How to use (General Income) Carryover Foreign Tax Credit

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martint
Posts: 105
Joined: Fri Feb 19, 2016 11:31 am

How to use (General Income) Carryover Foreign Tax Credit

Post by martint »

Can anyone suggest the options for using a large Carryover Foreign Tax Credit in the General Income category?

Background: I am a US citizen who lived in a very high tax country a few years ago. During the time I lived abroad, I accumulated a high 5 figure foreign tax credit in the general income category I have thus far been unable to use and carry forward every year. FWIW the credit was due to both high wage income as well as some passive income that I understand was characterized as general income due to the foreign country’s high tax rate. I live in the US again now but am interested to move abroad again in a few years and while I wouldn’t be moving solely to use the credit, being able to use the credit certainly would be a bonus.

Since returning to the US, I have a moderate taxable investment in international ETFs (VXUS, etc) that earn foreign dividends. Thus far I claim the passive income foreign tax credit but the general income category just carries forward.

I think these are my options … I’d appreciate any suggestions or corrections for my misunderstanding…

A) Change nothing. The credits will carry forward for 10 years since the foreign tax year it was paid then simply expire.

B) Move back to a high-tax country. If the foreign country’s tax rate is higher than US federal tax rate, I would accumulate more foreign tax credit.

C) Move to a low/no tax country such as Bermuda without a job and live off my investments. I think in this option, US-based dividends or capital gains would count as foreign-sourced passive income and I would not be able to apply the general income foreign tax credit against my US federal tax liability.

D) Move to a low/no tax country with a US job, i.e. remote worker. Assume employer is ok with this. The wages from the remote work would be foreign-sourced since I live in the foreign country. I could apply the carried over foreign tax credit to my US federal tax liability.

Are there other options? Do I have the basics for can/can’t use general income foreign tax credit carryover correct in the above options? For option D, can anyone give me or point me to a _simple_ explanation for how much of the credit I could use each year as a function of total federal tax and AGI? I know I could just try hypothetical scenarios in Turbo Tax but I am trying to get a better understanding.


NB: I found a thread here on the Passive Income foreign tax credit but not the General Income one. It’s my understanding you can’t use Passive Income-based foreign tax payments (eg VXUS dividend payments) to offset the General Income foreign tax credit, but I’d be curious to hear otherwise.
Topic Author
martint
Posts: 105
Joined: Fri Feb 19, 2016 11:31 am

Re: How to use (General Income) Carryover Foreign Tax Credit

Post by martint »

Bumping …
JHart
Posts: 41
Joined: Wed Sep 14, 2016 9:14 pm

Re: How to use (General Income) Carryover Foreign Tax Credit

Post by JHart »

I'd love to hear the answer to this. I am living abroad for eight months this year and then moving back to the US. I will have a lowish five figure foreign tax credit carryover. I was not aware of the passive vs general income issue - will look into that. Hopefully someone knowledgeable on this topic will reply!
Running Bum
Posts: 137
Joined: Sun Feb 10, 2013 2:00 pm

Re: How to use (General Income) Carryover Foreign Tax Credit

Post by Running Bum »

Option E) Invest in an international index fund or something else that generates foreign income. This should allow you to use some of your foreign tax credit.

I don't understand the point of B), to accumulate even more foreign tax credit you may never use.
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