Why is my 'Utilized" Foreign Tax credit so small on From 1116 when I have lots of income?

[jstevensr]

Why does the Form 1116 Comp Wks only utilize $9 of the 527 Foreign Tax Credit Carryover that I have available?

[rogge1722 · Accepted solution]

is the amount on 1040 line 16 greater than $9?

[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.

[jstevensr]

Yes, the (Tax) amount on 2020 1040 line 16 is much, much largee

r.

[jstevensr]

I know that what you state below is true, but on which worksheet and with what logic does TurboTax calculate "U.S. tax liability on the foreign income"? I can't seem to find any completed "income" fields on the single  "Passive Income" form 1116 I have completed for the total dividend income from the 1099s and two K-1s that I connect to it because I paid the Foreign Tax on these dividends via those accounts. All I see 

[jstevensr]

I just looked at the Form 1116 "Comp Wks". I noticed that Part I - Taxable Income (Loss) for line g, Column A  for country "Various" is "0". Shouldn't TurboTax be automatically pulling the two  K-1's Beneficiary Share "Qualified dividends' to line g Column A, so that the value is a lot larger than 0 because the amount of dividend income I received is much, much larger.

[jstevensr]

When I follow my advice above with a manual entry summing the the two  K-1's Part III Beneficiary Share "Qualified dividends' (line 2b) into  the Form 1116 "Comp Wks".  Part I - Taxable Income (Loss) for line g, Column A  for country "Various" I now get a much higher (full) credit. To my remaining questions are: 1. Is it OK to make this manual entry? 2. Why doesn't TurboTax do this automatically? I have been making a lot of changes to these form this year or perhaps it is because I use the country 'various'?)

[jstevensr · Accepted solution]

Whoops - Correction: The correct manual entry summing the the two  K-1's Part III Beneficiary Share "Qualified dividends' (line 2b) into the Form 1116 "Comp Wks".  Part I - Taxable Income (Loss) for line g, Column A  for country "Various" need to be for only the Gross Income dividends for those various countries (not the total dividends from all companies). This number is not directly provided  to me on the K-1s in a specific line 14 entry (thus not entered by me yet)  but is provided to me by each K-1 administrator as additional "Foreign Tax Credit Information. This explains why Turbotax does not "know" to sum it into to Part I - Taxable Income (Loss) for line g, Column A  for country "Various". Though not as large, it still makes a huge difference in my utilized foreign tax credit.

[NHenry]

I paid $2865US of Canadian non resident tax because I withdraw $11460 US from my RRSP which represent 20% of the amount . In US a similar withdrawal would be 15% ($ 1719 US) why Turbotax utilize only $250 US as a deduction ?

[DaveF1006]

It depends. According to the IRS, Your foreign tax credit can't be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources. Here is an example on how this works.

If your tax liability on Line 24 of your 1040 is $5000, your foreign income is $11,728, and your total income, foreign and US income, is $50,000. The foreign tax that can be claimed for this year is ($5000)($11,728/$50,000)=$1173. This is the maximum amount of credit that can be claimed this year. Any excess foreign tax credit can either be carried back to a previous year or carried forward for 10 years to offset any past or future foreign tax credit paid on foreign income. So if you had a $5000 credit, $1173 will be credited this year while $3827 will be a carryback or carryforward, or both.

I don't know what your tax liability is on line 24. If your Canadian income is small compared to your total income, the foreign tax credit will be small. I think this may be true in your case.

[NHenry]

Thanks Dave ,your explanation is very clear. I really appreciate your help.By doing this, it seems that I am taxed  in Canada and retaxed in US for the same amount. Every year my Canadian income is low compare to my US income , does  it means that at the end of the day I will never be able to utilize my credits. Is there a way I could report it differently and be in accordance with the  IRS rules.

[DaveF1006]

No. There's no other method other than reporting it the way I described​ it. The remaining excess can be carried back one year to offset foreign income in 2023 or carried forward for ten years. If you have foreign income to offset in those remaining years, then the foreign tax will be used.‌ if not, these carryovers will remain until the ten-year period has expired. 

@NHenry 

[NHenry]

Hi Dave 

Your answers are very clear and to the point.  Would you mind to guide me to enter an NRA from a Canadian RRIF. So this NR4 has code 26. Also I have an NR4 code 11 for a non registered plan.

Many thanks for your help.

[NHenry]

Hi Dave 

Your answers are very clear and to the point.  Would you mind to guide me to enter an NRA from a Canadian RRIF. So this NR4 has code 26. Also I have an NR4 code 11 for a non registered plan.

Many thanks for your help.

[DaveF1006]

Enter the Code 11 amount as US Social Security.  Code 26 is treated as a Canadian registered pension. Both of these are reported separately.

For Code 11:

• Go to income
• Retirement plans 
• Social Security

For Code 26:

• Go to income
• Retirement plans
• Social Security
• Canadian Registered Pension

@NHenry