Simplified Foreign Tax Limitation Election (for AMT)

[rootsmusic]

I'm amending my 2018 form 1040.  My 1099-DIV reports $14 in foreign tax paid on $73 in foreign dividends.  I have no other foreign income.

My 2017 tax return wasn't prepared by TurboTax or by me.  In it, I have a form 1116 that I can't view because it wasn't attached to the filing.  However, I can view the carryover utilization worksheet for foreign tax credit (also paid on foreign dividends) .  How can I determine whether my 2017 tax return elected the Simplified Foreign Tax Limitation Election?  Thanks!

[Anonymous · Accepted solution]

The Simplified Method is when you claim the FTC without filing form 1116.  the penalty for doing this is you lose the right to claim any FTC carryover.     Under the SM, if you are single you can claim up to $300 of FTC ($600 if married) on passive income without filing the form.  The credit is also limited to your tax liability.  so if you have $300 of FTC, a tax liability of $200, and elect the SM you reduce your liability to $0 but lose the $100 carryover. it would seem that since form 1116 was not included in the filed tax return you have no usable carryover from 2017.   

[HM888]

This is the first year, my foreign tax credit is more than $1000, so I need to choose "Simplified  Foreign Tax Limitation" .  Once I choose this, I can't file my tax online.   I don't need to pay any ATM. Should I still  select the Simplified Foreign Tax Limitation  or I can just choose the Non-Simplified AMT and wait until I need to pay ATM ( unlikely)? 

Going forward, I will receive Pension income from Canada every year, so I will expect my FTC around $1000 each year.  In my case, should I choose the Simplified foreign tax limitation or Non-Simplified AMT?  

Thanks. 

[DaveF1006]

Yes, I would choose  Non-Simplified AMT and wait until I need to pay AMT if that ever happens. This way, you can efile your return.

[HM888]

Thank you so much for your help again.  

Anyway, I still can't file online and getting the same error message "To correct, navigate to the Deductions & Credits Tab, under the Menu Heading Estimates and Other Taxes Paid choose Foreign Tax Credit Proceed to answer all questions in the topic.

I went through all questions three times and selected " I chose Not to use the elections in 2019 or a previous year" , but my file still got rejected even there's no error was found  in  my tax return. 

I don't know if it is because I have two type of foreign income : Passive Income ( dividend) and General Income ( for Pension), and I also have Foreign Tax Credit Carry overs to 2021 for  both Regular Tax and AMT.  

In this case, do you think that there's nothing I can do and choose  to mail my tax return instead of  e-filling?  Please advise, thanks. 

[HM888]

Any thing you can think that could stop the e-filing event I choose not to simplified the Foreign Tax Limitation. 

I don't need to pay the AMT, do I still need to answer the questions: " Alternative Minimum Tax - Canada  : enter the amount of any alternative minimum tax pre refences or adjustments applicable to the income or expenses for Canada ( pension income)?"  If I choose the foreign tax credit , it should automatically pick up all the adjustment and not need to complete this question, correct?   Thanks. 

[SL-10us]

HM888, I had a situation where I had 2 types of income with foreign taxes paid.  After I had completed entering all data into TurboTax, I got to the end and I was informed I could not efile.  Long story short, don't recall how I found this answer BUT I found it within the TurboTax program, that in order for TurboTax to be able to efile with my particular circumstance, the General category income with the foreign taxes paid had to be the first Form 1116.  The Passive category income with foreign taxes paid, which is on a different Form 1116, had to be after the General category income with foreign taxes paid.  Somehow my first Form 1116 was the Passive income.  Once I re-entered my information so that my first Form 1116 was the General category income, TurboTax was able to efile my return.  This may or may not help you with your situation. 

[64dancer]

2020 was the first year I used Form 1116. TT says my 2020 return showed that I decided to use AMT adjustments to determine my taxable income on the Form 1116 I filled out for AMT purposes. I now need to continue to use this method. I do not recall doing this, but do recall being confused by the question last year.

My 2020 Carryover worksheet shows that I "utilized" some of the AMT carryover for the Foreign Tax Credit. How did I use it if I didn't have to pay AMT? How did it calculate this number? And what form does this show up on? I have to use form 1116 again in 2021 and again do not owe AMT. How do I calculate this carryover?

[RobertB4444]

TurboTax calculates AMT despite it being unnecessary 90% of the time.  It calculates it because somewhere when you were entering things and hadn't yet finished the program thought you might need it and added it in there.  You don't need it.  You may never need it.  But it reflects the activity on your regular tax return.  So if you used the foreign tax credit for regular income tax purposes you used it up for AMT purposes as well.

[64dancer]

Ok, I can go along with that. But, am I now obligated to use the adjustment method rather than the simple method even though I didn't have AMT in 2020 so didn't need to make the election?

On a separate note, TT did not adjust my Taxable Income from Foreign Sources for Form 1116, Line 1a and should have. I'm sure I missed a question somewhere. Can you tell me what question I missed and how to find it?

[64dancer]

I re-went through the questions and this time it gave me an adjustment for Form 1116, Line 1a, but I believe it is incorrect. I went to the Foreign Tax Computation Worksheet and compared it with the same worksheet from 2020. They were NOT calculated the same. I believe 2020's is correct and 2021's is incorrect. Are there instructions for this somewhere? After comparing the two, this is what I found:

Line 1c and f are correct for both years. 2021 is at $5670. This is the Total Foreign Income.

Line 1g is titled, "Ordinary Income" in both 2020 and 2021.

In 2020, Line 1g was the Nonqualified Dividends. In 2021, Line 1g is NOT the Nonqualified Dividends.

It was calculated by:

Qualified Dividends - (.4054 x Qualified Dividends) = $4371.31 - (0.4054 x $4371.31) = $2599.18.

In 2020, Line 1h are the Qualified Dividends. In 2021, Line h is NOT. It was calculated by:

Total Foreign Income of $5670 - $2599 from Line 1g = 3071.

For 2021, these two mistakes cause the final result to be incorrect. 

How do I correct this?

[64dancer]

I do not qualify for the exception. I calculated my adjustment as follows:

Qualified Dividends  of 4371.31 x 0.4054 = 1772.13

Qualified Dividends of 4371.31 - 1772.13 = 2599.18

Total Foreign Income of 5670.16 - 2599.18 = 3070.98 ---> Belongs on Form 1116, Line 1a

TT has  3844 on Line 1a. I looked at the TT prepared worksheet and it is completely wrong. They have the 3070.98 on Line 1g which is titled Qualified Dividends. I looked at the worksheet from 2020 as a comparison and the line 1g was correct.

How do I correct this field in TT?

[64dancer]

I found the error and corrected it.

[64dancer]

Next problem, Form 1116, Line 3e is $2428 higher than what I have calculated (I calculated the same way I did last year which tied to TT). I have read that there is an error on TT for this line. The smart worksheet only gives the total, not a breakdown of how it came up with this number. That's not very SMART now is it? The bottom line doesn't change anything, so I am good there, but the detail is inaccurate.

How do I get to FORMS MODE to make a change? I am using the online version and I do not see an icon to take me there. I also don't have an icon this year to bookmark pages. 

[DaveF1006]

If you wish to have the ability to work in forms, you will need to purchase a Turbo Tax Desktop from here. Since you haven't paid for the online version, you can transfer your tax return from the online version to desktop once you have downloaded and installed your desktop product on your computer. 

Once your desktop product is installed, you will go to the forms mode and you may edit form 1116 in Box 3e. You can also right click in Box 3e to find out the data source used to determine the amount.

Once your program has installed, here is how to transfer your online tax return to the software.

1. If you are logged in go to tax tools>tools>Save your 2021 return to your computer
2. After you receive the .exe notification at the bottom of the screen, open it and it should launch your Turbo Tax desktop return on your computer. Be sure before you do this, your desktop product is not opened on your desktop or else this won't work.
3. Also, you can open your Turbo Tax software and when you reach the landing page, there will be s link that says find a tax file. After selecting this, it should find the only tax file that should be installed on your computer.
4. Also you may need to check in your PC download file and select there if it didn't automatically launch in the way that it should have.

@64dancer