When should you elect to use the Simplified AMT Foreign Tax Credit Limitation? This is my first year claiming FTC and I don't understand how I should answer this.

[wintermute]

Following up on the question: is there any way to determine based on the 1116 form if I have made the simplified election in the previous year? Based on the thread it seems to be possible, but I am not sure what I should be looking for.

[crisdapartyman10]

Hi pok, thanks for the answer. I'm just wondering though, what is this section to begin with? I mean, what is Simplified AMT Foreign Tax Credit Limitation??? Why is this important? In the case that I am not earning a huge amount, I assume AMT is not something to worry about, but I just don't really understand how it applies to FTC, and if I have foreign income in only the general category, WHY is it correct to choose the simplified method? I am feeling a bit lost about what this implies, and also how this will affect how I must fill out future returns as well. Thank you.

[aliali107]

Hi, how about if my foreign income is of general category (wages) but my US income includes mutual fund or stock trading? Should I use simplified method or the complicated method?

[taimeng]

I have rental income from Canada. I already pay taxes for that income in Canada so I'm eligible for foreign tax credit.

This is the second year that I am claiming a foreign tax credit. Last year Deloitte (accountant) did my taxes and they did not use the simplified method. I'm doing my taxes using TurboTax this year and out of courtesy, my former accountant told me that he believes I should select "First year I am eligible for the election."

My first question is, does it matter if the choice I make is incorrect?

My second question is, if I select "first year I am eligible for the election", does that mean the simplified method will be used?

Because I see the same "Foreign Tax Credit" form, form 1116, both on the 2018 tax return, and on the 2019 tax return. It doesn't seem to me that a simplified method was applied. For tax year 2019, I chose "First year I am eligible for the election" in TurboTax.

[styro_forum]

Topic: When FTC & AMT (incremental $ tax kicking-in) happen first time, whether to elect 'Simplified'

@pk said: >> if your foreign income is of general category ( wages, interest income  etc. ) then you are correct in using the simplified method.  If you have incomes  from many categoreis, including trusts, complicated investment portfolios  etc. and / or multi category carry over credits, do not choose simplied  method.

My Qs:  Thanks so much, very helpful (re FTC when AMT (incremental $ tax) is indeed kicking-in! 

1) Can you elaborate on why + what the effect/ interplay tends to be please? 

2) Is the 'simplified election' just to save man-hours when filling forms? OR does it also help reduce near term tax bills (i.e. give you a higher immediate foreign tax credit limit figure)?

3) Going forward if one expects to have mainly foreign property rental income which may sometimes be deemed passive categ (in years where lesser time is spent on managing the properties), and may sometimes be deemed general income categ (in years where more time is spent on property biz) then what is likely the better choice?
4) Since the diff in Form 1116 (FTC calculator) and Form 1116 AMT version is mainly that the latter strips out deductions (from numerator and denominator of the ratio), is it the size of your typical overall US itemized deductions that drives the choice (i.e. Simplified or not)?

Thanks so much!!

[nikki20201]

Here is a Summary (As per my understanding) :

[a] Normally the regular Form 1116  will be generated.

Note: In the Regular Form 1116 the:

          Regular FTC Limitation = Tax (without ftc) x  [Foreign Source Income / Total Worldwide Income]

[b] ADDITIONALLY

IF you have AMT taxes then you will see: (1)  6251 AMT Tax form (2)  AMT Form 1116

Now on the AMT Form 1116 one has to calculate AMT FTC Limitation - i.e. the max FTC allowed for the year, rest you will have to carryforward.

AMT FTC Limitation = 

AMT Tax (without any ftc credit) x  [Foreign Source AMT Income / Total Worldwide AMT Income]

BUT  since in above formula the "Foreign Source AMT Income" is a bit complex to calculate, IRS allows the tax payer to CHOOSE/ELECT to use in its place "Foreign Source Income" - same value that you used in the Regular Tax FTC Limitation numerator. This is called the "Simplified" method:

So your formula becomes: 

AMT Simplified FTC Limitation = 

AMT Tax (without any ftc credit) x  [Foreign Source Income / Total Worldwide AMT Income].

Note: Basically if you do,  you will use the same net foreign source income for AMT that you used for regular tax. (The amount on line 17 of your AMT Form 1116 will be the same as the amount on line 17 of your regular tax Form 1116.)

You must make the election (to use Simplified ) for the first tax year after 1997 for which you claim an AMTFTC. If you don’t make the election for that year, you may not make it for a later year. Once made, the election applies to all later tax years and may be revoked only with IRS consent. [3]

=========================================

To figure out IF you ever already opted for AMT Simplified Method or Not:

If you see only 1 form 1116 - In ALL years from the first year you started doing Form 1116 -  it means you never needed to deal with AMTFTC so the opportunity to choose - AMT Simplified method or Complex Method - NEVER Arose as yet.

If you see Both forms - In any year from the first year you started doing Form 1116 - It does NOT  tell you that you have used Simplified method or Not. - you need to look Deeper at the numbers

Note: (From what I understand) - There is No separate Indicator that goes to the IRS on the Return - saying I have chosen Simplified method or not.  One has to Look at the number in AMT Form 1116 OR the top of Form 6251 and see if "Foreign Source Income" is being used in the numerator (so it will be matching with same as on Regular Form 1116) or "Foreign Source AMT Income" is used.

And IRS also uses this same way to determine what choice you have made.

===========================================

please comment if anyone has any agree/disagree comments.

Thank you

[xyliu]

Thanks a lot nikki! My 2019 tax was handled by a tax firm, and this is the first year I have to handle FTC myself. Your explanation is incredibly helpful!

My 2019 1116 *almost* matches the simplified method you suggested. In both regular 1116 and AMT 1116, I have the same gross foreign income (3d) and gross income from all sources (3e). However, the regular form had a standard deduction (24,400 for 3c) on both numerator and denominator, so the line 17 is (3d - 3c) and line 18 is (3e - 3c), and the rate is (3d-3c)/(3e-3c). In the AMT 1116, there was no deduction at all, so line 17 / line 18 is simply 3d / 3e. I think this is very close to the simplified method you suggested, but since you mentioned that line 17 in both forms should be the same in order to be eligible for the simplified method, I'm not sure if this is considered "simplified".

Could you (or anyone) help clarify? Thanks!

[ReneeM7122]

If you hade made the simplified foreign tax limitation election for AMT last year, you should only one Form 1116.  For example, if you only had foreign tax credit on wages in a prior year,  and you did make the simplified election, you would have only one Form 1116 for general limitation income.  

But you would have 2 Forms 1116 for general limitation income in your return if you did NOT make the election.  One would be for AMT and the other one would be for regular tax. 

Since you have two forms from your prior year, it sounds like you did NOT make the simplified foreign tax limitation election for AMT last year. 

@xyliu

[PB11]

So I have been taking FTC for many years, but this is the first time I am paying AMT. Does this mean, it is ok to make simplified election this year?

If I make simplified election now, will I run into issues in the future years when the tax situation is complicated? What will be my choices in that situation?

[DaveF1006]

it depends. Please read this article by Super Turbo Tax Agent LinaJ2020. In summarizing what she said, if you have not taken the simplified election in the past, you cannot make it now. Whatever election you made in the beginning is the election you will make this year.

Besides as you said, you can run into issues later on where the simplified election would not be applicable in your case. For example, if you have income that is of more than one category type, the simplified election simply will not work amongst multiple income categories. 

[nikki20201]

@DaveF1006 please see above PB11 is saying though he has been doing FTC for many years THIS is the first year he is dealing with AMT. So What do you mean by saying - If you have taken Simplified EARLIER ? Please clarify. How can PB11 have opted for AMT Simplified or NOT Simplified when THIS is the first year he is dealing with AMT? What is your logic? 

Thanks

[DaveF1006]

it depends. I should have worded this a little better to clarify my decision. He asked if it was alright to elect to take the simplified election.  My point is that yes it is OK but only if you have one type of income category to report. If there are several types though, you cannot make the simplified election. 

The rules state that if you make the simplified this year and then try to change your mind next year, then this is not allowed unless you obtain IRS consent. My point is, if you choose the simplified method this year and then you find next year you have several categories of income, then do not pick the simplified method.  I hope this clears up the confusion.

[PB11]

If I do not make simplified election, are the instructions easy enough on turbo tax online to proceed? Ideally this year I will have only one type of income category to report. But I will have the flexibility in the coming years.

I am not sure if I do not choose "simplified election", and then change my mind; how easy it is to come back & do simplified election with TT online.

The word "simplified" is so tempting, but I do not want to get in a soup 🙂 

[ReneeM7122]

It's easier if you use the Simplified method.

DaveF006 mentioned in a previous thread:

According to the following Turbo Tax link, if your foreign income is of general category ( wages, interest income  etc. ) then you are correct in using the simplified method.  If you have incomes  from multiple categories, including trusts, complicated investment portfolios  etc. and / or multi category carry over credits, do not choose the simplified  method.

@PB11

[ajabon]

If you have to fill out Form 1116, it looks like TT will always ask this question so it can calculate AMTFTC in case you need to pay AMT.

When I go into the form view of TT, I see Form 1116, but not the AMT version. If I "open form" and search for Form 1116 AMT I do see the form populated with numbers. If I print out my tax return to be filed, I see only Form 1116.

If I don't need to pay AMT then have I really "chosen" a method? I don't think TT sends all the worksheets when you e-file so how would the IRS know what what numbers you used when you tried to calculate AMTFTC?