Foreign tax credit - Form 1116

[gb_1435]

I have reported foreign income in the income section of Turbo Tax premier. I have also paid foreign taxes. I have an $800 taxes due, and $3K in foreign tax available credit. The tax credit doesnt seem to get applied to the taxes due. The foreign income was primarily interest, dividends and capital gains due to sale of stock, and was reported as ordinary income on 1099-SR. The $800 tax due is because of Affordable Care Act subsidies.

Any ideas why the foreign credit doesnt get applied.

[pk]

@gb_1435  need a little bit more information:

(a) this $3000 foreign tax credit is which year(s) --- this carried forward or what ?

(b) what is your world income  and  foreign income for 2021?

(c) what is the foreign  taxes paid for 2021 ?

(d) if the foreign taxes paid  in 2021  is within the  safe harbor limit why did you choose  form 1116 (if )?

(e) foreign taxes paid to which country?

(f) if the foreign income was from stock sales  was this long term or short term and did you also have  US  asset sales resulting in  gains ( that can offset foreign gains )

I look forward to getting your answers and I will circle back

pk

[gb_1435]

Hello PK, 

Thanks for your response. I file 1040-SR returns and am a retired, senior permanent resident. 

(a) has been carried forward from previous tax years

(b) Worldwide income is $34K, and most of it is foreign income.

(c) foreign taxes paid in 2021 is $3200

(d) Not sure what is the safe harbor limit. Filing Form 1116 as a continuation from previous years. 

(e) India 

(f) Combination of Long term and short term capital gains. No US asset sales in 2021. 

[DaveF1006 · Accepted solution]

The foreign tax credit is a complicated matter in the way it is determined.  Here is a brief synopsis on how it is applied. 

Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources. You don't need to make this determination because Turbo Tax does this for you.

This means  you take the total tax liability on line 24 and multiply it by your total foreign income/total income from US and Foreign sources. Usually what happens is that the Foreign Tax Credit is much smaller than what you paid to the foreign country. The remainder is carried over as a foreign tax carryover that can be carried over indefinitely. It sounds like you have more foreign taxes accumulated than what can be applied in a given tax year.

As far as I know, there is no safe harbor convention that applies to this. 

@gb_1435