Foreign income tax paid on US income: how to get credit

[retailboy99]

I am a new tax resident of Portugal and pay Portuguese tax on parts on my US income. It's all passive income: Social Security, annuity, interest, dividends, and capital gains. I have no Portuguese income. How do I claim a tax credit? I have gone down numerous rabbit holes in TurboTax Deluxe. I know for 1116 is key, but how do I invoke it? Thanks. 

[gbriel]

I have a very similar issue, as I moved to Italy in 2024 and as a new citizen and resident there will owe Italian income tax on all worldwide income.  My ONLY income is interest earned in the USA and Canada that I have always reported on my USA tax return as a USA citizen and previous resident.  I know that I need to report all of that interest from 1099-INT forms on my 2024 tax return like always because I am a USA citizen, but I too cannot figure out how (as in where specifically to do it via Turbo tax online) to get the applicable tax credit for the taxes on that same interest income that I will pay to Italy and that will be far greater in amount then the taxes I would pay if I still resided in the USA.  The interest income was not SOURCED in Italy, but will I believe be re-sourced by tax treaty and considered Italian sourced income since they have first taxing rights to the interest earned.  Using tax form 1116 does not seem to work, UNLESS I plug into box 6 for every 1099 the amount of tax I will pay to Italy (but have not yet paid and is not reported on the 1099 generated by the USA or Canada).  This may be the solution, but it is technically incorrect since I have not paid any foreign tax on those USA and Canada 1099 interest amounts reported on my USA return.  The only other thing that I can think of is to go into the Less Common Income section (Miscellaneous Income) and enter a negative number that exactly equals the total interest reported as Interest income on my USA return when entering all 1099's, thereby eliminating that income entirely because it is being taxed in Italy under the USA/Italy tax treaty.  Doing that would not however result in possible carry forward tax credits re the much higher tax amount I'll pay in Italy as compared to what will be necessary to eliminate the USA tax on that same income.  Not sure if a form 8833 would also need to be filed explaining all of this.  Maybe the reality is that Turbotax does not work in a situation like this one and it's software may well be unable to accommodate what needs to be done here.  Surely Turbotax will want to opine on this matter to make it clear to users like you and I and I am confident many others who have similar issues!

[gbriel]

...and it will require that a Turbotax expert take the time to explain this clearly and walk us thru it step by step (I use Turbotax online), as it is not something that can be addressed with a quick response that lacks specific detail.  I trust that Turbotax wouldn't want it's users having to seek out other tax filing software providers that better handle these expat type situations and that they will want to quickly and capably assist to avoid losing business.

[DaveF1006]

Yes, now I agree you are on the right track when you mention income resourced by treaty.  Under this provision, U.S. source income is treated as foreign source income under an applicable income tax treaty. This can help prevent double taxation by allowing you to claim a foreign tax credit for taxes paid to a foreign country on that income. Since the US has a tax treaty with Portugal and Italy, you may use this provision. Here is how to report.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5. Now navigate through the screens until it says Tell us about your foreign taxes. Select none of these apply.
6.  Then navigate two more screens indicating you wish to take the credit.
7. Then navigate to the screen where it says no other income and expenses, select no.
8. In two screens, it will ask the income type, here you will select income sourced by treaty
9. Next under country summary, select Portugal in the drop-down
10. Select edit next to Portugal or Italy
11. First screen will ask for gross income. Here total up all the income sources you were taxed on in Italy or Portugal. Don't be confused by the verbiage here because we have now resourced the income to Portugal or Italy.
12. Now skip screens until you have reached a screen to report foreign taxes. First say no.  You have foreign taxes paid on rental, royalty or other income.
13. Now you will report the total of your foreign taxes paid on other income.
14. Now you are done with the country.
15. Now navigate through the Foreign Tax section and not make any more entries, except for the country of residence.  Here you you will say Portugal or Italy.

Don't do anything like creating fictious foreign tax paid in 1099's. Just keep it simple and follow steps I have outlined.  one thing i need to mention before i post. Your foreign tax credit is limited by the amount of your tax liability. This is done by taking your adjusted gross income for the year and subtracting your standard or itemized deduction.  Your tax liability is based off of the taxable amount that is remaining. If the foreign taxes exceed the tax liability amount, then you will only receive credit up to the tax liability amount and the excess can be carried back one year, then carried forward for the next ten years.

For an example, if your adjusted gross income was $20,000 and your standard deduction is $16,200.  Your taxable income is $3800 and the tax liability is $380. if your foreign tax is $1000, you will only receive credit for $380 and $620 would be a carryover.  i only mention this in case if you receive a credit for less than the foreign taxes paid for the year.

[Edited 02/25/25|2:15 pm PST]

@retailboy99 

@gbriel 

[gbriel]

This is the exact opposite of what I believe is the correct method of handling based upon everything that I have read.  As a USA citizen with only USA sourced income, the only way that you can reduce or eliminate your USA tax obligation is to re-source that income by completing form 1116 so that you can then get the foreign tax credit due and necessary to reduce or eliminate the USA tax liability on that very same income.  The questions above were more focused on HOW this is properly recorded using the TurboTax software.  To be specific, in my case, I have the 1099 interest forms from both Canada and the USA (my only sources of income).  I am a USA citizen, but reside in Italy where I am also now a citizen.  I will therefore owe tax in Italy on my worldwide income.  As a USA citizen, I of course have a filing obligation, but to avoid being double taxed on that income, need to use FTC’s and the only way to do that is to resource that USA sourced income to be Italy sourced on form 1116.  The issue is that I do NOT have any foreign tax showing in box 6 on any of the form 1099’s, so am not sure how to reflect the tax that I WILL pay to Italy on that 1099 income.  Do I plug a tax paid number into box 6 on each 1099 and say it was/will be paid to Italy?  That would populate form 1116 with the foreign tax that will be paid to Italy and then also show the applicable FTC for the income that was re-sourced.  Kindly advise step by step as I use TurboTax online and have for many years now but just moved to Italy in 2024.

[gbriel]

…I should have clarified that the USA-Italy tax treaty allows for the re-sourcing of the USA and Canada sourced income to be considered Italy sourced interest income, thereby allowing the FTC to be calculated in removing the USA tax obligation on that same interest income.  I am asking about the mechanics of getting all of that information input using the TurboTax online software program, as it is confusing.  As I said, I can “force” the foreign tax by inputing a number in box 6 on each form 1099 entered in the income section, with that number being the 26% of the 1099 interest number that will be paid to Italy, but there isn’t a number in box 6 o; any of the 1099’s as issued.

[DaveF1006]

Yes, now I agree you are on the right track when you mention income resourced by treaty.  Under this provision, U.S. source income is treated as foreign source income under an applicable income tax treaty. This can help prevent double taxation by allowing you to claim a foreign tax credit for taxes paid to a foreign country on that income. Since the US has a tax treaty with Portugal and Italy, you may use this provision. Here is how to report.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5. Now navigate through the screens until it says Tell us about your foreign taxes. Select none of these apply.
6.  Then navigate two more screens indicating you wish to take the credit.
7. Then navigate to the screen where it says no other income and expenses, select no.
8. In two screens, it will ask the income type, here you will select income sourced by treaty
9. Next under country summary, select Portugal in the drop-down
10. Select edit next to Portugal or Italy
11. First screen will ask for gross income. Here total up all the income sources you were taxed on in Italy or Portugal. Don't be confused by the verbiage here because we have now resourced the income to Portugal or Italy.
12. Now skip screens until you have reached a screen to report foreign taxes. First say no.  You have foreign taxes paid on rental, royalty or other income.
13. Now you will report the total of your foreign taxes paid on other income.
14. Now you are done with the country.
15. Now navigate through the Foreign Tax section and not make any more entries, except for the country of residence.  Here you you will say Portugal or Italy.

Don't do anything like creating fictious foreign tax paid in 1099's. Just keep it simple and follow steps I have outlined.  one thing i need to mention before i post. Your foreign tax credit is limited by the amount of your tax liability. This is done by taking your adjusted gross income for the year and subtracting your standard or itemized deduction.  Your tax liability is based off of the taxable amount that is remaining. If the foreign taxes exceed the tax liability amount, then you will only receive credit up to the tax liability amount and the excess can be carried back one year, then carried forward for the next ten years.

For an example, if your adjusted gross income was $20,000 and your standard deduction is $16,200.  Your taxable income is $3800 and the tax liability is $380. if your foreign tax is $1000, you will only receive credit for $380 and $620 would be a carryover.  i only mention this in case if you receive a credit for less than the foreign taxes paid for the year.

@retailboy99 

@gbriel 

[gbriel]

Thank you for this.  I am the one in Italy (the initial post that I commented on was from somebody in Portugal).  In Italy, my understanding is that my interest income will be taxed at a flat rate of 26% upon the completion and filing of that tax return and I do not believe any personal exemption exists or is allowed against that income.  With my USA effective tax rate being no higher then 12% (of course after considering the standard or itemized deduction) I seemingly will end up with a substantial foreign tax carry forward.  I use TurboTax online so I assume your instructions above are applicable to that and I will have to work thru them tomorrow morning my time.  Kindly check back here tomorrow if I have any follow up comments or questions once I work thru the program and see the result.  With my only income being USA and Canada sourced interest and with tax on that income being due to Italy because I am now a resident and also a citizen, I have to re-source it to Italy in order to generate the FTC necessary to eliminate most or all of the tax liability I will have in filing my USA return as a USA citizen.  Just wasn’t sure exactly how to work thru the TurboTax software, especially since the tax slips received from the USA and Canada d not include any foreign tax amount…leaving me uncertain as to how the form 1116 would be populated.  I will follow up tomorrow.

[gbriel]

Sorry one more thing before I call it a night here…do you know if this particular situation requires the filing of a form 8833 re the tax treaty related matter and having to utilize that to re-source the interest income?  Since I live overseas and plan to file online like I always do and I know TurboTax doesn’t support that form, I am hoping not.

[AmyC]

1.You will fill in the relevant information for Form 1116. See Where do I enter the foreign tax credit (Form 1116) or deduction?

2. It depends. Claiming Tax Treaty Benefits states:

The payee does not have to file Form 8833 for any of the following situations:

1. The payee can claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate.
2. The payee can claim a treaty exemption that reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship and fellowship grants.
3. The payee can claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement.
4. The payee is a partner in a partnership, or a beneficiary of an estate or trust and the partnership, estate, or trust reports the required information on its return.
5. The payments or items of income that are otherwise required to be disclosed total no more than $10,000.

For recent changes to the requirements for filing Form 8833, refer to the instructions attached to the Form 8833.

Reference: About Form 8833, Treaty-Based Return Position Disclosure

@gbriel 

[gbriel]

I explained my specific situation in above posts, so do you think a form 8833 is required?  I am simply re-sourcing my USA and Canada interest income to have it considered as sourced in Italy under the treaty so that I can then generate and utlize a FTC to offset the USA tax on that same income since I am required as a tax resident of Italy (also a citizen of both Italy and the USA) to pay tax on it there.  Simply trying to avoid double taxation.

[DaveF1006]

Yes, if are considered a dual-citizen, you should file Form 8833 if you wish to claim a treaty-based return position to re-source your U.S. income to Italy. Form 8833 is used to disclose treaty-based return positions as required by Internal Revenue Code section 6114 or 7701(b). This form is necessary when you are taking a position that a tax treaty between the U.S. and another country (in this case, Italy) affects your tax liability.

By filing Form 8833, you are informing the IRS of your intention to apply the tax treaty provisions to your income, which may result in different tax treatment than what is typically required under U.S. tax law.

@gbriel 

[gbriel]

Isn’t the whole purpose of Form 1116 and the box that can be ticked to indicate that some income is being re-sourced from the USA to Italy to inform the irs of what you are doing in accessing the FTC because you are paying tax on that same income to a foreign country and need to offset the USA tax on that same income?  In other words, why would form 1116 have a box to tick indicating the re-sourcing of income under a tax treaty if you also had to complete a form 8833?  I believe that there are situations where you do not have to complete a form 8833 and I believe that my situation is one of them.