Foreign Land sold with capital gains

[harrybig]

Thanks a lot @DianeW777 . I will do this tonight and let you know.

[harrybig]

Hi @DianeW777 ,

Here are the token numbers for my returns. Note that I am providing you two token numbers, the first one without any foreign cap gains or credits entered for Form 1116, and the second one which includes both. The software drastically increases the taxes I owe in the second scenario. My state is MA although I have not yet done anything on the state returns yet.

Token Number: 1286636 without foreign cap gains or credit

Token Number: 1286647 with foreign cap gains and credit

Thank you very much

[DianeW777]

It appears you have entered this income twice when trying to complete your foreign tax credit on Form 1116. The screen titled 'Any foreign source qualified dividends or long term capital gains?' TurboTax has the amount of income 'for this category' and then the box below it is filled in as well.

Remove this amount as shown in the image below and the return should be ready to go.  Please update here if you have additional questions. 

@harrybig 

[harrybig]

Thanks a lot for that @DianeW777 . I did what you suggested and realize the taxes go down if I blank out that field. The question is a little misleading here in that I interpreted it as asking me how much of my foreign income was cap gains or qualified dividends. 

But even after I blank out the field, the taxes it computes are still higher than what it showed me before I added these sections (cap gains and foreign tax credit). Compare the return with token number 1286636 which is without foreign cap gains or credit with the new one 1286973 which has these sections filled in but with the field you pointed out is emptied here. As the taxes I paid in India are at the rate of 22.5% which is lower than the 15% US would have charged me (long term rates), I should not have seen a rise in taxes due in India. 

[DianeW777]

Please explain if I misunderstand the tax rates. India 22.5% tax rate and US 15% tax rate which would be the most allowed. It appeared to me the Qualified Dividend and Capital Gain worksheet was being calculated correctly. Double check your income didn't rise above the 15% rate.

Also on the first return there was no capital gain for the India transaction if I recall. Please update here if you still have questions.

[harrybig]

Hi @DianeW777 , thank you for your continued help, I appreciate it!

So yes, my question is regarding comparing the taxes I owe from the two versions of the returns, one where I did not input anything regarding the India sale - it showed me that I owe a certain amount of taxes. Let's say it is $1,400. Next I add back the capital gains and the foreign taxes I already paid (which was about 22.5% of the gains) into the second version. I would expect the taxes due to still be $1,400 as my India taxes are higher than what US would have charged. But when I do enter the cap gains and the amount of taxes paid in India, my US taxes owed shoot up to more than $4,000. That's the piece I do not understand. I am not expecting the software to give me a refund, but it should not increase the taxes due. Does that make sense?

[harrybig]

Hi @DianeW777 , I did check if adding my cap gains would take me over the income limits to be in the 15% tax bracket and yes, I am filing married filing jointly and I would remain well within the 15% bracket. Even if I were to be in the 20% bracket, I still should not have to pay anything in the US as I already paid about 22.5% in India - this is my understanding.

[DaveF1006]

It depends. There may be a couple of things that are happening here. Without being able to look at your return, I can speculate on the following.

1. First of all, have you applied the foreign tax credit? If not, then the US may be treated this strictly as US based income. It might not be applying the FTC to offset the U.S. tax liability on those gains.
2. The capital gains may have pushed you into a higher tax bracket. 
3. Alternative Minimum Tax (AMT): The AMT can sometimes affect the calculation of the FTC, especially if there are adjustments related to foreign income. This could lead to a higher tax liability.

These are some main considerations to consider.  Let me know if any of this information addresses your concern and if it doesn't I will take a look at the diagnostics. 

@harrybig 

[harrybig]

Hi @DaveF1006 ,

I will try and answer your questions:

1. When you ask me if I applied the foreign tax credit, are you asking me if I filled in those questions (Form 1116 related questionnaire)? Yes, I did fill in that section exactly as was described in the beginning of this thread.

2. I see your second point, but I am not entirely sure that is happening, because when I click on the "Explain my taxes" button on the top left and drill into the "Your Taxes" and see the amount in the Credits amount, that is significantly lower than the taxes I have paid in India.

3. I did not make any adjustments to the foreign income so not sure about this.

I would really appreciate it if you can take a look at both versions of my returns - the one with token number 1286973 which shows the higher taxes due based on this foreign land sale and the one with token number 1286636 which is just based on US income (no cap gains for the foreign sales nor the foreign credit).

Thank you very much!

[DaveF1006]

To clarify before I give you the results, what amount was taxed in India? Was it for gross proceeds, or was it for the net amount of the sale that included the adjustment? If you were taxed on the amount of the proceeds, go back into the Foreign Tax Credit section and change the gross amount to $158,205. Make sure before you do this, you know that exact amount you were taxed in India. This will lower your tax due if you can take advantage of this.

Another thing I noticed is that your Net Investment Tax rose from $1695 to $7082 because of the investment sale. ‌Before you entered the sale, you only had net investment income from interest and dividends. Now that you have the sale of the apt. included, this is a significant raise. Net investment income tax is paid by MFJ who have a combined income of over $250,000 and is taxed at 3.8% of the net investment income.

Now, let's talk about the foreign tax credit. The tax is determined by a ratio that compares your foreign income to your total income that includes foreign and domestic income. In this case it's around 30%. When you multiply this ratio by the tax you owed on Line 16 on the 1040, this may be less than the total tax you paid in India, because the foreign tax credit cannot exceed the US tax liability amount on the same income. If you cannot claim the full amount of the credit this year, it will be carried forward for the next ten years to offset any future foreign income may earn during that period. This is reflected in Form 1116 Comp worksheet.

So your increase in tax is a combination of Net Investment tax owed and not being to claim the full amount of the foreign tax credit. Be sure to check the amount of that you were taxed on in India, whether it was on the gross amount or if it was on capital gains. If it was capital gains, then don't change the amount in the Foreign Tax Credit section.
 

[harrybig]

Thanks a lot @DaveF1006 . I think this is what is happening. The net investment tax plus the ratio logic you mentioned must be the cause for this.

Thanks a lot to you and @DianeW777 for walking me through this. Really appreciate it.

[DianeW777]

One last item for you to see on your tax return. You are also paying 'Additional Medicare Tax'.  You will see Form 8959 in your tax return showing this additional tax and a credit at the same time. This happens when the W-2 wages are above a certain amount and the link will provide additional details.

Thank you for your kind words.

@harrybig 

[deepakkhat]

Hello @DaveF1006 and @DianeW777 ,

I have a similar situation and fill up all the details as mentioned in this post. I am using Turbotax online.

After completing the Foreign Tax Credit section. The Federal Tax due get reduce but not to the extent when it was before I had added the sale of my apartment in India. The Minnesota state tax had also increased a substantial amount after adding the sale of apartment. But the state tax did not change a bit also after Foreign Tax Credit section.

Can you please help me with this.

Thanks

[RACI625]

Hello @DaveF1006 and @DianeW777 ,

How can I close this chat forum or remove myself. I continue to get emails and other notifications whenever someone has a question.

[DianeW777]

You can change the email notifications that you receive from TurboTax by following these steps: 

1. While in TurboTax,
2. Open your Intuit Account listed on the lower left side of your screen,
3. Select Data & Privacy,
4. Scroll up until you see TurboTax,
5. Select View,
6. On this screen you can turn off all notifications from TurboTax.

In addition, you can unsubscribe directly from the email you received. In the email you received from TurboTax, if you scroll to the bottom there is a blue link that will say "unsubscribe".  When you select that it should take you to a screen where you can unsubscribe from all TurboTax emails.  

If you've already done that and are still receiving unwanted emails, please reach out to Customer Support.

Original post can be viewed here by our Tax Expert @MonikaK1.

@RACI625