2 questions about the Foreign Tax Credit

[expat-allover]

Hello! 

This is my first time trying to file with the Foreign Tax Credit (FTC).  We’re Married Filing Jointly (MFJ), and we live outside of the US.  The FTC is more advantageous for us than the Foreign Earned Income Exclusion (FEIE) because the FTC allows us to use credits for children and childcare expenses, which wouldn’t be possible if we used the FEIE instead of the FTC.

Most of our foreign income – about 75,000 USD – is from wages in the country where we live, which we’ll call Country 1.  We also have a tiny bit of interest (about 13 USD) from a bank account in Country 2; Country 2 did not withhold any tax on that interest.  And finally, we have about 10,000 USD in dividends and capital gains from US sources.  Country 1, where we live, has taxed all our worldwide income, and the amount of foreign tax is about 1,700 USD.

So, to summarize:

• Of our 85,013 USD in income, 75,013 USD is foreign income, and 10,000 USD is US income.
• Of the 75,013 USD in foreign income, 75,000 USD is wages from Country 1, and 13 USD is interest from Country 2.
• In Country 1, we’ve accrued 1,700 USD on our worldwide income of 85,013 USD.  No taxes are due in Country 2.

I have two questions.

1. I entered the 13 USD worth of interest in TurboTax by indicating that’s it’s reported on a 1099-INT, even though we obviously didn’t get a real 1099-INT for this interest, since the interest is from a non-US bank account.  But, since Country 2 withheld no taxes on that 13 USD, I have no idea how to indicate in TurboTax that this 13 USD is foreign income.  If I pretend that foreign tax was withheld on the 13 USD and enter an untrue amount in Box 6 of the 1099-INT, then TurboTax will allow me to indicate that the entirety of the 13 USD was foreign interest, but in reality, no tax was withheld on this interest.  In order to calculate the FTC limitation correctly, TurboTax needs to know that the 13 USD is foreign income and not US income.  If I’ve understood correctly, foreign interest should be included in Form 1116 under Passive Category income.  But when I create a Form 1116 for Passive Category income, I don’t know how to connect the form with the 1099-INT info that I entered previously, and TurboTax tells me very strictly, ‘Do _not_ enter any income already reported on Form 1099-INT’.  In another thread on this forum, a poster suggested that to enter foreign interest into Form 1116, ‘There is an instruction [in TurboTax] to link each class of foreign income to a separate 1116 form.  The first class to come up are 1099 INT.’  But this doesn’t happen for me, unless I enter a false amount in Box 6 (Foreign tax paid) of that 1099-INT.  Is the solution to enter the true amount (zero) in Box 6 of the 1099-INT, and then simply to ignore the ‘Do _not_ enter any income already reported on Form 1099-INT’ and to create a Form 1116 for Passive Category income manually and enter the 13 USD from Country 2 there?
   
   
2. In the TurboTax section on the FTC, I’m getting all sorts of questions about the Alternative Minimum Tax (AMT).  But our total income – 85,013 USD – isn’t nearly high enough to trigger the AMT, right?  If I understood correctly, since we’re filing MFJ, there’s no question of the AMT unless income is above 118,100 USD.  What’s going on?

Thank you very much!

[pk]

@expat-allover , have read through your post, and recognizing that I am not familiar with on-line version of TurboTax ( if that is what you are using ) ,  the facts as I get are :

(a) You and your spouse ( both US person) file MFJ

(b) your tax home is Foreign -- Country -1 ( Germany ? )

( c) Your total  income for the year  -- Foreign -- US$ 75, 000 ( Country 1 ) plus Passive  income of US$13 ( Country 2);

(d) You also have US sourced  Passive income of US$ 10,000

 (e) Country 1 taxed you on world income of US$ 85,013 , to the tune US$ 1700.  Therefore  US purposes you are seeking  recognition of Foreign taxes paid/ accrued  of US$1700

To achieve you need to enter  two  form 1116 -- one active category  and one passive category.  Also note that your US sourced  income has been taxed by Country 1.  Therefore  you need to do two things 

1. Allocate your foreign taxes between active  income of  US$75000  and the passive income of US$10,013 ---- either pure ratio ( if country 1 uses flat or stepped on taxable income )  OR   by category if that country uses  category based tax ) .

2. In the passive income form 1116 , your foreign income is US$10,000  ( resourced because  country 1 also taxed it  )  + Passive income of US$13 ( again because there has been taxed by a foreign taxing authority ).

This should get you  and is legally correct.      Keep your records  and a note reminding yourself that you resourced  the US Passive income to country  1  for purposes of form 1116 ( Passive ).

Does this help ?

Is there more I can do for you ?

pk

[expat-allover]

Dear pk,

Thank you very much for your message!

My first question isn't actually about how to allocate the foreign income between countries, but rather about how to enter the information in TurboTax (yes, I'm using the online version).  How do I tell TurboTax that the 13 USD is foreign income, even though the foreign tax withheld on this 13 USD, as reported in the 1099-INT info that I entered, is zero?  (Whether the 10,000 USD of US-source income should be treated as re-sourced by Country 1 is a separate issue.  I could provide more details, perhaps in a DM, but it's not what I'm asking about here.)

As for my second question, why is the AMT even being invoked when our income is below the minimum amount that triggers the AMT?  TurboTax asks me all sorts of questions about the Simplified Limitation, Election, AMT-FTC Carryovers, etc.  But our income is below the AMT exemption threshold of 118,100 USD.  So, the way I see it, the AMT shouldn't even come up at all.

Thank you again!  I really appreciate your help!

Sincerely,

expat-allover

[pk · Accepted solution]

@expat-allover , my apologies  for getting the wrong end of the stick.  Since I am unfamiliar  with working of thew on-line version(s) of TurboTax ( even though it should pretty similar to the  windows download/CD version), I will ask my colleagues whom are familiar with that product for help

For both 1099-INT and 1099-Div, there is no general way to declare  the income as foreign source , but  there is a dedicated box for  foreign tax paid.   The only way to declare passive income as foreign is on form 1116.

You are welcome to PM, if you have specific questions on the law/ statute and interpretation thereof .  I cannot help  on  the product  and/or entry screens  for  TurboTax On-line