Foreign taxes on passive income

[ashutoshsharmaindia]

I was going thru this thread

and this one 

I have a different tax situation. I sold one real-estate property in India. Indian government immediately deduct the taxes on that property sale(called TDS or tax deduction at source) which is around 21.5% of the overall value(not profit but overall value).

I am US Citizen. Do I need to report this? Can i get some money back as here  in USA - my effective tax rate is around 15%.

When I called Turbo tax - I got some shaky answers - like fill form 1116. When i filled form 1116 - it seems I can claim the entire tax that i paid in India back here in USA. This really doesn't make sense to me as whatever is my overall long term gains(property was held for 19 years), I need to either pay the taxes in USA or India.

Can somebody guide me? thanks in advance.

I don't trust turbo tax tax experts nowadays a lot as every time I will call - I will get a different advice. Most of them are seasonal workers and contractors.

[DaveF1006]

Yes, to receive a foreign tax credit, you need to fill out form 1116. The foreign tax credit that is claimed is  the lesser of the amount of foreign taxes paid or the U.S. tax liability on the foreign income.  In your case, it is possible that the  foreign taxes you paid were less than your US tax liability thus you were able to claim full credit for your foreign taxes paid. Here are the complete steps for reporting this income accurately so that you can receive the proper foreign income credit. 

First report the sale of your property in the investment section of your return. 

1. In your Home and Business program, go to personal>personal income>choose what you work on.
2. Go to investment income
3. Go to Stocks, Cryptocurrency .......
4. Classify this as other
5. Follow all prompts that follow to determine what your capital gains is on the sale.

Now to claim your Foreign Tax Credit.

1. Federal>deductions and credits>deductions and credits>estimate and other taxes paid>Foreign Tax Credit>start or revisit
2. When it asks We just need to check if you have any uncommon situations indicate I paid foreign taxes on income I earned while working in another country.  
3. Navigate and record the entries that the program asks for and when you reach the page that mentions Foreign Tax Credit Worksheet, this is where you take notice between a deduction or credit.
4. The first that you will be asked is what category of income is it, you will say passive income..
5. Next screen will say Country Summary, select add a country and then select India.
6. When it says Other Gross Income - India.  Here is where you report the capital gains income that your sale was taxed on in India. 
7. Then you will navigate through the screens until you come to a screen that says Foreign Taxes Paid - India, here is where you record the amount paid under Foreign Taxes on Other Income. Then below that you will enter the amount of taxes paid in taxes.  This is a screenshot what this screen looks like.  After you report this , you should receive a country summary screen included in my previous post.

If you haven't reported your income and credit in this manner, then do so as this will accurately calculate what your foreign tax credit should be.

[Edited 02/13/24|4:15 pm PST]

[ashutoshsharmaindia]

Thanks.

This should be considered passive income, right?

Even after filling this, for one condition:

Foreign taxes paid in foreign currency and you converted the amounts to U.S. dollars

It is asking me to use the forms method(directly editing the form 1116). 

But when I go to the forms mode - I don't see a place for currency conversion. I used google to do the currency conversion so it should be fine.

When i go to the forms mode - I see form 1116 AMT also - I don't know why and how it got generated?

After that it also indicates that passive income tax credit exceeded your allowed credit by certain $$$ which can be taken over the next 10 years. I am confused whether I am doing it right or not?

[DaveF1006]

Yes, you are correct. I erred in my previous post declaring this general category income. To report this on your US tax return, you will need to report this in US dollars. Unfortunately, Turbo Tax does not make these conversions so you will need to be responsible for performing your own currency conversions.  

As far as the far as the Form 1116 AMT, it sounds like you may be in an alternative tax situation. Form 1116 AMT limits the foreign tax credit you can claim if your income is subject to AMT. You may wish to view the following IRS source and look under the heading "Am I subject to the AMT". Also you may wish to view this link for additional information. The income from the sale of your house may have prompted the AMT activity in your return.

The Foreign Tax Credit is a non-refundable credit meaning that you may not claim a credit if your credit is greater than your tax liability for the year. On your 1040 return, compare Line 16 and line 24. If line 16 has an amount listed but line 24 doesn't, this means your tax liability is reduced to 0 and no more credit can be applied. Chances are though, some of your credit may be listed on line 20 of your 1040 and the rest listed as a carryover that will carryforward for the next ten years. You also may carry it back to 2022 if you reported foreign income on your 2022 return and paid foreign taxes on it.

[Edited 02/13/24|4:48 pm PST]

[Ramesh Aswathnarayana]

Hello Ashutosh , were you able finally resolve your foreign tax credit issue? Pls let me know sailing in same boat 

[kurmakote]

1. In your Home and Business program, go to personal>personal income>choose what you work on.
2. Go to investment income
3. Go to Stocks, Cryptocurrency .......
4. Classify this as other
5. Follow all prompts that follow to determine what your capital gains is on the sale.

I am unable to classify this as other in turbotax.  When I click the update it goes to where i have imported information.  No way to classify as other 

what do I do?

Thank you

V

[kurmakote]

1. Federal>deductions and credits>deductions and credits>estimate and other taxes paid>Foreign Tax Credit>start or revisit
2. When it asks We just need to check if you have any uncommon situations indicate I paid foreign taxes on income I earned while working in another country.  
3. Navigate and record the entries that the program asks for and when you reach the page that mentions Foreign Tax Credit Worksheet, this is where you take notice between a deduction or credit.
4. The first that you will be asked is what category of income is it, you will say passive income..
5. Next screen will say Country Summary, select add a country and then select India.
6. When it says Other Gross Income - India.  Here is where you report the capital gains income that your sale was taxed on in India. 
7. Then you will navigate through the screens until you come to a screen that says Foreign Taxes Paid - India, here is where you record the amount paid under Foreign Taxes on Other Income. Then below that you will enter the amount of taxes paid in taxes.  This is a screenshot what this screen looks like.  After you report this , you should receive a country summary screen included in my previous post.

If you haven't reported your income and credit in this manner, then do so as this will accurately calculate what your foreign tax credit should be.

I go to step one but step 2 does not come up like above in premier turbotax for this year 2025???

Thanks 

[MarilynG1]

In the Foreign Tax Credit section, you'll be asked first if you have other foreign income to report, other than what you already entered in the interest/dividends section.  Say Yes and Continue a few screens until you get a screen asking you to select the type of foreign income you have.  You'll be asked for the Country, Amounts of Income, Tax Paid, and whether 'paid or accrued'.  You'll then see the info on Form 1116.

However, if you're excluding foreign wages, go to the Foreign Earned Income Exclusion section to report this, and remember that you cannot also take a Foreign Tax Credit for income excluded from US taxation. 

The screens vary depending on which version of TurboTax you're using, which is why instructions may differ.  If you're using TurboTax Online, clear your Cache and Cookies periodically. 

Here's more info on Claiming the Foreign Tax Credit and Form 2555, Foreign Earned Income Exclusion. 

@kurmakote