Foreign Tax Credit

[Coach209]

I need help, please.  Background: I am using the TT deluxe edition for desktops and we are filing a joint return.

We have $667 in foreign tax credits from Fidelity and Vanguard mutual funds. I realize this exceeds the $600 threshold, but TT is only allowing $85 in foreign tax credit!

I would guess that at least most of the $667 would be allowed, and not just a small fraction like $85.

Can anyone explain why this might be happening and if indeed it is possible to only be allowed a small fraction of a reported $667 foreign tax credit?

Also, since we exceed the $600 threshold for joint returns, will we have to file For 1116?

Thank you!

[DaveF1006]

The IRS limits the foreign tax credit you can claim to the lesser of the amount of foreign taxes paid or the U.S. tax liability on the foreign income. The excess limit is created when the U.S. taxes on that foreign income are greater than the foreign taxes paid.

If you weren't given full credit for your foreign taxes paid this year, you can carryover the unused amount for ten years to offset future foreign income. Turbo Tax In any case, since the amount of your credit is $667 this year, the system should generate a Form 1116 because it is over the filing threshold of $600 for a married Filing Jointly return. Also, the Form 1116 worksheet is generated to help you keep track of the Foreign Tax Credit carryover from year to year.

[Coach209]

Thank you, Dave. But, I am confused why I have always received the full foreign tax credit, in past years, reported by Fidelity and Vanguard. I understand that all past years have been below the $600 threshold, but the limits you describe apply no matter what the foreign tax credit, do they not?

If the limits you describe only apply if one is over $600 (joint return), then I wish I could only report one of the mutual funds foreign tax credit ($513), then I could receive a much larger credit!   I hope what I am suggesting makes sense.

Again, thank you.

[AmyC]

Yes, the tax law for the credit is always the smaller of tax paid to the foreign country or U.S. tax on the same amount.

Deluxe contains the 1116 and must be filled out. Since it is your first year, perhaps the form did not get filled in completely and correctly. You want to use the credit, not the deduction since that is what you have described. Choosing deduction, would add it to sch A and could be the reduction difference you are seeing.

You should use RIC for the country since you are using  regulated investment companies, Fidelity and Vanguard. You must enter the foreign income and foreign tax.

Reference:

Instructions for Form 1116 

Claiming the Foreign Tax Credit with Form 1116 - TurboTax

[Coach209]

But, Form 1116 generated by TT shows the $667 CREDIT (shown on the two 1099-DIVs, line 7)  as foreign INCOME (on line 1a for Form 1116).

That does not seem correct. The foreign income shown in the details from Fidelity and 
Vanguard is much more than this - over $4,000 I believe.  I just cannot understand what TT is doing here.

Am I just missing something? I may be!

Thank you.

[RalphH1]

When you go through the Foreign Tax Credit screens, there’s one where you enter the actual income (it’s right after you enter the country, or “RIC” for Regulated Investment Company). Is it possible that the $667 foreign tax amount has been entered as the “Foreign Source Income” on this page? That would reduce the credit to something in the ballpark of the $85 you’re seeing, and also explain the Form 1116 line 1a entry.

@Coach209, have you entered everything else in your return, and verified that there’s a tax liability (on line 16 of your 1040) to reduce with the credit? (If there’s only an $85 tax liability on that line, that will be the credit amount.) I’m guessing you’re on top of this (as you have Foreign Tax Credit experience), but I thought I’d bring it up (in case my first paragraph isn’t the answer), as it’s sometimes the cause of an unexpected result.