Scenario 1 - If I say I got interest as $1500 and Foreign tax held was $600 - My Tax due is $6015
Scenario 2 - If I say I got interest as $1500 and Foreign tax held was $601 - My Tax due is is increased to $6615
1. How is it possible that I paid more tax in foreign and my Tax due to IRS increased by $600?
2. What's the logic or rule behind this? Is there a limit on foreign Tax paid of $600?
3. Should I just my final income as $900 ($1500-$600) and make my life easy? because if I list Foreign tax paid, I will have to file more documents for Alternative Minimum Tax (AMT)? Also I need to update Form 1116.
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Yes, there is an explanation for that. When you originally reported the foreign taxes paid at $600, there was no requirement to report a Form 1116 in your return because any amount $600 (MFJ) or less does not have a Form 1116 filing requirement.
Now, the new amount at $601 requires a Form 1116 in order to claim the credit. That is why your original amount of $600 was erased. Also, you will not offset your interest income with the foreign tax paid because these are separate categories in your return.
To file a Form 1116 and claim your credit:
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