Foreign tax credit LIMIT

[BlackPanther2020]

​Foreign companies​ that pay dividends deduct foreign taxes​, e.g. Canadian companies​ deduct ​​15% ​. ​However, when the taxes exceed $600​ (for couples)​​ , the tax code has a foreign tax credit​ LIMIT ​ that is calculated on Form 1116. Can I​ ignore this limit and  claim 100% ​​of the foreign taxes I paid since the income is from dividends (passive income)?

[pk]

@BlackPanther2020 , the safe harbor  of $600  ( when filing MFJ) in foreign taxes paid on passive income allows bypassing  form 1116 and its computations.  Outside the safe harbor one must use form 1116.  On the other hand  as an example  if the total foreign taxes paid is  $800, it may be  more  better to claim on $600 and thus avoid the limits imposed by form 1116.  You have to work it out both ways to see which helps you more  -- there is no requirement that you must claim all the  foreign taxes paid -- you try to maximize the credit.

Do you need more help on this ?

[BlackPanther2020]

@pk thanks for your response. If I pay $1,000 in foreign taxes on my dividend, I understand that you're saying I have two options.

1. Claim the  $600 without form 1116.

2. Use the form to calculate some other value that may be less than $1,000. 

Is there  a way to  claim the entire  $1,000 in one year without having to claim a portion and roll forward the remainder? The problem with rolling forward the remainder is that I may pay  ~$1000 in foreign taxes EVERY year, so I'll never be able to use the roll forward amounts. 

[pk · Accepted solution]

@BlackPanther2020 , your understanding is correct.  As you mentioned the problem with using form 1116 is that it limits the allowable  credit for the year based on the ratio of foreign income to your world income ( in a round about way) but it does allow carry back and forward for the unused portion of the claimed/recognized foreign taxes paid.   That is why I suggested  that you work out your amount of credit both ways and see which is more beneficial  in your particular case ( and what you expect  your future scenario to be ).  It all depends on your specific facts and circumstances.

Is there more I can do for you ? 

[rogge1722]

In order to prevent carryovers or if they exist, to eliminate them, is to increase foreign income but not foreign taxes paid.  There are about 18 countries that do not withhold taxes on dividends.  A few examples are the UK, Hong Kong, Singapore and Bermuda.  In most cases, the stocks are in the form of American Depository Receipts. (ADR’s) or look for mutual funds/ETF’s that are specific to those countries which do not withhold taxes.

 If possible, reduce your Canadian income so that the foreign tax paid is minimal. 

A large foreign income will result in an increase in the foreign tax credit limit.  The current year foreign tax paid will be minimal and the remaining amount will draw down from the carryovers.

[TommyMo]

1099-Divd was downloaded to Turbo Tax with $5,880.42 Foreign Dividend income and $941.24 Foreign Tax paid.

I do not see a foreign tax credit on my married joint tax return form, not even the $600 limit.   Please advise how to claim the maximum $600 foreign tax credit on my 2021 Turbo Tax return/

[pk]

@TommyMo , here is the rub ---- if you let TurboTax recognize ( enter  ) the full $941.24 as your foreign taxes paid, it would not even ask  you if you want the simplified method  and/or the safe harbor treatment.  You will need to  change that entry on the worksheet/entry area for the 1099-DIV to $600 --- then it will ask if you want the simplified treatment and therefore allow the recognition of the $600  as foreign tax credit against US taxes.

If the amount remains where it is  downloaded ( US$941.24 ) , TurboTax will only ask if you want foreign tax credit or deduction ( for an itemized deduction on schedule-A  ).

Does this help your situation or do you need more help ?

[TommyMo]

I entered the $600 limit on the worksheet then selected the simplified method and still did not receive a foreign tax credit.  My 2020 income tax calculation is already at zero.  Is their any way to get credit for foreign tax paid in prior years and carried over in Turbo Tax plus foreign tax paid this year? 

[pk]

@TommyMo , I hope I am reading you correctly ---- recognize that the foreign tax credit is a Non-Refundable Credit i.e. it  can only reduce your tax liability but not below zero .  Thus  if  your tax liability is $300 and the foreign tax  paid  was   entered as  $600 --- your  total tax liability would be reduced to ZERO  ( not a refund of $300 ).

  Does that make sense ?

[woodwardann]

I am unable to take a Foreign Tax Credit of $42 in 2020 due to software. It generated a Form1116 but NOT

Schedule for Simplified Method on 1040.

[pk · Accepted solution]

@woodwardann , I don't know where exactly you are  in your data entry -- what I remember is that when in  credits/deductions , you select that you have foreign tax credits and then it guides  you into whether you want foreign tax credit or deduction and thereafter lets you choose  "simplified method" -- this should result in NO form 1116  and/or schedules.  The amount of the credit then should show up on schedule 3 in the top half  where it deals  with non-refundable credits ( it just reduces your  tax liability but not below zero, implying that if your  tax liability is already zero then the credit does nothing for you ).

Please tell me more about the situation  so I can duplicate and see what/where Turbo is making error--yes ?

[Terryho99]

I am really confused. I only have $561.00 in foreign tax. MFJ. It says I must file form 1116. Doesn't ask me if i want the simplified method. How do I bypass to use the simplified method?

[JohnW152]

You may not be eligible for the simplified method.

There are actually three conditions that must be met to claim foreign tax credit without using Form 1116, but most people only know about the $300/$600 limit.

According to the 2021 Instructions for Form 1116, the conditions are:

• All of your foreign source gross income was “passive category income” (which includes most interest and dividends). 

• All the income and any foreign taxes paid on it were reported to you on a qualified payee statement. Qualified payee statements include Form 1099-DIV, Form 1099-INT, Schedule K-1 (Form 1041), Schedule K-3 (Form 1065), Schedule K-3 (Form 1120-S), or similar substitute statements. 

• Your total creditable foreign taxes aren't more than $300 ($600 if married filing a joint return).

If this isn't your scenario, please post back.

@Terryho99

[Terryho99]

We meet all 3 conditions. Could it be that I used form 1116  in 2020? I'm still confused because my foregn tax for 2020 was only $471.

Thanks

[DaveF1006]

It may have been that some of your Foreign Tax Credit was not applied in 2020 and a carryover form 2020 needed to be reported in 2021. Check your 2020 return to see if there was a carryover amount for an unused portion of a Foreign Tax Credit.

@Terryho99