In 2021 UK foreign taxes of $5000 were withheld for cashing in a pension plan. I was able to use $2000 of the $5000. as a foreign tax credit against my 2021 taxes. I have a carryover of $3000 to 2022.
In 2022 I received a refund of the full $5000 from the UK. I have not filed my 2022 tax return as yet as I have a extension and am hoping I can report the refund and negate the carry foward within my 2022 return.
Can I report the refund on my 2022 tax return somehow? I don't think I can just list it as income in 2022 as it is a tax credit, not income.
Must I file an amended 2021 return? If I do it doesn't seem fair that I will most likely incur penalties.
From what I read, I may be required to file form 1118, Schedule L to report the refund in 2022? Turbo Tax does not offer this form and I don't want to mail in a paper return. Last time I did that it was a 10 month wait.
IRS tax topic 856
If the foreign income taxes you claimed as a credit are refunded to you or otherwise reduced, you must file an amended return on Form 1040-X reporting the reduced foreign tax credit no later than the due date (with extensions) of your return for the year in which the foreign taxes were refunded or reduced.
so you have to amend 2021
form 1118-L is for corporations not individuals.
from form 1116 instructions page 4
Reporting requirements. If any of the above foreign tax
redeterminations occur after you file your tax return, and the
foreign tax redeterminations change the amount of U.S. tax
due for any tax year, you must generally file Form 1040-X,
Amended U.S. Individual Income Tax Return, or other
amended return, to notify the IRS so that your U.S. tax for the
year or years affected can be redetermined. If you have a
foreign tax redetermination that results in an increase in your
U.S. tax liability for any year, note in the explanation of
changes section of your amended tax return (for example,
Form 1040-X, Part III), “This amended return and Form 1116
are for a change in foreign tax credit that increases U.S. tax
liability.” Complete and attach to Form 1040-X (or other
amended return) a revised Form 1116 for the tax year(s)
affected and a statement that contains information sufficient
for the IRS to redetermine your U.S. tax liability. In some
cases, you may not have to file Form 1040-X or attach Form
1116. See Pub. 514 for more information, including
exceptions. An increase in your U.S. tax liability as a result of
a foreign tax redetermination is excepted from the general
statute of limitations against assessment and collection. See
sections 6501(c)(5) and 905(c)
Thanks you for your quick and very explicit reply. Ver helpful.
As I understand it:
-I will file an 1040X for tax year 2021. I only need to fill in my information at the top and then skip to Part III and state in the explanation section "This amended return and Form 1116 are for a change in foreign tax credit that increases U.S. tax liability.”
- I will include a new amended Form 1116. Since all the tax was refunded, should I fill in the income amount the same and show the taxes paid as $0, eliminating the entire amount previously reported?
-I will include a statement giving details regarding how the foreign tax paid in 2021 was refunded and reduced my credit to $0 for 2021. Shall I make this a separate statement page, or do all of the detailed explanation on Part III of the 1040X?
I have not used any of the carry forward FT credit in my 2022 return and will just delete the form from Turbo Tax.
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