Form 1116 Foreign Gross Income. Tax for 2021

[Kiki]

I am working on Form 1116 for foreign taxes paid on income through1099DIV and 1099INT.

Rental income without foreign taxes involved should be included in Form 1116?

This is my situation:

I have income by renting a Bare Land out, but Foreign taxes is not related to this income. (I pay $0 to the government legally)   

Received $ 5000 from renter

Property Tax paid $ 1000

Management Fees paid $ 500

This income is reported in Schedule E.

Q1.  On Form 1116 PartI 1a.  Gross income from sources within country

        Do I need to include rental bare land income here?  Or No necessary because it's not generate any taxes?

        If it's needed to report,  $5000 (before expenses)  here and  $ 1500 (Property tax and Management fees) on Part I 2.   Expenses definitely

       related to the income on line 1a ?

Q2.  Part I 3. d.  Gross foreign source income

         Do I need to include rental income here regardless of whether I report it to part I 1 a. or not?

Q3.  Does the IRS consider income from rent the Bare Land as Passive Income?

I really appreciate any responses and help.

Thank you so much.

[tagteam]

I will page @pk for this.

Generally, rental income is passive but such income can be recharacterized under certain circumstances.

[pk]

@Kiki , having read through your post, description of situation and agreeing with @tagteam  about generally passive character  of rental income,  here is what I understand of the scenario:

(a) you a US person ( citizen/ Green Card / Resident for tax purposes ) live in the USA

(b) You own land  in a foreign country ( which country ? ) that you rent out , through management services

(c) your total income  from this rental is US$5000 , which incurs Prop Tax of US$1500 and management fees of US$1000.  Thus your net income from this rental is US2500 and which you recognize on schedule-E

(d) you pay NIL/None  income tax on this rental to a foreign country.

Given the above , why are you filing a form 1116 to claim foreign income tax on this income stream?   I agree  that  the 1099-DIV and 1099-INT reported foreign earnings and taxes paid thereon is  indeed eligible  for foreign tax credit.  And usually these taxes ( those reported on 1099-DIV and 1099-INT ) are also subject to safe harbor rule  of full / unlimited credit of $300 ( for single )/ $600 ( for joint filers) and without using the form 1116.

So please can you clarify your situation in light of above comments ? Additionally your citizenship and the country where the land is located would be useful ( for treaty assertion  purposes ).

I will circle back after I hear from you

pk 

[Kiki]

Thank you very much for your reply, tagteam and pk

I apologize that I should have explained better about my situation.  

(a) you a US person ( citizen/ Green Card / Resident for tax purposes ) live in the USA    ---    Correct, I am a green card holder, I am a Japanese citizen

(b) You own land  in a foreign country ( which country ? ) that you rent out , through management services   ---  Correct,  in Japan,  

(c) your total income  from this rental is US$5000 , which incurs Prop Tax of US$1500 and management fees of US$1000.  Thus your net income from this rental is US2500 and which you recognize on schedule-E   ---  Correct,  (it's not important here but Prop tax $1000, and Management fees $500, so Total Expenses is $1500 and Total net profit is $3500)

(d) you pay NIL/None  income tax on this rental to a foreign country.  ---   Correct,  $0 foreign tax paid

Additional information：

(e) 1099 INT :  $65 Foreign Tax Paid to Japan on earned interest of $320 from Bank accounts in Japan   

(f)  1099 DIV :  Total of $50 Foreign Tax Paid to 4 different countries (Canada, Taiwan, Japan, S.Africa, Marshall Island) and also Various on 

                          dividends and capital gain from ETFs and Stocks.

                        These Form 1099 DIVs from U.S Brokerage such as Vanguard, TDAmeritrade, JPMorgan, and Apex Cleaning

I was working on Form 1116 with 1099 INT(e) and 1099 DIV (f), and when I came to Part I, 3d  "Gross foreign source income", I suddenly wondered if I should include the income from land rent or not. After reading the IRS instructions, and Pub 514, I became even more confused. And I started to wonder if I should include it fully in form 1116 even no foreign taxes generated.   I decided to ask for help here.

I've never had the intention of reporting any part of information of the land rent in any part of Form1116 except reporting it in Schedule E since I paid no foreign taxes on it, of course no receipt of credit.   I haven't reported it in 1116 in the past 2 years since this rent land income generated.

If you can share your knowledge or what you think, that would be very appreciated.  Thank you!

[pk]

@Kiki . thank you for the extra information. Now I understand the situation better.

You have foreign earnings  in the form of  

(1) Interest  on savings --- on this since you do not have a 1099-INT, you just report  as if you had received  a 1099-INT --- Gross Interest earned ( US$ 320 )  and foreign taxes paid (US$65)

(2)  Dividend reported on 1099-DIV -- you just enter the details as reported --- total dividends, qualified dividends, foreign taxes paid etc. etc.

If your total foreign taxes paid  ( passive -- Interest, Dividends etc. ) is not more than the safe harbor amount  { US$ 300 per filer i.e. US$600 for a joint filer ), just tell TurboTax that you want to use simplified method --- thus no form 1116 is required  and you get foreign tax credit of upto the  safe harbor amount / actual paid whichever is less.

If your total of foreign tax is more than  safe harbor amount,  you can indeed file the form 1116, but  this will mean that whereas the filing would recognize the FULL amount of foreign taxes paid, the actual amount allowed for the current year would be base on a  ratio of  US tax on  your foreign income  and  your  world income. The un-allowed portion of the full foreign taxes paid is allowed to carry back one year and forward 10 years --- ( note that each year again you will use the form 1116, the same ratiometric logic would apply and must have foreign income ).

Also note that if you are having to use the form 1116, then the net rental income  ( quoted as US$3500 )  can be classed as passive foreign income, thus boosting your foreign income to world income ratio.

Does this now make sense ?

pk

[Kiki]

Hi pk,

Thank you very much for your clear and kind explanation for me.

Just to be sure, please let me double check on my original questions.

Q1.  On Form 1116 Part I, 1a.  Gross income from sources within country

        (Column of Japan), enter Amount of ( $320 INT + $3500 Rental of Land )

Q2.  On Form 1116 Part I,  3d.  Gross foreign source income

        (Column of Japan),  enter Amount of ($320 INT + $3500 Rental of Land + $$$ DIV from all other 4 countries and Various)

        (Column of Various)                                                                     Same as above

        And in each column with 4 different countries                       Same as above

I really appreciate your time and help!

[pk]

@Kiki , your understanding is correct.

Is there more I can do for you ?

Arrigato Gozaimaas

pk  ( one of the few Nippon words I know )

[Kiki]

 (^o^)//      ARIGATO GOZAIMASU!  pk

I added $3500 (Rental of Land net income)  on Form 1116 Part I, 1a.  Gross income from sources within country (Japan) and 3d. Gross foreign source income.

It turns my Foreign Tax Credit jump up more than 15 times than it without $3500 (Rental of Land net income) on 1a. and 3d.  That's great for me but that is about 8 times more than the Foreign Tax I paid.   I haven't touched anything at all except to add $3500 to 1a and 3d.

Is it possible to get credit more than I actually paid?

Thank you!  

[Mike9241]

could you have entered in the US$ column the amount you paid in Japanese yen? we can't see your return so this is a pure guess but obviously, you can't get more in FTC than you actually paid but if you have a FTC carryover from prior years then maybe. but unlikely. 

your additional FTC from this land rental should be the net of the $3500 less the amount from form 1116 line 6 of that column divided by taxable income (1040 line 15) times the line 16 of 1040 or the FTC you paid on this whichever is less. 

[Kiki]

Thank you for your reply, Mike9241,

No, I couldn't have entered Japanese Yen.  I converted all JPY to US$ to enter into TT.    (It supposed to enter in foreign currency in Part II when tax paid in foreign currency but TT doesn't let it do on their software)

I still haven't solved this issue.

[pk]

@Kiki , something here does not make sense -- the tax credit allowable is always lesser of computed US tax on the  income or actually paid.  So I think we need to fall back/ regroup and understand the situation totally.  Please would be kind enough to  provide  ( for each of the foreign incomes and taxes --- (a) type ( INT / DIV/ Rent/ etc ); (b) total foreign income --Gross in US $ ; (c) taxes  paid --- in US$; (d) country --( Japan/ various /etc ); (e) for the land rental ( already reported on schedule-E ) Total income in US$, Total expenses in US$ ( management, property taxes  , etc, ).    and (f)   Carry-Over foreign tax credit from 2020  from Federal carry over worksheet or from form 1116.

I would like to recreate the scenario both by hand as also using TT ---- the results so far does no make sense.

Please 

pk

[Kiki]

Hi pk,

Thank you for your response.  I'm sorry that it took me a while to reply to you. 

To answer to your inquiries : This is my situation

 (a) type ( INT / DIV/ Rent/ etc )

(Japan)        (INT)         $324        Bank Interest Income /  $65 Tax paid

(Japan)       (RENT)      $6500      Rental Land Income  /   $0 Tax paid

(Various)    (DIV)          $2060      Dividends Income   /   $46 Tax paid  (**1099DIV from TDAmeritrade Investment ETF etc)

 (b) total foreign income --Gross in US $ 6824 (324+6500)  in Japan

(c) taxes  paid --- in US$     $111  (65+46)

(d) country --( Japan/ various /etc )       Japan and Various

(e) for the land rental ( already reported on schedule-E )     $7500  received from Renter - $500 Management Fees - $ 500 Property tax=$6500 Net Profit

Total income in US$    $ 45300

Total expenses in US$ ( management, property taxes  , etc, ).  

(f)   Carry-Over foreign tax credit from 2020  from Federal carry over worksheet or from form 1116.      $4632

I have tried to ask CPAs about this issues. I will post their opinions here when I get them too.

Thank you!

[pk]

@Kiki , took me a little to get back to you . 

A quick look at the figures that you provided  says that TurboTax is correct in increasing your foreign tax credit by three fold when you entered the foreign earnings from your rental ( which were no taxed by Japan but is being taxed by the USA and is indeed foreign income).  Here is the  back of the envelope logic:

Assuming that the basis for foreign  tax limitation i.e. allowable for the current year  is based on ratio of Foreign earnings for the year to world income  ( it actually is a little bit more contorted by if I assume linear  tax schedule then  rough results  will be directionally  correct). 

(A) Before including the Japan untaxed income :

Foreign income =   ( US$324 + US$2060 )= US$2384

World Income = US$45300 + US$2384 = US$47,684.

Thus  limitation ratio is 2384 / 47684=4.999%

Total Foreign Tax credit available = US$4632 + US$111=US$4743.

Thus max allowable credit is  .0499 X 4743 = US$236.68

(B) After including the Rental income reported on Schedule-E and classing this as foreign income ( taxed or otherwise :(

Foreign income = US$2384 + US$6500= US$8884.

Total world income now is  US$45300 + US$ 8884)= US$ 54184.

The limitation ratio is now  8884/ 54184=  16.395% .

Thus the max allowable  credit is now  .116395 X 4743 = US$777.66

Approx three times.

Now of course many of the assumptions are for purpose of simplifying to get an order of magnitude.  The actual figure porbaly will be much lower  but the amplification of approx three times is generally maintained.

If you wish I can run the TurboTax with  the figures and get a you a better figure.  But I am generally satisfied  that Turbo is correct.  

Also as far as I know there is not stipulation by the IRS  that one can only recognize foreign income  if , and only if, the income is also taxed by a foreign entity.  So it is allowed as far as I can tell.

Is there more I can do for you?

pk