Applying Foreign Tax Credit to Passive Income

[pcmoan]

Hello-

I'd like to connect with a TurboTax export to help answer two specific questions.  There is an expert service available but it appears to kick in only after starting an online tax return.  For reasons I'll skip here, I need to use the desktop version. So, I'm not sure how to proceed. 

Issue #1

I need the service of an accountant familiar with applying a foreign tax credit to passive income.  My case is very simple.  I'm dual Canadian/US citizen living in Canada.  I have dividend income and I need to fill out a Form 1116 for passive income to apply the credit.   I currently have a small bit owing to the IRS, and cannot figure out what is required to drive this to zero.   

Issue #2

I have RRSP income this year but should not be taxed on the amount invested because I've already paid taxes on this amount (I'm self-employed, and self-employed people cannot deduct income with an RRSP when living abroad for some reason).  I need assistance with claiming the gain as income.  

Thanks for any guidance.

[MarilynG1]

If you have Dividend Income to report but did not receive a 1099-Div enter it 'as if' you had a 1099-Div.

Any foreign tax paid on this income (you enter the tax amount) will be transferred to the Foreign Tax Credit section for you.  All you need to do is enter the amount of the passive income in the Foreign Tax Credit section related to the tax. 

Click this link for steps on Reporting Dividend Income without 1099-Div. 

To report Canadian RRSP Income, go to Wages & Income > Retirement Plans and Social Security > Canadian Registered Pension Income (screenshot).

To claim a credit for taxes paid on your RRSP, you will need to enter both the Income Amount/Taxes Paid in the Foreign Tax Credit section (general income category). 

This link has info on Reporting Canadian Pension Income.

[pcmoan]

Much appreciate the response.

Unfortunately, I'm still  not clear on how to apply the FTC to my dividend to get my tax bill to zero.  To simplify this exercise, I deleted all dividends and brought the amount owed back to zero, then added a single dividend listed on my 1099-DIV. This gave me a non-zero amount for Federal Tax Due. Assume I owe $100.  My objective is to reduce the $100 to $0 in TurboTax using a FTC for passive income.

To this end, I navigated to Deductions->Foreign Taxes and created a Foreign Tax Credit Computation Worksheet for "Passive Income" and stepped through all screens that followed, trying to identify where I need to enter Canadian taxes paid on my passive income to offset the $100 TurboTax is currently saying I owe.

The specific screens are listed below. I've experiment with each to see how they affect the tax bill, and there is no field I can see that I can use to offset the bill.

1. Personal->Deductions & Credits
2. Choose the Income Type (Passive income)
3. Country Summary (Canada)
4. Any foreign source qualified dividend
   • Foreign qualified dividends and l.t. capital gains (_blank_)
5. Taxes Paid or Accrued (Paid)
6. Other Deductions Not Definitely Related
   • First Deduction (_blank)
   • Second Deduction (_blank)
7. Investment Interest
   • Other Interest Expense (_blank_)
8. Trade or Business Interest
   • Trade of Business Interest Expense (_blank)
9. Passive Interest
   • Passive Interest Expense (_blank_)
10. Country of Residence (Canada)
11. Reduction in Foreign Taxes
    • Reduction in Taxes (_blank_)
    • Description (_blank_)
12. High Tax Kickout
    1. Taxes reclassified under high tax kickout (_blank_)
13. Foreign Tax Credit Carryovers
    • Year 2014 thru 2020 shows Foreign Taxes paid and Amount Used.
    • Not clear why TT is showing me this..
    • Figures pertain to taxes paid as a self employed consultant.
14. AMT Foreign Tax Credit Carryovers
    • Same table as above
15. Gross Income Adjustment
    • Gross Income Adjustment (_blank_)
16. Miscellaneous Items - Answered No

Thanks in advance for any insight.   

[MarilynG1]

When you entered your 1099-Div, did you enter the amount of Foreign Tax? (screenshot)

Then, in the FTC section, you will see:

Choose 'Report Income', and you will then confirm that the total amount of income reported on your 1099-Div was from Canada. 

[pcmoan]

Hi MarylnG1-

You asked about whether I entered the amount of foreign tax in box 7.  I did not.  Box 7 is blank on the 1099-DIV I received,  and I assumed (perhaps incorrectly)  I should enter exactly what was on the form (versus also including tax I paid to the Canadian Revenue Authority).

If I enter in the amount of tax I paid to the Canadian Revenue Authority (CRA) in Box 7 then step through the FTC pages as you noted, then my tax is reduced to zero, but as implied above... I'm not sure I if I've done the correct thing here, which leads to 2 questions:

1. Can I enter tax I paid to the CRA  in box 7 or does the IRS require that Box 7 match exactly what's on the form I received from the broker?  (If the IRS requires they match, then I'm stumped 😁)
2. When TurboTax asked "Where Did You Receive Dividend Income From", I selected RIC (per instructions on the same web page).  Your example below notes the Country as Canada, but that would not every apply to a situation where the dividend being paid by a mutual company or registered investment company correct?

Thanks for your timely response to my previous two posts. Much appreciated!

Patrick

[DaveF1006]

Yes, you should enter the amount that is listed in Box 7 on the 1099-DIV.  In fact, I found this IRS document which explains the matching process in detail and the purposes behind it.

As far as selecting the country, if this dividend was issued from a RIC, then it would be correct either listing Canada or selecting RIC. Selecting RIC is particularly helpful if you have a large number of dividends to report that were issued by RIC's.

[pcmoan]

Thank you for your reply.  GIven that Box 7 must match what is on the Form 1099-DIV, then I am back at square one, because I see no way in TurboTax to specify the Canadian Tax that I've paid on this dividend.  As said above, TurboTax tells me I owe $X to the IRS after stepping through each screen associated with setting up a Form 1116 for passive income.  

[DaveF1006]

It depends. if you are reporting a 1099 DIV and in the screen entitled Let's get the info from your 1099-DIV, you will enter the dividend amount and then check the box that says My form has info in other boxes (this is uncommon). Select this and you will be able to enter the foreign tax paid in Box 7.

[evanrmurphy]

Hi pcmoan, did you ever figure this out? I'm having the same problem. It seems like people are giving you contradictory answers here. As you point out, you have to enter foreign taxes in box 7 on the 1099-DIV if you want TurboTax to acknowledge a reduction in your tax bill. But then you have not entered the 1099-DIV faithfully to the numbers that appear in its boxes.

What did you do? Any advice from you or others familiar with Form 1116 and common expat situations?