Relationship between Form 8621 + Form 1116

[Polaris23]

Background:

- Step #1- In my 2019 US tax return I filed Form 8621 through which I declared/paid US taxes on mutual fund capital gains held at a foreign bank (I was a "US person" back in 2019, so taxes had to be paid in the US, not in the foreign country). The foreign bank also applied withholding tax on those same capital gains, which I filed as a foreign tax credit in my 2019 US tax return under Form 1116. I was actually able to offset some of my 2019 US tax liability (related to the same mutual fund capital gains held at the foreign bank) based on this same foreign tax credit filed under From 1116.

- Step #2- In 2020, I had no foreign income, so I just carried forward the remaining ending balance of the foreign tax credit carryover filed in 2019 under Form 1116.

- Step #3- In 2021, I received back the withholding tax from the foreign bank and declared it (Under Schedule 1) as foreign income in my 2021 US tax return. This foreign income was partially offset with my existing foreign tax credit carryover from 2019, but given the computation of the foreign tax credit carryover, I was not able to use it all against the withholding tax income declared a foreign income in my 2021 US tax return. 

- Step #4 - Now in my 2022 tax return, I still have a remaining balance left for my foreign tax credit carryover present in my Form 1116.

Questions:

- Question #1 - Does the timeline / steps taken above make sense to you, or am I missing anything here? It just seems weird to end-up with a foreign tax credit carryover after having paid US taxes on both the initial mutual fund capital gains AND the related withholding taxes income received from the foreign bank (related to the same mutual fund capital gains).

- Question #2 - Is the life of the foreign tax credit carryover 10 years? If so, I understand it would be 10 years since it was generated. As such it would expire in 2029, correct?

Thanks in advance.

@Form 1116 @Form 8621

[Polaris23]

Any thoughts here @DanaB27 and/or @dmertz? Promise this is my last question. Thanks a lot in advance!

[DaveF1006 · Accepted solution]

For Question 1 and if i understand your question correctly, you had a carryover because you did not receive a full credit for your foreign taxes paid in 2019. 

The way the credit works is that you can claim to the lesser of the amount of foreign taxes paid or the U.S. tax liability on the foreign income.  So you can pay US taxes on the same income and still receive a Foreign tax Credit. You won't be able to claim the entire credit however because of the restrictions that i just mentioned thus this creates a carryover.  This is because the Foreign taxes exceeded the US tax Liability and the FTC is limited by the US tax liability on the foreign income. 

So in answer to your question, yes you can have a carryover even if you pay US and foreign taxes

For question 2, the carryover will expire in 2029.