How to change the category of FTC that was incorrectly assigned in the previous tax return?

[Stsxoz]

Last year I used a CPA to complete our 2022 tax return. Upon review it became clear that an item in foreign tax credit (FTC) was incorrectly categorized under "general" instead of "passive". I am completing our 2023 return using TT at the moment, and I would also like to correct this error while I am working on our return. I would appreciate it if you could point me in the right direction on how to correct the category allocation of the mentioned FTC. Will this require filling an amendment for our 2022 return?  Thanks.

[tagteam]

I'll page Champ @pk. Please check back later.

[pk]

@Stsxoz , whereas  general instruction for amendment of returns ( 1040 ) is  NOT to file one if there is no  change in Tax Liability,  for form 1116 it is slightly different.  This is because ( and only if, there is) foreign tax credit carry-over requires Schedule-B recognition --- i.e. reconciliation of unallowed foreign tax  credit by category.  Therefore , I would suggest that you file an amended return  ( you are amending only category entry  ) to rectify the error on form 1116 for the year 2022.  There are probably NO tax changes , even for  2023.  It is more of information correction.  The reason  for filing an amended return should be " Change in Category of income on form 1116" .

 What country and what type of income are we talking about ?

Is there more I can do for you ?

[Stsxoz]

@pk, many thanks for your reply.

To answer your question, this was capital gains income from the sale of an investment property located in Australia, and the foreign tax credit was claimed for the CGT tax paid (or rather accrued at that time, to be more accurate) in Australia.

You are correct that this will lead to no tax changes in the 2022 return. Regarding the filing of an amendment, is this something I can easily do using TurboTax, although the 2022 return was not completed in TT? As this will be the first time I will be filing an amendment, I would appreciate any pointers that you could share on the process.

[pk · Accepted solution]

@Stsxoz , if I were to assume that you do not have access to TurboTax 2022 on your windows machine and because this is quite a simple change,  you  could download  form 1040-X ( for the year  ---  the most recent version is from 2024) -- it is a pdf.  Then either hand write or pdf edit .   In your case  every entry is the same as your filed return ( note that this means  the blocks "Income & Deductions", "Tax Liability", "Payments" etc. all remain the same as in your original filed return .  The only area  you enter new is  Part II where you explain  " Change of Foreign Income Category  from  General to  Passive"  and attach a copy of your form 1116 first page.  

If this was  (2022) your first year of Foreign Tax Credit -- then there is no need for Schedule-B  ( form 1116 ).  Else you may also have to update and include the Schedule-B.

Obviously if you have access to  TurboTax  for tax year 2022, then you should consider recreating 2022 return to match  your printout from the CPA filed return . Then  you go into  TubroTax again and  choose you want to edit the return.   Save the   tax file under a different name -- like  same as original + "Amended".   Now on your screen you will have the source for the amended return  ( it will be called  the name you have given it).  

Make your changes to this return as mentioned above.  Finally print the 1040-X and the changed pages of the return, print , sign, date and mail-in.

IRS would  not  get to it for a while.  This is the basis for your 2023 return.  So  ow you can create your 2023 return ( using TubroTax 2023 ) and when you transfer the amended  2022 return, it will fill all required  info including the Foreign Tax Credit carry over info.

Does this help?   If you need more help, please feel welcome to add to this thread or PM.

[Stsxoz]

Thank you for this great explanation, @pk

I sent you a PM with one additional question. Many thanks again. 

[pk]

@Stsxoz , responded to PM

[Stsxoz]

Thank you @pk. Sent one more quick PM.