Foreign Tax Credit

[juinnder]

I have never owed taxes until this year. My question is if I am taxed on the interest from my bank investments in New Zealand why does the Foreign Tax Credit I claimed (Form 1116) not prevent me from paying tax on that same foreign interest here in the US? When I delete that foreign interest from Schedule B it shows I don't owe taxes but when I re-enter that interest I am owing. Does that mean I am paying double taxes? Or does the Foreign Tax Credit only cover so much? 

Thanks in advance for advice and explanation. 

[MayaD]

The credit can be limited.

Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. Your foreign tax credit is the amount of foreign tax you paid or accrued or, if smaller, the foreign tax credit limit.

However, If you have foreign taxes available for credit but you cannot use them because of the foreign tax credit limit, you may be able to carry them back to the previous tax year and forward to the next 10 tax years. 

For more information please check: Foreign Tax Credit - How to Figure the Credit

[juinnder]

Thank you very much for your response but how do I know what is my federal tax liability? I currently owe $309 and my foreign tax credit is $226. The foreign tax I paid to NZ was $177 USD. 

[DaveF1006]

To clarify, how much total foreign tax did you pay in 2021? Was it $226 or $177? Were there other foreign tax paid to any other country besides New Zealand?

@juinnder

[juinnder]

I guess my big question is why am I owing instead of getting back money after figuring my federal taxes? If I delete the bank interest ($2157, including the foreign bank interest) I don't owe anything. What did I do wrong and how can I avoid this next year? Can you please direct me to someone else to answer this if you can't. I really appreciate this and thanks in advance.

[juinnder]

When I filled out Form 1116 I included a $13 foreign tax on a 1099-Div I received for some investments through a US financial planner which brought my total to $190 for foreign taxes paid on interest received. Then the form does some math and I end up with a tax credit of $226. I guess it is not enough to offset the amount of interest I made. I just want to learn what I did wrong to now owe in federal taxes to avoid this again next year if possible.  I notice if delete even the $1777 in foreign interest I don't owe and get a little back (of course I put this back into Schedule B) .

I don't even make that much money in take home pay so not sure where I am going wrong or maybe this is how it will be from now on?

[DaveF1006]

Yes, unfortunately if you don't have enough taxes taken from your take home pay, this will happen with added income such a interest income. You may wish to adjust your withholding pay by submitting Form W4

to your employer to increase your withholding so this doesn't happen again next year.

[juinnder]

Thanks but my taxable income was only $62586 and my bank interest was $2157. It is a bit discouraging to save too much and earn interest and end up paying taxes on it.  I don't like the stock market too much since one could lose money there though I have some investments in it. I wonder what the cutoff point is to avoid paying taxes on earned interest. I am just hoping I didn't do my taxes incorrectly but I have checked it several times and come out with the same amount.  I was hoping my foreign tax credit would cover how much interest I got in NZ but it appears it didn't.  I still feel like I am getting taxed twice on this foreign interest.

[DaveF1006]

There is no cutoff point for not being taxed on interest unless your total income for the year is less than your filing threshold. This means if your Adjusted Gross income is less than your itemized or standard deduction amount for the year, then there is no filing requirement.

@juinnder