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.
What about income from the sale of a rental property?
That is capital gain/ loss .
You enter this just as if the property disposed was in the USA --- Tell TurboTax that you have assets that were disposed in 2018. All your basis, sales proceeds etc. must be converted to US$ of the day -- the exchange rate being based on US Treasury, known sites, or bank in the country where the transaction took place. Any taxes paid on this gain/loss situation to a foreign taxing authority is eligible for foreign tax credit or deduction ( if use itemized deduction )
If you need more on this , please include your questions in comments and I will circle back
How can I determine if I've used this method on a past return?
If this is the first year you claim the foreign tax credit, you would check the box for "First year I am eligible for the election".
The other two options are for if you have claimed the foreign tax credit and made the election in the past. Please continue to read:
For foreign tax credit, there seem to be 2 elections that can be made:
If the amount is less than $300 (or $600 for married filing jointly) then you can claim FTC without filing Form 1116. [1]. This amount can also be used directly as FTC for AMT purposes. [2]
If you have both AMT and FTC, then you can elect for "Simplified Limitation" which lets you use the same foreign source income for AMT as for regular taxes.
The second election has the condition that you have to make the choice the first time you have the option and that applies for all later tax years
You may elect to use a simplified section 904 limitation to figure your AMTFTC. If you do, when figuring your AMTFTC, 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 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]
I'm using the Premier addition of TurboTax and at the FTC interview section on selecting the method it lets me know that I have used the complicated method in the past, but it doesn't tell me which year. If you have always used the simplified method I'm not sure it would flag your choice of the simplified method for this year.
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 simplied method.
Thanks for this detail!
> If you have incomes from multiple categories, ...
Should this instead read "If you have or ever expect to have incomes from multiple categories, ..."?
This choice seems to carry through to future tax years. If I think I might have foreign income from multiple categories in the future, then it seems like I should avoid the simplified method now, correct?
That is correct, A simple rule to follow if you are making this decision is 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 categories , including trusts, complicated investment portfolios etc. and / or multi category carry over credits, do not choose simplified method.
how do I know my election for Foreign Tax credit in previous TurboTax years
You would need to look at the Form 1116 for each year.
There is a worksheet called Foreign Tax Credit Computation Worksheet. If you have the worksheet in this year's taxes that may help you too.
Thanks, is there a line or a box on the form 1116 that would let me know that I have taken the simplified method or not?
It looks like I once used the AMT adjustments for form 1116 foreign tax credit so I can’t use the simplified method, though I doubt I will ever have an entry for the several questions the longer interview asks. The only one I have doubts about is the question on high tax kickout. Would this be reported on a 1099? I only have passive mutual fund (RIC) income (dividends) from an international fund.
The kickout would only apply to passive income, such as rental income and capital gains on sale of rental property. It would not apply to dividend or interest income.
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.
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.
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?
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.
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!!
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
[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) 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 "Foreign Source Income"
So your formula becomes:
AMT Simplified FTC Limitation =
AMT Tax (without any ftc credit)
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.
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please comment if anyone has any agree/disagree comments.
Thank you
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!
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.
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?
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.