help!! Foreign Tax Deduction

[GreenApple123]

Dear Sir/Madam,

I had a Canadian gig in 2022 (I am a US citizen). The total payment is $6000. When my US agent send me a check (directly from my agent in USD), they withheld $675 as Canadian Tax Withheld. So I received $5325.

I just received my 1099-NEC with income of $6000. How can I deduct the $675? Is it on Schedule C, Line 23 "Enter Taxes not from Form 1098"? or some IRS Form? Please help/guide me about which Form to use and how to enter the $675?

Thanks for your help

[RalphH1]

Reducing your self-employment tax by including it on Schedule C would be nice, but unfortunately they don’t let you deduct income taxes (including foreign ones) that way. (See the Schedule C instructions here.) You can approximately avoid being double-taxed on the $6k though, by using the “Foreign Tax Credit” (described by the IRS in this article).

Here’s a TurboTax support answer about where to go in our program to enter this. It can be slightly tricky, and there are frequently several questions which don’t apply to a simple scenario. When you’re done and print your return, you’ll see a Form 1116 result which carries to Schedule 1 (line 1), and then to your 1040 (on line 20), where it’s subtracted from your total tax.

Note that the credit may or may not be the $675 amount you actually paid to Canada. (It’s the smaller of either the actual amount paid, or what the U.S. tax would be on that amount of income. So if your rate in Canada was higher than the U.S. rate, it will be reduced.)

[GreenApple123]

Ralph,

Thanks so much!

Question is: I did not receive the foreign income directly. It was paid to my us agency and my agency sent me a check (in USD). I also received the 1099-NEC from my agency.

If I use Form 1116, and enter my foreign income again, will I get double taxed? or, can I enter foreign income is zero, while enter the $675 as tax withheld amount?

[JohnB5677 · Accepted solution]

To be confident I understand the situation correctly. 

• I expect that all amounts are in US Dollars.
• You received a cash payment of $5,325.
• You paid Canadian Taxes of $675.
• You received a 1099-NEC for $6,000.

To post all of these:

1. You would post $6,000 (1099-NEC) to Self-Employment.
   1. You can then deduct various expenses.
   2. This money will be taxed for:
      1. Income tax and
      2. Self-employment tax (15.3%).
2. Select Search and search for foreign tax credit. 
   1. Select the Jump to link.
   2. When you reach the screen Do You Want the Deduction or the Credit? select the option you prefer for your situation.
   3. If you select Take a Credit:
      • Select Continue on the next screen, then select No to fill out Form 1116
      • When you reach the screen Country Summary, select Add a Country
      • Answer the questions about your foreign income, taxes, and expenses on the following screens.
      • When finished, you'll be taken back to the Country Summary screen. 
      • If you have income from other countries to enter, select Add a Country. Otherwise, select Done.
      • Answer the questions on the following screens until you reach your Foreign Tax Credit Summary. 
      • If you’re finished with this section, select Done.
   4. If you select Itemized Deduction:
      • Enter your foreign taxes paid on the next screen. These should show up in the Deductions & Credits section of your tax return, under Other Deductible Expenses

In most cases, taking the credit works out better than the deduction. 

We'll help you decide which one's best for you when you go through this section.

If the $675 is greater than the US Tax, you only get credit to reduce the US tax.

[GreenApple123]

John,

Thanks for your detailed reply.

Use form 1116, what do I enter for my foreign income? If I enter $6000, then I would be double taxed since it's amount included in my 1099-NEC? Can I enter zero for foreign income and enter $675 for foreign tax withheld?

[JohnB5677]

I just posted the entire scenario and confirmed that it does not double up the $6,000.

To get to the Foreign Tax Credit

1. Go to Deductions & Credits
2. Estimates and other taxes paid.
3. Select Foreign Tax Credit.

This is a lengthy interview, but it does work.

[GreenApple123]

thanks!