Tax question: Foreign Tax Credit

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randompacking
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Tax question: Foreign Tax Credit

Post by randompacking » Sun Feb 25, 2018 2:50 pm

I have two questions about the Foreign Tax Credit with respect to one's income tax. Below is the hypothetical case:

2017 income tax (single filer):
dividends: $10,400
standard deduction + 1 exemption = $10,400
foreign tax paid (1099-DIV, box 6) = $100

Based on the above, the taxable income is $0. My two questions are these:
1. In this case, the filer will not get a tax refund of $100, right? My understanding is that the foreign tax credit is "nonrefundable".
2. If the answer to #1 is "yes", does the $100 foreign tax paid get carried over to the 2018 income tax year?

Thanks!

mega317
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Re: Tax question: Foreign Tax Credit

Post by mega317 » Sun Feb 25, 2018 3:19 pm

1. Correct
2. Very good question. To my reading of pub 514 it seems like yes
If, because of the limit on the credit, you cannot use the full amount of qualified foreign taxes paid or accrued in the tax year, you are allowed
a 1­year carryback and then a 10­year carryover of the unused foreign taxes.
The first sentence under the "limit on the credit" section is
Your foreign tax credit cannot be more than your total U.S. tax liability
but this isn't something I've thought about before. Looking forward to seeing other responses.

nalor511
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Re: Tax question: Foreign Tax Credit

Post by nalor511 » Sun Feb 25, 2018 3:43 pm

The carry forward happens on form 1116, so if you don't file that one (most tax programs don't do it for you by default if your foreign tax paid is less than $600), then no carrying forward or back. It says this right in the form 1116 instructions.

tidelandp
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Re: Tax question: Foreign Tax Credit

Post by tidelandp » Sun Feb 25, 2018 9:17 pm

1116 is a monster form. As I understand it, the credit can only be used to reduce past or future returns to the extent that U.S. taxes on foreign income exceed foreign taxes paid on that income. To start, you’d have to segregate income by source and category.

randompacking
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Re: Tax question: Foreign Tax Credit

Post by randompacking » Sun Feb 25, 2018 9:57 pm

Thank you all for your help. Form 1116 has always been a pain for me to do. I find that Taxact.com does a slightly better job (in the interface) than H&R Block. Fun stuff.

Thanks!

randompacking
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Re: Tax question: Foreign Tax Credit

Post by randompacking » Sun Feb 25, 2018 10:16 pm

i just tried to force H&R block to record the un-used foreign tax credit, but I can't seem to get it to "stick". Any tips?

nalor511
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Re: Tax question: Foreign Tax Credit

Post by nalor511 » Sun Feb 25, 2018 11:36 pm

I haven't had much luck with hr block and 1116 carryover, but I don't know if I'm doing it wrong (thus no carryover), or if it's the software. No big deal because in my case it's like $534 and not worth too much crying over. I would be curious how you do it if you get it working

Wagnerjb
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Re: Tax question: Foreign Tax Credit

Post by Wagnerjb » Mon Feb 26, 2018 8:52 am

tidelandp wrote:
Sun Feb 25, 2018 9:17 pm
1116 is a monster form. As I understand it, the credit can only be used to reduce past or future returns to the extent that U.S. taxes on foreign income exceed foreign taxes paid on that income. To start, you’d have to segregate income by source and category.
Using form 1116 to carry over unused foreign tax credits might not solve the problem. This is because form 1116 generally limits your foreign tax credit to the percentage of foreign income divided by your total US tax liability. Here is an example, using artificial numbers:

2017:

$10,000 Dividend Income, of which $2,000 was from foreign sources
Foreign income % = 20%
Foreign Tax withholdings of $100
US Tax Liability = $0

2018:

$10,000 Dividend Income, of which $2,000 was from foreign sources
$10,000 of Other Income (wages)
Foreign income % = 10%
Foreign Tax withholdings of $100
US Tax Liability = $500

So, the taxpayer goes to fill out form 1116 in 2018 in an attempt to use his $100 carryover. Form 1116 will determine that his allowable foreign tax credit is 10% of his US Tax Liability of $500, or $50. So he can only deduct $50 of foreign tax credits in 2018! Not only can he not use his carryover, but he cannot use his full current year FTC of $100 either. This taxpayer just made his problem worse. He would have been better off to use the exception in 2018 and just claim the current year FTC of $100 directly on line 48 of his form 1040.

Form 1116 and foreign tax credits are very complicated and I am no expert on the subject. But I think this simple example highlights the potential problems that one might find. Most important is that you have to use form 1116 in future years to potentially benefit from the carryover FTC's. You cannot simply put the carryover FTC directly on line 48 of our form 1040. In order to use line 48 directly, those foreign tax withholdings must be reported on a current year 1099-DIV document.

Best wishes.
Andy

kaneohe
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Re: Tax question: Foreign Tax Credit

Post by kaneohe » Mon Feb 26, 2018 1:53 pm

Can't you switch methods each yr ? Use 1116 to save unusable FT credits and don't use it if it is better to just do the simplified method.
Of course you will need to use 1116 to make use of saved credits which means getting your US tax rate higher than the foreign tax rate.

Wagnerjb
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Re: Tax question: Foreign Tax Credit

Post by Wagnerjb » Mon Feb 26, 2018 3:33 pm

kaneohe wrote:
Mon Feb 26, 2018 1:53 pm
Can't you switch methods each yr ? Use 1116 to save unusable FT credits and don't use it if it is better to just do the simplified method.
Of course you will need to use 1116 to make use of saved credits which means getting your US tax rate higher than the foreign tax rate.
I assume if you choose to use the simplified method in year 2, then you lose the carry forward of the FTC (which is documented on line 10 of form 1116). In that case, you went to all the trouble to fill out form 1116 in year 1, but it didn't result in any value. It may still be better to fill our form 1116 in year 1 (just in case things change), but do so with your eyes open.

Best wishes.
Andy

nalor511
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Re: Tax question: Foreign Tax Credit

Post by nalor511 » Mon Feb 26, 2018 3:44 pm

So Andy, in your example how much FTC is actually carried forward to 2019, $100 from 2017 and $50 from 2018 for a $150 total?

kaneohe
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Re: Tax question: Foreign Tax Credit

Post by kaneohe » Mon Feb 26, 2018 3:55 pm

Wagnerjb wrote:
Mon Feb 26, 2018 3:33 pm
kaneohe wrote:
Mon Feb 26, 2018 1:53 pm
Can't you switch methods each yr ? Use 1116 to save unusable FT credits and don't use it if it is better to just do the simplified method.
Of course you will need to use 1116 to make use of saved credits which means getting your US tax rate higher than the foreign tax rate.
I assume if you choose to use the simplified method in year 2, then you lose the carry forward of the FTC (which is documented on line 10 of form 1116). In that case, you went to all the trouble to fill out form 1116 in year 1, but it didn't result in any value. It may still be better to fill our form 1116 in year 1 (just in case things change), but do so with your eyes open.

Best wishes.
I don't get that impression from the F1116 instructions.............

Election To Claim the Foreign Tax Credit Without Filing Form 1116
You may be able to claim the foreign tax credit without filing Form 1116. By
making this election, the foreign tax credit limitation (lines 15 through 21 of
the form) won't apply to you. This election is available only if you meet all
of the following conditions.

..................................................
If you make this election, the following rules apply. You can't carry over to or from any
other year any foreign taxes paid or accrued in a tax year to which the
election applies (but carryovers to and from other years are unaffected). See
the instructions for line 10, later.

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Electron
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Re: Tax question: Foreign Tax Credit

Post by Electron » Mon Feb 26, 2018 5:46 pm

I think the question is answered in Publication 514. See Example 2 on Page 23.

Code: Select all

Year  Limit  Paid  Unused foreign tax (+) or excess limit (-)

2012  $600   $800   +200
2013  $600   $700   +100
2014  $500   $700   +200
2015  $550   $400   −150
2016  $800   $700   −100
2017  $500   $550   + 50
"You cannot carry the $200 of unused foreign tax from 2012 to 2013 or 2014 because you have no excess limit in any of those years. Therefore, you carry the tax forward to 2015, up to the excess limit of $150. The carryover reduces your excess limit in that year to zero. The remaining unused foreign tax of $50 from 2012 can be carried to 2016. At this point, you have fully absorbed the unused foreign tax from 2012 and can carry it no further. You can also carry forward the unused foreign tax from 2013 and 2014."
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Wagnerjb
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Re: Tax question: Foreign Tax Credit

Post by Wagnerjb » Mon Feb 26, 2018 8:44 pm

kaneohe wrote:
Mon Feb 26, 2018 3:55 pm
Wagnerjb wrote:
Mon Feb 26, 2018 3:33 pm
kaneohe wrote:
Mon Feb 26, 2018 1:53 pm
Can't you switch methods each yr ? Use 1116 to save unusable FT credits and don't use it if it is better to just do the simplified method.
Of course you will need to use 1116 to make use of saved credits which means getting your US tax rate higher than the foreign tax rate.
I assume if you choose to use the simplified method in year 2, then you lose the carry forward of the FTC (which is documented on line 10 of form 1116). In that case, you went to all the trouble to fill out form 1116 in year 1, but it didn't result in any value. It may still be better to fill our form 1116 in year 1 (just in case things change), but do so with your eyes open.

Best wishes.
I don't get that impression from the F1116 instructions.............

Election To Claim the Foreign Tax Credit Without Filing Form 1116
You may be able to claim the foreign tax credit without filing Form 1116. By
making this election, the foreign tax credit limitation (lines 15 through 21 of
the form) won't apply to you. This election is available only if you meet all
of the following conditions.

..................................................
If you make this election, the following rules apply. You can't carry over to or from any
other year any foreign taxes paid or accrued in a tax year to which the
election applies (but carryovers to and from other years are unaffected). See
the instructions for line 10, later.
I am pasting another section from page 17 of the form 1116 instructions, as I believe you are right about the carry forward:
If, for any year, you elected to claim the foreign tax credit without filing Form 1116 (as explained earlier), the following rules apply.

- You can't carry over unused foreign taxes paid or accrued in a year to which the election doesn't apply to or from any year for which you made the election.

- The carryback-carryforward period isn't extended if you are unable to use a carryback or carryforward because you made the election.



- Don't reduce the carryback or carryforward by the amount you would have used in the election year if you hadn't made the election.

While the first point isn't crystal clear, it does seem to support your point that you can take the election in one year (to report FTC directly on form 1040) and yet maintain your carry forward balance.

Best wishes.
Andy

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Electron
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Re: Tax question: Foreign Tax Credit

Post by Electron » Tue Feb 27, 2018 1:39 pm

Form 1116 Line 10 is labeled "Carryback or Carryover (attach detailed computation)". That seems to imply that the attached computation would take priority over any information provided in previous filings of Form 1116. It seems unlikely that the IRS would store that information for future use. It's also not clear if one really needs to file Form 1116 if the tax credit is $0.00 although I would want a copy for my records. Another issue is whether tax software provides the detailed computation.

The Foreign Tax example I posted earlier from Publication 514 is really worth reviewing from time to time. It is a reminder that the current year Foreign Tax paid is used first followed by the earliest available carryover paid within the previous ten years. Excess Foreign Tax credit paid in the current year can also be carried back one year.
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nalor511
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Re: Tax question: Foreign Tax Credit

Post by nalor511 » Tue Feb 27, 2018 5:46 pm

The thing I don't get about form 1116 is, if you paid (for example) $200 in foreign tax, but due to the ratio/calculation you can only take $100 in credit this year, why isn't there a line listing the amount that gets carried forward to next year? Form 8801 for the AMT credit has a line for carryforward to next year. Boo.

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Electron
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Re: Tax question: Foreign Tax Credit

Post by Electron » Wed Feb 28, 2018 3:14 pm

nalor511 wrote:
Tue Feb 27, 2018 5:46 pm
The thing I don't get about form 1116 is, if you paid (for example) $200 in foreign tax, but due to the ratio/calculation you can only take $100 in credit this year, why isn't there a line listing the amount that gets carried forward to next year? Form 8801 for the AMT credit has a line for carryforward to next year.
A line for the carryforward would be a help and I make that calculation in my tax spreadsheet. Maybe they considered it unnecessary with the detailed computation requested for Form 1116 Line 10.

It looks like Form 1116 can get quite complicated with five different categories of income and a separate Form 1116 required for each. In addition, unused tax credit can be carried forward up to ten years. It might simplify the detailed computation if a worksheet was available that covered the full ten years. We should all hope that we never have to amend a tax return that changes the Foreign Tax carryforward. Any change could impact all later returns!
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Wagnerjb
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Re: Tax question: Foreign Tax Credit

Post by Wagnerjb » Wed Feb 28, 2018 6:52 pm

Electron wrote:
Wed Feb 28, 2018 3:14 pm
A line for the carryforward would be a help and I make that calculation in my tax spreadsheet. Maybe they considered it unnecessary with the detailed computation requested for Form 1116 Line 10.

It looks like Form 1116 can get quite complicated with five different categories of income and a separate Form 1116 required for each. In addition, unused tax credit can be carried forward up to ten years. It might simplify the detailed computation if a worksheet was available that covered the full ten years. We should all hope that we never have to amend a tax return that changes the Foreign Tax carryforward. Any change could impact all later returns!
I worked overseas for 7 years and my company paid Price Waterhouse to prepare my US (and foreign) tax returns. I had a significant amount of foreign tax credits, most of which were carried forward each year (and most ultimately expired after 10 years). Price Waterhouse would attach a schedule to my tax return, and the schedule would show the aging of the carry forwards by year. It showed the amount earned each year, the amount used in each year, and the remaining balance of FTC's from each vintage.

On the form 1116 on line 10 they wrote ("Statement 8") to reference that the FTC schedule was the 8th attachment to my tax return. They filled in the amount on line 10, which matched the amount from statement 8.

Best wishes.
Andy

talzara
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Re: Tax question: Foreign Tax Credit

Post by talzara » Wed Feb 28, 2018 9:55 pm

randompacking wrote:
Sun Feb 25, 2018 10:16 pm
i just tried to force H&R block to record the un-used foreign tax credit, but I can't seem to get it to "stick". Any tips?
Print out and file on paper. The H&R Block software has problems with zero amounts, and it's also very bad at filling out form 1116. You have a form 1116 that's zero, so you're running into both problems.

TaxAct and Turbotax are much better at form 1116. You should switch software next year.

talzara
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Re: Tax question: Foreign Tax Credit

Post by talzara » Wed Feb 28, 2018 10:06 pm

Electron wrote:
Tue Feb 27, 2018 1:39 pm
Form 1116 Line 10 is labeled "Carryback or Carryover (attach detailed computation)". That seems to imply that the attached computation would take priority over any information provided in previous filings of Form 1116. It seems unlikely that the IRS would store that information for future use. It's also not clear if one really needs to file Form 1116 if the tax credit is $0.00 although I would want a copy for my records. Another issue is whether tax software provides the detailed computation.
You must file form 1116 if you want to establish a carryover for the year, even if the foreign tax credit is zero. If you don't file, then you don't get a carryover.
You may be able to claim the foreign tax credit without filing Form 1116. ... If you make this election, the following rules apply.

You can't carry over to or from any other year any foreign taxes paid or accrued in a tax year to which the election applies (but carryovers to and from other years are unaffected).

https://www.irs.gov/pub/irs-pdf/i1116.pdf
The IRS stores tax returns for 7 years, and they store the form 1116 carryover amounts in your Individual Master File. They can check your calculations if they need to.

TaxAct and Turbotax can generate carryover worksheets. H&R Block cannot. If you use H&R Block, you have to calculate the carryover yourself. Since you can't attach the computation, you'll also have to file on paper.

talzara
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Re: Tax question: Foreign Tax Credit

Post by talzara » Wed Feb 28, 2018 10:25 pm

Electron wrote:
Wed Feb 28, 2018 3:14 pm
It looks like Form 1116 can get quite complicated with five different categories of income and a separate Form 1116 required for each. In addition, unused tax credit can be carried forward up to ten years. It might simplify the detailed computation if a worksheet was available that covered the full ten years. We should all hope that we never have to amend a tax return that changes the Foreign Tax carryforward. Any change could impact all later returns!
If the IRS made a carryover worksheet, then tax software would be more consistent.

Right now, it's a mess. Turbotax's carryover worksheet has 5 columns. TaxAct's worksheet has 6 columns, with an extra column for carryback. H&R Block doesn't have a worksheet because it can't calculate the carryover.

This is a sorry state of affairs. The IRS says that the foreign tax credit is the second most-claimed tax credit, behind only the child tax credit: https://www.irs.gov/pub/irs-soi/15inintaxreturns.pdf

More people have to file form 1116 every year, because the $300 / $600 simplified election threshold has never been adjusted for inflation: viewtopic.php?f=2&t=243009

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Electron
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Re: Tax question: Foreign Tax Credit

Post by Electron » Wed Feb 28, 2018 10:47 pm

Andy - Thanks for the interesting history on your experience with the Foreign Tax Credit. It sounds as though Price Waterhouse did a first-rate job on your tax return.

nalor511 - I think the reason that Form 1116 does not calculate a carryforward is that there are several different carryforward amounts in play. Any carryforward from the current year tax credit must be defined separately since it will be tracked for up to ten years. There is also the total carryforward to the next year which is comprised of individual carryforwards all with individual expiration dates. That total could easily be calculated but it might not be a good idea to provide it on the form. If it was provided it might give a false impression of the work required to document the details of all credits going back ten years.
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Re: Tax question: Foreign Tax Credit

Post by Electron » Thu Mar 01, 2018 12:33 am

talzara wrote:
Wed Feb 28, 2018 10:06 pm
The IRS stores tax returns for 7 years, and they store the form 1116 carryover amounts in your Individual Master File. They can check your calculations if they need to.
Thanks for all the information on the different points. I didn't know about the Individual Master File at the IRS or the seven year period. I think you're stating that the carryback or carryover on Form 1116 Line 10 would be stored and perhaps any attachments with detailed computations as well.

The Foreign Tax Credit is much too complex in many cases and even worse when you add the AMT version. I think you're right that a ten year worksheet for Form 1116 Line 10 would be a great help.
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nalor511
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Re: Tax question: Foreign Tax Credit

Post by nalor511 » Thu Mar 01, 2018 1:03 am

talzara wrote:
Wed Feb 28, 2018 10:06 pm

You must file form 1116 if you want to establish a carryover for the year, even if the foreign tax credit is zero. If you don't file, then you don't get a carryover.
...
The IRS stores tax returns for 7 years, and they store the form 1116 carryover amounts in your Individual Master File. They can check your calculations if they need to.
...
TaxAct and Turbotax can generate carryover worksheets. H&R Block cannot. If you use H&R Block, you have to calculate the carryover yourself. Since you can't attach the computation, you'll also have to file on paper.
If the IRS is tracking the carry forward, I don't know why they don't just have a schedule/line for it, going back 10 years. Just seems overly complicated. If your credit is under $300/600, but you don't have tax obligations that year to credit against, why force filling 1116 (which doesn't even have carry forward)? :oops:

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Epsilon Delta
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Re: Tax question: Foreign Tax Credit

Post by Epsilon Delta » Thu Mar 01, 2018 11:58 am

tidelandp wrote:
Sun Feb 25, 2018 9:17 pm
1116 is a monster form.
It's not that bad if you just have vanilla funds or ETF. It's all passive income and you can use "RIC" in Column A instead of breaking it out by country. Pre 1998 you had to do it full fig to get any tax credit. I did several for about $17 of tax credit from Total International. It took less than 20 minutes so it was still worth doing.
Electron wrote:
Wed Feb 28, 2018 3:14 pm
A line for the carryforward would be a help and I make that calculation in my tax spreadsheet. Maybe they considered it unnecessary with the detailed computation requested for Form 1116 Line 10.
There isn't even a line for carryforward capital losses on Schedule D or any of the worksheets. (There was a couple of decades ago). I think the IRS just doesn't do carryforward right anymore. I blame TurboTax.

talzara
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Re: Tax question: Foreign Tax Credit

Post by talzara » Thu Mar 01, 2018 12:30 pm

nalor511 wrote:
Thu Mar 01, 2018 1:03 am
If the IRS is tracking the carry forward, I don't know why they don't just have a schedule/line for it, going back 10 years. Just seems overly complicated. If your credit is under $300/600, but you don't have tax obligations that year to credit against, why force filling 1116 (which doesn't even have carry forward)? :oops:
I don't know either. The 10-year carryover worksheet really ought to standardized and added to Form 1116. That would make tax software more consistent. It would also force H&R Block to calculate the carryover because it would be right on the form.

Form 1116 isn't an obscure form. In 2011, 8.1 million returns took the foreign tax credit, and 3.9 million of them filed form 1116: https://www.irs.gov/statistics/soi-tax- ... tax-credit

The numbers have doubled since 2001, and they'll keep going up as international mutual funds become more popular. As soon as you cross the $300/$600 threshold, you have to file form 1116.

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Re: Tax question: Foreign Tax Credit

Post by talzara » Thu Mar 01, 2018 12:46 pm

Epsilon Delta wrote:
Thu Mar 01, 2018 11:58 am
There isn't even a line for carryforward capital losses on Schedule D or any of the worksheets. (There was a couple of decades ago). I think the IRS just doesn't do carryforward right anymore. I blame TurboTax.
Schedule D has lines for carryover capital losses. Short-term carryover is on line 6, and long-term carryover is on line 14. The Capital Loss Carryover Worksheet is on page D-11 of the instructions.
Form 1116 is much worse. There is no worksheet in the Instructions for Form 1116. Instead, it tells you to read Publication 514, which gives carryover examples with 4-column tables. The table is so confusing that no tax software follows Publication 514. Instead, TaxAct and Turbotax came up with their own carryover worksheets.

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Epsilon Delta
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Re: Tax question: Foreign Tax Credit

Post by Epsilon Delta » Thu Mar 01, 2018 1:25 pm

talzara wrote:
Thu Mar 01, 2018 12:46 pm
Epsilon Delta wrote:
Thu Mar 01, 2018 11:58 am
There isn't even a line for carryforward capital losses on Schedule D or any of the worksheets. (There was a couple of decades ago). I think the IRS just doesn't do carryforward right anymore. I blame TurboTax.
Schedule D has lines for carryover capital losses. Short-term carryover is on line 6, and long-term carryover is on line 14. The Capital Loss Carryover Worksheet is on page D-11 of the instructions.
Form 1116 is much worse. There is no worksheet in the Instructions for Form 1116. Instead, it tells you to read Publication 514, which gives carryover examples with 4-column tables. The table is so confusing that no tax software follows Publication 514. Instead, TaxAct and Turbotax came up with their own carryover worksheets.
There's no doubt that Form 1116 is worse, but neither Schedule D or any of the worksheets compute the carryover to next year. Line 6 and 11 are for the carry over from last year, just like line 10 of the 1116. Compare this to line 29 on the 1990 Schedule D, this number carries forward directly to line 5 in 1991. The handling of carryforwards has gotten progressively worse over the decades. I still blame TurboTax.

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Re: Tax question: Foreign Tax Credit

Post by talzara » Thu Mar 01, 2018 1:41 pm

Epsilon Delta wrote:
Thu Mar 01, 2018 1:25 pm
There's no doubt that Form 1116 is worse, but neither Schedule D or any of the worksheets compute the carryover to next year. Line 6 and 11 are for the carry over from last year, just like line 10 of the 1116. Compare this to line 29 on the 1990 Schedule D, this number carries forward directly to line 5 in 1991. The handling of carryforwards has gotten progressively worse over the decades. I still blame TurboTax.
The IRS removed that line when they redesigned Schedule D in 1993: https://www.irs.gov/pub/irs-prior/f1040sd--1993.pdf

I blame Turbotax for a lot of things, but not Schedule D. What was Turbotax's share of tax returns filed for 1993?

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Re: Tax question: Foreign Tax Credit

Post by Electron » Thu Mar 01, 2018 2:55 pm

Another difficulty with Form 1116 is the section on Deductions and Losses in Part I. As seen in this forum, individuals don't always agree on the specific calculations even after studying the Instructions and Publication 514 in detail. The different Tax Software programs also handle some of the deductions differently.

I wanted to note that the IRS receives Foreign Tax Credit information on Form 1099-DIV. In theory, they could calculate the sum for a given category of Foreign income. After receiving Form 1116 they could also calculate the carryforward.

If one failed to file Form 1116 with zero tax credit to establish a carryforward, it should still be possible to file a subsequent year Form 1116 the following year. The taxpayer would have the required 1099-DIV Forms in their records for backup. The main issue appears to be whether the IRS would flag the missing Form 1116 and contact the taxpayer.
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randompacking
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Re: Tax question: Foreign Tax Credit

Post by randompacking » Fri Mar 02, 2018 8:45 am

Thank you all for your guidance.

i just tried to do a rough tax return with taxact (free) just to see if they would include a form 1116. i even purposefully chose to answer the form 1116 Q&A. it did not print out that form or carryforward. I guess i might make an attempt to fill out form 1116 by hand. I am not sure if it is worth it though.

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Re: Tax question: Foreign Tax Credit

Post by skatterZ » Fri Mar 02, 2018 11:17 pm

If you have foreign tax paid at more than one brokerage, the order in which you enter the various amounts matters very much in Turbo Tax. After reading the little "additional information" in Turbo Tax, I deleted my entries and re entered with largest tax paid first, i lowered my federal tax $700. Worth the bother to get it right. Good luck. Please bring the postcard tax form, Washington.

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Re: Tax question: Foreign Tax Credit

Post by talzara » Sat Mar 03, 2018 4:08 pm

skatterZ wrote:
Fri Mar 02, 2018 11:17 pm
If you have foreign tax paid at more than one brokerage, the order in which you enter the various amounts matters very much in Turbo Tax. After reading the little "additional information" in Turbo Tax, I deleted my entries and re entered with largest tax paid first, i lowered my federal tax $700. Worth the bother to get it right. Good luck. Please bring the postcard tax form, Washington.
The order does not matter. I tried it both ways:
  • First, I entered the smaller tax first. Turbotax calculated 0 foreign tax credit.
  • Then, I entered the larger tax first. Turbotax calculated the correct foreign tax credit.
  • Then, I entered the smaller tax first. Turbotax still calculated the correct foreign tax credit.
  • Then, I started a new tax file and entered the smaller tax first. Turbotax still calculated the correct foreign tax credit.
I don't know what I did the first time, but it's probably the same thing you did.

Personally, I'd rather fill out the forms. The interview just gets in the way. All it takes is one wrong answer, and the software goes down a different path.

Your wish for a "postcard tax form" will not come true as long as Intuit is making billions of dollars from Turbotax. Intuit has been lobbying against simplified tax filing for decades.

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grabiner
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Re: Tax question: Foreign Tax Credit

Post by grabiner » Sat Mar 03, 2018 8:53 pm

Electron wrote:
Thu Mar 01, 2018 2:55 pm
Another difficulty with Form 1116 is the section on Deductions and Losses in Part I. As seen in this forum, individuals don't always agree on the specific calculations even after studying the Instructions and Publication 514 in detail. The different Tax Software programs also handle some of the deductions differently.
An interesting wrinkle I discovered with TaxAct: gross income includes all your capital gains, even if they are offset by losses. I had a $668 capital gain in 2017, but paid no extra tax because it was offset by carryover losses (and I also took $3000 against ordinary income). TaxAct computed my gross income including the capital gain, so it was $3668 more than the "Total Income" line on my tax return. This slightly reduced the amount of foreign tax credit I could claim, as the extra income was all US-sourced. (The maximum credit is still much more than I actually paid.)

The more common issue is that the software cannot allocate state income taxes correctly, because you do the federal return first, and at that time, the software doesn't know how much of your state income tax was imposed on the foreign income. It treats state income tax as a deduction not directly connected with either the US or foreign income, which gives the right value only if the state taxes the foreign income and the US and state taxable income are the same. What I do is let the software fill out the federal and state forms, then go back manually and correct the treatment of state income tax.
Wiki David Grabiner

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