Foreign Tax Credit ELI5?

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SweetAeromotion
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Foreign Tax Credit ELI5?

Post by SweetAeromotion »

I invested in a taxable brokerage account for the first time in 2019 with proceeds from an inheritance. The international investing I did in this account (mid February 2019 without ever selling) was for roughly $135K at the time into IEFA and IEMG approx 80%/20% split.

I believe within the dividends I have received I possibly paid taxes to outside countries and will also to the U.S. and could be eligible to adjust accordingly? If I am mistaken, please let me know.

I will receive tax documents by Feb 15, 2020 from my broker (Fidelity), but I am curious as to the steps to claim this possible adjustment after the Qualified and unqualified U.S. adjustments.

This question is for tax purposes for filing 2019 taxes, FYI.

Thank you in advance and if I made things unclear I will try to clarify.
Last edited by SweetAeromotion on Sat Feb 01, 2020 8:38 pm, edited 1 time in total.
Topic Author
SweetAeromotion
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Re: Foreign Tax Credit ELI5?

Post by SweetAeromotion »

Probably should have put this into the Personal Investments area, to be honest.
jdilla1107
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Re: Foreign Tax Credit ELI5?

Post by jdilla1107 »

Your Fidelity 1099 will state how much foreign tax you paid through funds that you held. You put this number into tax software and you get a credit for that amount.
Topic Author
SweetAeromotion
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Re: Foreign Tax Credit ELI5?

Post by SweetAeromotion »

jdilla1107 wrote: Sat Feb 01, 2020 8:41 pm Your Fidelity 1099 will state how much foreign tax you paid through funds that you held. You put this number into tax software and you get a credit for that amount.
Okay, so I thought that might be the case. My tax software "should" then fill out the appropriate forms to claim this credit, then? Sorry if this is basic for those who have had taxable accounts for years, but I am trying to anticipate, and more importantly, not miss anything is all.
JustinR
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Re: Foreign Tax Credit ELI5?

Post by JustinR »

SweetAeromotion wrote: Sat Feb 01, 2020 8:45 pm
jdilla1107 wrote: Sat Feb 01, 2020 8:41 pm Your Fidelity 1099 will state how much foreign tax you paid through funds that you held. You put this number into tax software and you get a credit for that amount.
Okay, so I thought that might be the case. My tax software "should" then fill out the appropriate forms to claim this credit, then? Sorry if this is basic for those who have had taxable accounts for years, but I am trying to anticipate, and more importantly, not miss anything is all.
Your tax software will have a credits section. Just make sure this is accounted for there after you've filled out everything.
livesoft
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Re: Foreign Tax Credit ELI5?

Post by livesoft »

You can read the instruction for Form 1116, the Form 1116 itself, and the IRS Publication 514 Foreign Tax Credit to get a jump start on all this. It is better to put your time and energy into these IRS information sources than to worry about all this. Tax prep software is nice, but don't you want to know more than a black box tells you?
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Katietsu
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Re: Foreign Tax Credit ELI5?

Post by Katietsu »

The simplest version:
-The 1099-DIV line 6 shows foreign tax paid.

If the total of foreign tax paid is <$300 if single or $600 if married
Then the total of the foreign tax paid is equal to the foreign tax credit and is put on Schedule 3 line 1.

It sounds like this might be the OP’s situation.

Once it gets more complicated then you need to move on to livesoft’s references.

Here is the wiki link:
https://www.bogleheads.org/wiki/Foreign_tax_credit
Topic Author
SweetAeromotion
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Re: Foreign Tax Credit ELI5?

Post by SweetAeromotion »

livesoft wrote: Sun Feb 02, 2020 6:34 am You can read the instruction for Form 1116, the Form 1116 itself, and the IRS Publication 514 Foreign Tax Credit to get a jump start on all this. It is better to put your time and energy into these IRS information sources than to worry about all this. Tax prep software is nice, but don't you want to know more than a black box tells you?
I have tried to look into the 1116 form and it is massively confusing.

-After receiving my tax documents for my taxable account, I have paid $352 in foreign taxes for 2019. Can I just claim $300 in foreign taxes paid and get the credit for $300 without the 1116 form and leave the other $52 on the table? Or is it more complicated than that? The extra $52 (and possibly more) may be eaten up by fees in other tax software. Also, the time involved isn't worth that $52, IMO.

-If the above is not possible, then I may look into filing a 1116 somehow as being double taxed on $352 of my income is worth trying to recoup as a tax credit.
kaneohe
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Re: Foreign Tax Credit ELI5?

Post by kaneohe »

SweetAeromotion wrote: Sat Feb 15, 2020 11:30 pm .........................................documents for my taxable account, I have paid $352 in foreign taxes for 2019. Can I just claim $300 in foreign taxes paid and get the credit for $300 without the 1116 form and leave the other $52 on the table? Or is it more complicated than that? The extra $52 (and possibly more) may be eaten up by fees in other tax software. Also, the time involved isn't worth that $52, IMO.

-If the above is not possible, then I may look into filing a 1116 somehow as being double taxed on $352 of my income is worth trying to recoup as a tax credit.
You cannot do that. You may think you are giving up the $52 credit so you are sacrificing. However being able to take the FT as FTC if <300 (single) is a gift to you for simplicity. It may turn out if you actually go thru F1116 that your FTC is even less than 300 and you are not giving up anything at all and you are getting more than you are due.
Or the opposite , but you won't know until you do the form.
kaneohe
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Re: Foreign Tax Credit ELI5?

Post by kaneohe »

SweetAeromotion wrote: Sat Feb 15, 2020 11:30 pm ........................................

I have tried to look into the 1116 form and it is massively confusing.

.................................
It can be but certain situations may be less so. Do you take the std deduction? You may want to try your particular situation and see what happens. Others here may be able to help if you have details.
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grabiner
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Re: Foreign Tax Credit ELI5?

Post by grabiner »

Here is a simple explanation of the way Form 1116 works.

If you pay tax to a foreign country and the US on the same income, you are entitled to a tax credit to avoid double taxation.

The tax credit is the lower of the tax you paid to the foreign country, or a prorated share of your US tax. For example, if 10% of your taxable income was taxed by the foreign country, the credit is limited to 10% of your US income tax.

The main purpose of the form is to determine how much of your taxable income was taxed by the foreign country. You start with your total foreign income, and your total income. Every deduction to get from total income to taxable income is subtracted either from taxable US income, or taxable foreign income, or prorated across both, depending on which type of income the IRS considers it to relate to. (A natural example: if you deduct state income tax, the part of the state income tax on your foreign income reduces your foreign taxable income. If the state didn't tax your foreign income at all, then the entire state income tax is related to US income.) After you have counted all the deductions, you then see how much taxable foreign income and total taxable income you have left, and that is the ratio you use.

But the bottom line is that most investors who only pay foreign tax on dividends will wind up deducting all that foreign tax, and need only file Form 1116 to let the computer determine that.
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JonnyB
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Re: Foreign Tax Credit ELI5?

Post by JonnyB »

grabiner wrote: Sun Feb 16, 2020 6:46 pm The tax credit is the lower of the tax you paid to the foreign country, or a prorated share of your US tax. For example, if 10% of your taxable income was taxed by the foreign country, the credit is limited to 10% of your US income tax.
It is quite common for people in lower tax brackets to not have enough pro-rated US tax to take full advantage of the foreign tax credit.

In that case, you can carry forward your unused portion of foreign tax credit for up to 10 years. However, if you continue to have unused credits, eventually they expire and are lost.
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