101  

1. Let me try the screens -- thought  there was a screen that asks if you are  immune from  FICA taxes.   I will be back in a short while.

2. For the Foreign Tax credit form 1116, you enter the Canadian income before taxes were deducted  ( equivalent  W-2 box 1 ).   It is the same amount that shows up on Schedule- C under net income ( assuming that you have deductible expenses  , else it will be the Gross income from the top of  Schedule-C ).

Will be back after checking the Schedule-SE screens

[pk]

@astral101  it is a bit hokey way to do it -- because you are in the USA but your SSA/ SECA payments are withheld in Canada -----  Forms Tab ;  then from the  drop down forms tree ( applicable to your particular return ), look for Schedule - SE Adjustment worksheet; open this , right at the top -- like line 1 you will see a ref.  " approved form 4029"   click the check BOX -- you are claiming approved  form 4029  ( approved by SSA ).  This form is for religious ministers etc. but the approval comes from SSA.  You do the same thing, show the certificate of participation  ( ref'd in my earlier note ) to SSA and you get their approval .   You do not have to send this to the IRS ( just your US employer ( if any  for the Canadian income ).  There is an explanation  box -- click that  and include your explanation that  you claim this benefit under  totalization agreement  between US and Canada.   That should work -- just make sure that not only the SECA   liability is zero but also the 50% adjustment to your world income is also zero before computing AGI.

Hope this helps.

[astral101]

Hi. Please see questions below in bold/italics:

Forms Tab ;  then from the  drop down forms tree ( applicable to your particular return ), look for Schedule - SE Adjustment worksheet (are you able to attach here a screenshot? Not sure where to look for this forms tree); open this , right at the top -- like line 1 you will see a ref.  " approved form 4029"   click the check BOX -- you are claiming approved  form 4029  ( approved by SSA I assume you mean Canada's SSA /CRA (Canada Revenue Service) or I need to have the form approved by the United States SSA? I ask because my filing deadline is the 15th and unless I can get this done in person at the US SSA office I feel like this will take weeks or months to hear back?).  This form is for religious ministers etc. but the approval comes from SSA.  You do the same thing, show the certificate of participation  ( ref'd in my earlier note ) to SSA and you get their approval .   You do not have to send this to the IRS ( just your US employer I don't have a US Employer. My employer is 100% in Canada. Does this change things? If so, how? ( if any  for the Canadian income ).  There is an explanation  box -- click that  and include your explanation that  you claim this benefit under  totalization agreement  between US and Canada.   That should work -- just make sure that not only the SECA   liability is zero but also the 50% adjustment to your world income is also zero before computing AGI (sorry, but where do you get the figure of 50% to adjustment to world income and how do I adjust this or does TurboTax adjust it automatically and where do I see this adjustment in the filing?). Thanks in advance.

[pk]

@astral101  to make it  fair compared to wage earners,  50% of the SE Tax  ( SECA) is  included as an adjustment  for AGI computation   ( Wage earners  pay 50% of SECA, the employers pays the  other 50% making FICA  tax for wage earners 50% of SECA).

You claim the  SECA immunity  now but do go the SSA and  show the certificate of participation and keep that with you for future ref.  This is kind of back-door  because your employer is in Canada withholding the equivalent of FICA/SECA.

But this work because those are the facts and circumstances.