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taxfiler18
Returning Member

When to recognize foreign tax credit

I have sold some property in India in 2022 and trying to add the gain to taxes. I am using turbotax. I have already paid some tax for this in India in 2023. India has tax year spanning over two years and in this case tax was due in 2023, which I have taken care of. My question is about when to take the foreign tax credit for this transaction. Should I be taking credit in 2022, when the transaction happened or in 2023, when I paid the foreign tax?

 

Thanks!

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7 Replies
pk
Level 15
Level 15

When to recognize foreign tax credit

@taxfiler18 , for US purposes, if the transaction   ( the disposal of an asset ) took place in calendar year 2022, then you recognize the taxes accrued / paid   on your tax filing for the year 2022.   If the final amount  ( because I though India  collects the estimated tax at source ) is different than the amount withheld at source, then you may have to file an amended return to reconcile the difference.  I suspect though that in your particular case the final amount has been already settled  ( it is now  2023 October ).

 

Note though that because India uses an indexing scheme to adjust the basis of the asset, the gain  for Indian tax purposes may be very different  than that for the US ( there is no indexing of basis  in the US ).  For  form 1116  ( foreign tax credit ) you need to use the  US  gain as the foreign source income and the  Indian taxes levied/paid on that .

 

Does this make sense ?   Is there more I can do for you ?

 

pk

taxfiler18
Returning Member

When to recognize foreign tax credit

Thank you pk! Yes, my final amount already settled. This happened in 2023, no tax was paid in 2022 in India. In this case, I recognize the tax credit in 2022 or 2023?

 I am not using indexation used in India for US tax purposes.

 

Thanks,

Manoj

taxfiler18
Returning Member

When to recognize foreign tax credit

Sale transaction happened in 2022 but tax was paid in 2023. Just making it clear.

taxfiler18
Returning Member

When to recognize foreign tax credit

My question is not answered 100% though it sounds like I can credit for foriegn tax paid in 2023 on 2022 sale transaction. I am reporting this on 2022 tax return.

pk
Level 15
Level 15

When to recognize foreign tax credit

@taxfiler18 , considering that the transaction that generated the tax demand  ( no matter when paid ) still belongs to the tax year 2022 ( for US purposes ) --- India would probably note it as tax year 22/23 since their tax year overlaps two calendar years.

 

Also note that for foreign taxes paid/accrued ,  to be recognized/allowed , there must be foreign spource income in that tax year ( for US purposes ).

 

Therefore my position  for recognizing the disposal of the asset, foreign source income and the taxes paid/levied thereon , is still the same -- tax year 2022 for US tax purposes.

 

Is there more I can do for you ?

 

Namaste ji

 

pk

pk
Level 15
Level 15

When to recognize foreign tax credit

@taxfiler18 , i have answered , I think --- tell me  what am I missing --- I will promptly rectify my error(s) -- Please forgive the delay 

taxfiler18
Returning Member

When to recognize foreign tax credit

Thank you pk! My question is answered.

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