Never-Ending Foreign Tax Credit Problem

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siamond
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Re: Never-Ending Foreign Tax Credit Problem

Post by siamond » Tue Dec 24, 2019 9:06 pm

restingonmylaurels wrote:
Wed Feb 15, 2017 11:14 am
But what I am really looking for is someone who has been able to get out of the situation of ever-increasing foreign tax credit carryforwards.
Welcome to the club. I've been stuck in the same predicament for years. Didn't find a way out. Being double-taxed is NOT fun, nor fair.

Any update on your situation?

Chip
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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Wed Dec 25, 2019 12:47 pm

I'm glad this thread was resurrected. I missed it the first time around.

I am in the same situation as the OP, kramer and siamond: early retiree with significant QDI taxed at low rates; foreign QDI < 20k. I carried over about 8% of foreign taxes paid in 2017, 30% in 2018. I estimate about 70% carryover for 2019. I will hit RMDs and max social security before those carryovers start aging out. At that point it appears I'll start drawing down the carryovers, as kaneohe mentioned.

I haven't modeled what will happen if dividends grow enough to cross the 20k QDI threshold. I suspect it will be a problem. There is a check box in Turbotax that allows one to force the qualified dividends "adjustment". When I do that on my 2018 return I end up at 100% carryover of foreign tax paid, vs. the 30% carryover without the adjustment.

I think this is an important issue for reasonably high earners (high 22% bracket or above) who are saving a high percentage of income and plan to retire early without pensions. Foreign tax credits may be easily claimed in full while they're working but then limited after early retirement. At that point there may be significant capital gains exposure on the international funds held in taxable, so no easy way out.

triceratop's tax efficiency spreadsheet, by necessity, assumes full claiming of the foreign tax credit. That assumption requires careful examination by anyone who is considering a lengthy early retirement with significant amounts of international funds in taxable.

nalor511
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Re: Never-Ending Foreign Tax Credit Problem

Post by nalor511 » Wed Dec 25, 2019 2:28 pm

I like this thread too.

Year 1 I had really low income, and carried 100% of my FTC.
Year 2 I had medium income, and carried 35% of my FTC.
Year 3 I did a Roth conversion, and only carried 13% of my FTC.

So far, it seems that the higher US taxes you may on your particular income, the more of the FTC you can use.

livesoft
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Re: Never-Ending Foreign Tax Credit Problem

Post by livesoft » Wed Dec 25, 2019 2:35 pm

Chip wrote:
Wed Dec 25, 2019 12:47 pm
At that point there may be significant capital gains exposure on the international funds held in taxable, so no easy way out.
I don't understand what you mean here since realized capital gains on US-based mutual funds such as Vanguard Total International Stock Index fund are not foreign-source income. If you own shares on London Stock Exchange and sell to realize cap gains there, then that is foreign source income.

In other words, a realized capital gain in VTIAX is no different than a realized capital gain in VTSAX.
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Chip
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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Wed Dec 25, 2019 2:44 pm

livesoft wrote:
Wed Dec 25, 2019 2:35 pm
I don't understand what you mean here since realized capital gains on US-based mutual funds such as Vanguard Total International Stock Index fund are not foreign-source income. If you own shares on London Stock Exchange and sell to realize cap gains there, then that is foreign source income.
What I mean is that the investor will have to incur significant US capital gains to reduce their foreign exposure in taxable or else lose some of their foreign tax credit forever via many years of carryovers. Especially if QDI starts to exceed 20k.

I will be looking to reallocate so that I have less foreign in taxable over the next few years as I think breaching 20k of QDI is inevitable with dividend growth. But I have a good bit of modeling to do before making that decision. If I'm lucky there will be a big enough market drop that I'll be able to do it without any tax cost.

nalor511
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Re: Never-Ending Foreign Tax Credit Problem

Post by nalor511 » Wed Dec 25, 2019 2:46 pm

Chip wrote:
Wed Dec 25, 2019 2:44 pm
livesoft wrote:
Wed Dec 25, 2019 2:35 pm
I don't understand what you mean here since realized capital gains on US-based mutual funds such as Vanguard Total International Stock Index fund are not foreign-source income. If you own shares on London Stock Exchange and sell to realize cap gains there, then that is foreign source income.
What I mean is that the investor will have to incur significant US capital gains to reduce their foreign exposure in taxable or else lose some of their foreign tax credit forever via many years of carryovers. Especially if QDI starts to exceed 20k.

I will be looking to reallocate so that I have less foreign in taxable over the next few years as I think breaching 20k of QDI is inevitable with dividend growth. But I have a good bit of modeling to do before making that decision. If I'm lucky there will be a big enough market drop that I'll be able to do it without any tax cost.
Keep in mind that if your Foreign is in Roth/IRA, you still lose the FTC (you still paid those taxes, and you still don't get them back). At least if they're in taxable, they're carried and potentially usable for 10 years.

rkhusky
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Re: Never-Ending Foreign Tax Credit Problem

Post by rkhusky » Wed Dec 25, 2019 3:05 pm

Also keep in mind that Foreign in tax-advantaged protects you from a higher dividend rate and lower qualified dividends.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Wed Dec 25, 2019 4:01 pm

rkhusky wrote:
Wed Dec 25, 2019 3:05 pm
Also keep in mind that Foreign in tax-advantaged protects you from a higher dividend rate and lower qualified dividends.
+1

That's why one can end up in a box with too much int'l in taxable and a low tax rate. Without the benefit of the FTC the international funds are a good bit less tax efficient than domestic funds.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Wannaretireearly » Wed Dec 25, 2019 6:02 pm

Tag. I dont understand this well, but need to
... I missed this first time around too.
.
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Bfwolf
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Re: Never-Ending Foreign Tax Credit Problem

Post by Bfwolf » Wed Dec 25, 2019 8:44 pm

I've only skimmed this thread, but I appear to be in the same boat, so if there's a solution I don't know about, please let me know. I use Turbotax, and in 2018 it said I could take a ~$100 FTC even though I had paid ~$800 of foreign dividend tax that year, not to mention the ~$1,100 of carryover from prior years. Since I'm semi-retired and put much of my income I do earn into a solo 401k in order to get my income low enough for ACA subsidies, my 1040 line 11a is only ~$300. This seems to be what prevents me from being able to take most of the FTC.

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House Blend
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Re: Never-Ending Foreign Tax Credit Problem

Post by House Blend » Thu Dec 26, 2019 10:40 am

Chip wrote:
Wed Dec 25, 2019 12:47 pm
I think this is an important issue for reasonably high earners (high 22% bracket or above) who are saving a high percentage of income and plan to retire early without pensions. Foreign tax credits may be easily claimed in full while they're working but then limited after early retirement. At that point there may be significant capital gains exposure on the international funds held in taxable, so no easy way out.
A significant option in this scenario (early retirement/low taxes/limited ability to claim FTC/unable to successfully carryforward) is to increase your Roth conversion target so that more/all of the FTC can be claimed.

Even in the case where you have some QDI taxed at 0% and 15% rates (and the expectation that a Roth conversion would be taxed 27% Federally), the marginal tax cost when the conversion allows more FTC can be in the 19% to 21% range.

Here, the marginal tax cost as you vary the conversion amount in this scenario is *not* piecewise constant. Instead, it is a ratio of two polynomials (until the FTC is 100% claimable).

There are many parameters that can affect the precise tax cost, so the analysis is going to be much more case-specific than usual.

And there isn't much point in working this out to 6 decimal places, since you will have to decide how much to Roth convert at a time when you can only make rough guesstimates of how much foreign tax you will pay or how much in QDI you will have.

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Re: Never-Ending Foreign Tax Credit Problem

Post by livesoft » Thu Dec 26, 2019 10:44 am

Bfwolf wrote:
Wed Dec 25, 2019 8:44 pm
I've only skimmed this thread, but I appear to be in the same boat, so if there's a solution I don't know about, please let me know. I use Turbotax, and in 2018 it said I could take a ~$100 FTC even though I had paid ~$800 of foreign dividend tax that year, not to mention the ~$1,100 of carryover from prior years. Since I'm semi-retired and put much of my income I do earn into a solo 401k in order to get my income low enough for ACA subsidies, my 1040 line 11a is only ~$300. This seems to be what prevents me from being able to take most of the FTC.
I would be concerned that one's entries to TT created this inability to use the full FTC. That is, by filling out Form 1116 you were limited in the amount of FTC that you could take. I know that when my FTC was limited, I then read the Form 1116 instructions and figured out where the tax-prep software was incorrect. Since then though I have switched to HRBlock Deluxe where I did use my knowledge from reading the Form 1116 instructions and other research to get the Form 1116 filled out to my benefit.

I write this to tell you that I had more than $1000 in FTC in 2018 although Form 1116 calculated that my maximum limit would be over $1500. So while I don't know if what I wrote can apply to you, I think it is something to carefully consider.
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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Thu Dec 26, 2019 1:02 pm

House Blend wrote:
Thu Dec 26, 2019 10:40 am
A significant option in this scenario (early retirement/low taxes/limited ability to claim FTC/unable to successfully carryforward) is to increase your Roth conversion target so that more/all of the FTC can be claimed.

Even in the case where you have some QDI taxed at 0% and 15% rates (and the expectation that a Roth conversion would be taxed 27% Federally), the marginal tax cost when the conversion allows more FTC can be in the 19% to 21% range.

There are many parameters that can affect the precise tax cost, so the analysis is going to be much more case-specific than usual.
Thanks for weighing in!

Yes, paying more tax at a 20%+ marginal rate will definitely increase the amount of FTC that can be claimed. And I agree about the complexity of trying to model the effects.

I added a 10k increase in Roth conversions to my 2018 Turbotax return. As filed, it was within $100 of the line between 12% and 27% ordinary income rates. The 10k conversion resulted in a net increase of $2,332 in taxes, or a 23.3% marginal rate. If I add another 1k in conversions they are taxed at 23.8%. And there is still FTC being carried over.

My guess would be that few who had targeted converting at 12% or 15% would be willing to make the jump to 20%-27% for the sake of claiming the credit. But it might be a deciding factor for those on the fence about converting at higher rates.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Thu Dec 26, 2019 1:07 pm

livesoft wrote:
Thu Dec 26, 2019 10:44 am
I would be concerned that one's entries to TT created this inability to use the full FTC. That is, by filling out Form 1116 you were limited in the amount of FTC that you could take. I know that when my FTC was limited, I then read the Form 1116 instructions and figured out where the tax-prep software was incorrect. Since then though I have switched to HRBlock Deluxe where I did use my knowledge from reading the Form 1116 instructions and other research to get the Form 1116 filled out to my benefit.
Since Bfwolf's taxes before credits were only $300 (F1040, L11a), it's not at all surprising to me that FTC was limited to $100.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Tanelorn » Thu Dec 26, 2019 2:41 pm

livesoft wrote:
Wed Dec 25, 2019 2:35 pm
I don't understand what you mean here since realized capital gains on US-based mutual funds such as Vanguard Total International Stock Index fund are not foreign-source income. If you own shares on London Stock Exchange and sell to realize cap gains there, then that is foreign source income.
No, capital gains from trading foreign stocks are sourced to the taxpayers tax residence.

https://www.irs.gov/pub/int_practice_un ... _02_05.pdf

So person who is a US resident for tax purposes won’t generate foreign source income by selling foreign stocks or mutual funds at a profit, although the dividends those pay will be foreign source income since interest/dividends are sourced based on the payor’s location. But because those foreign dividends are often the source of the foreign tax withholding in the first place, you don’t get ahead on using up your credit by having these things unless you can get foreign dividends that are withheld less than the tax rate you can claim back. This depends on the treaty rates, your personal tax rates, and several other factors.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Bfwolf » Thu Dec 26, 2019 3:05 pm

Chip wrote:
Thu Dec 26, 2019 1:07 pm
livesoft wrote:
Thu Dec 26, 2019 10:44 am
I would be concerned that one's entries to TT created this inability to use the full FTC. That is, by filling out Form 1116 you were limited in the amount of FTC that you could take. I know that when my FTC was limited, I then read the Form 1116 instructions and figured out where the tax-prep software was incorrect. Since then though I have switched to HRBlock Deluxe where I did use my knowledge from reading the Form 1116 instructions and other research to get the Form 1116 filled out to my benefit.
Since Bfwolf's taxes before credits were only $300 (F1040, L11a), it's not at all surprising to me that FTC was limited to $100.
That is my sense as well Chip, although I appreciate Livesoft's suggestion that it could be a TT software error. I don't think it is, though I confess I've never read the instructions for 1116.

After credits, my tax bill was something like $6, so in one sense it's easy to say "well sure, what more FTC are you hoping to take when you're hardly paying taxes?" But the problem is that if I let my taxable income increase, my taxes owed before credits goes up quite slowly since I'm in the 12% tax bracket, and then on top of that I can only claim about 1/3 of the increase in my taxes owed as a FTC due to form 1116's calculations. So if I put $1,000 less into a traditional solo 401k, I think the benefit from a FTC perspective would only be roughly $1,000 x 12% x 33% = $40 in add'l FTC I could take. It doesn't really seem worth it when staying under 200% of the federal poverty level gives me such excellent ACA subsidies.

Also, I realize this post could rub some people the wrong way who see me as trying to have my cake and eat it too in terms of the FTC and the ACA subsidies. I understand that perspective, but am just trying to maximize my position under the law.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Thu Dec 26, 2019 3:54 pm

Bfwolf wrote:
Thu Dec 26, 2019 3:05 pm
But the problem is that if I let my taxable income increase, my taxes owed before credits goes up quite slowly since I'm in the 12% tax bracket, and then on top of that I can only claim about 1/3 of the increase in my taxes owed as a FTC due to form 1116's calculations. So if I put $1,000 less into a traditional solo 401k, I think the benefit from a FTC perspective would only be roughly $1,000 x 12% x 33% = $40 in add'l FTC I could take. It doesn't really seem worth it when staying under 200% of the federal poverty level gives me such excellent ACA subsidies.
This makes a lot of sense to me. It's difficult to claim a significant amount of FTC when in the 12% bracket with a fair amount of QDI and LTCG taxed at 0%. I agree with you that keeping income low for ACA purposes is worth way more than getting a few extra $ of FTC.

Can you see ahead to a time where you'll be off ACA and taxable income will increase? At that time you may be able to start clawing back those carried-over amounts.

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Re: Never-Ending Foreign Tax Credit Problem

Post by livesoft » Thu Dec 26, 2019 3:55 pm

Tanelorn wrote:
Thu Dec 26, 2019 2:41 pm
livesoft wrote:
Wed Dec 25, 2019 2:35 pm
I don't understand what you mean here since realized capital gains on US-based mutual funds such as Vanguard Total International Stock Index fund are not foreign-source income. If you own shares on London Stock Exchange and sell to realize cap gains there, then that is foreign source income.
No, capital gains from trading foreign stocks are sourced to the taxpayers tax residence.

https://www.irs.gov/pub/int_practice_un ... _02_05.pdf
[...]
I appreciate the correction, thanks!
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Re: Never-Ending Foreign Tax Credit Problem

Post by grabiner » Thu Dec 26, 2019 9:53 pm

livesoft wrote:
Thu Dec 26, 2019 10:44 am
Bfwolf wrote:
Wed Dec 25, 2019 8:44 pm
I've only skimmed this thread, but I appear to be in the same boat, so if there's a solution I don't know about, please let me know. I use Turbotax, and in 2018 it said I could take a ~$100 FTC even though I had paid ~$800 of foreign dividend tax that year, not to mention the ~$1,100 of carryover from prior years. Since I'm semi-retired and put much of my income I do earn into a solo 401k in order to get my income low enough for ACA subsidies, my 1040 line 11a is only ~$300. This seems to be what prevents me from being able to take most of the FTC.
I would be concerned that one's entries to TT created this inability to use the full FTC. That is, by filling out Form 1116 you were limited in the amount of FTC that you could take. I know that when my FTC was limited, I then read the Form 1116 instructions and figured out where the tax-prep software was incorrect. Since then though I have switched to HRBlock Deluxe where I did use my knowledge from reading the Form 1116 instructions and other research to get the Form 1116 filled out to my benefit.
I haven't used TurboTax in several years, but it at least used to use the less favorable treatment of the itemized deduction for charitable contributions (although you could correct it). TurboTax prorated charitable contributions equally across US and foreign income, while you are allowed to deduct them against only US income. TaxAct, which I have used in recent years, deducts charitable contributions against US income.

The only other error I know of with TurboTax is an inherent issue with all tax software. If you deduct state income tax, you are supposed to prorate based on how much US and foreign income was taxed by the state, not by how much was taxed on your federal return. No tax software can get this right because you fill out your federal Form 1116 before doing your state taxes; in the past, I have gone back and corrected Form 1116 after doing state taxes.

But both of these are minor effects, and are less likely to matter now that most taxpayers take the standard deduction. Taxpayers who take qualified charitable distributions avoid the issue with charitable contributions, as these distributions are subtracted from IRA withdrawals, and thus reduce US-source income.
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Bfwolf
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Re: Never-Ending Foreign Tax Credit Problem

Post by Bfwolf » Fri Dec 27, 2019 1:23 am

Chip wrote:
Thu Dec 26, 2019 3:54 pm
Bfwolf wrote:
Thu Dec 26, 2019 3:05 pm
But the problem is that if I let my taxable income increase, my taxes owed before credits goes up quite slowly since I'm in the 12% tax bracket, and then on top of that I can only claim about 1/3 of the increase in my taxes owed as a FTC due to form 1116's calculations. So if I put $1,000 less into a traditional solo 401k, I think the benefit from a FTC perspective would only be roughly $1,000 x 12% x 33% = $40 in add'l FTC I could take. It doesn't really seem worth it when staying under 200% of the federal poverty level gives me such excellent ACA subsidies.
This makes a lot of sense to me. It's difficult to claim a significant amount of FTC when in the 12% bracket with a fair amount of QDI and LTCG taxed at 0%. I agree with you that keeping income low for ACA purposes is worth way more than getting a few extra $ of FTC.

Can you see ahead to a time where you'll be off ACA and taxable income will increase? At that time you may be able to start clawing back those carried-over amounts.
Under current tax law, only if my business grew a fair bit to the point where I couldn't get my income low enough for ACA subsidies and thus decided maybe it would be best to just use a Roth solo 401k instead. I'm actually not far away from being unable to get down to under 200% of the federal poverty level. At that point, I'll still be eligible for a subsidy but the subsidy will be less valuable, so who knows maybe it will be worth it for me to switch to Roth at that point. As I'm building up these carryovers though, I doubt I'll ever be able to use them all or even most of them (or maybe any of them) before they expire in 10 years. But who knows, tax laws change.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Timon0201 » Fri Dec 27, 2019 1:44 am

Also if filing married - if total FTC for the year is under $600, you can take the total credit and not file the form 1116 at all.

If you think you really will never use the credit, you can opt to take the deduction. Something is better than nothing

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Fri Dec 27, 2019 5:52 am

Bfwolf wrote:
Fri Dec 27, 2019 1:23 am
Under current tax law, only if my business grew a fair bit to the point where I couldn't get my income low enough for ACA subsidies and thus decided maybe it would be best to just use a Roth solo 401k instead. I'm actually not far away from being unable to get down to under 200% of the federal poverty level. At that point, I'll still be eligible for a subsidy but the subsidy will be less valuable, so who knows maybe it will be worth it for me to switch to Roth at that point. As I'm building up these carryovers though, I doubt I'll ever be able to use them all or even most of them (or maybe any of them) before they expire in 10 years. But who knows, tax laws change.
I'm not an ACA expert, but isn't the limit for cost sharing reduction plan eligibility 250% of FPL, not 200%? Not that an extra 50% is that much wiggle room....

Running the numbers is obviously the key, but I would think keeping the subsidy would be worth far more than a few hundred $ of FTC. But I suppose that depends on your age. I've spent some time helping someone in their early 60s on ACA and their subsidies were very large.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Fri Dec 27, 2019 5:54 am

grabiner wrote:
Thu Dec 26, 2019 9:53 pm
I haven't used TurboTax in several years, but it at least used to use the less favorable treatment of the itemized deduction for charitable contributions (although you could correct it). TurboTax prorated charitable contributions equally across US and foreign income, while you are allowed to deduct them against only US income.
TurboTax didn't prorate charitable contributions in 2017, the last year I itemized.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Bfwolf » Fri Dec 27, 2019 10:55 am

Chip wrote:
Fri Dec 27, 2019 5:52 am
Bfwolf wrote:
Fri Dec 27, 2019 1:23 am
Under current tax law, only if my business grew a fair bit to the point where I couldn't get my income low enough for ACA subsidies and thus decided maybe it would be best to just use a Roth solo 401k instead. I'm actually not far away from being unable to get down to under 200% of the federal poverty level. At that point, I'll still be eligible for a subsidy but the subsidy will be less valuable, so who knows maybe it will be worth it for me to switch to Roth at that point. As I'm building up these carryovers though, I doubt I'll ever be able to use them all or even most of them (or maybe any of them) before they expire in 10 years. But who knows, tax laws change.
I'm not an ACA expert, but isn't the limit for cost sharing reduction plan eligibility 250% of FPL, not 200%? Not that an extra 50% is that much wiggle room....

Running the numbers is obviously the key, but I would think keeping the subsidy would be worth far more than a few hundred $ of FTC. But I suppose that depends on your age. I've spent some time helping someone in their early 60s on ACA and their subsidies were very large.
I'm in my 40s so worth less. And yes you are right, though there is a cliff at 200% as well that reduces the benefits.

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Re: Never-Ending Foreign Tax Credit Problem

Post by boomer_techie » Fri Dec 27, 2019 2:34 pm

Chip wrote:
Wed Dec 25, 2019 12:47 pm
There is a check box in Turbotax that allows one to force the qualified dividends "adjustment". When I do that on my 2018 return I end up at 100% carryover of foreign tax paid, vs. the 30% carryover without the adjustment.
What is the purpose of the "adjustment exception"? I've been trying to add form 1116 to my tax spreadsheet and can't figure out the reason for the adjustments. In what conditions does this reduce the tax due? And where do the constants in the line 18 worksheet come from? I notice they change slightly every year.

(Luckily my foreign tax paid is under the threshold and I don't need to file 1116 - so this is just an academic exercise for me.)

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Re: Never-Ending Foreign Tax Credit Problem

Post by siamond » Sat Dec 28, 2019 12:41 am

kramer wrote:
Thu Feb 16, 2017 3:44 am
My foreign tax credit carryover increases every year and I do NOT have $20,000 in foreign source dividend income (all from Vanguard ETFs).

The answer lies with the fact that my US tax rate is lower than the taxes paid on my foreign dividends AND that I exceed the $300/$600 threshold in foreign taxes paid for getting the full credit back. This is one of those places in the tax code where exceeding a threshold by even one dollar can create a step function in taxes paid.

The reason my US tax rate is low is that virtually all of my income is qualified dividends and capital gains, and my interest and unqualified dividends fall into the 0% bracket.

A few years ago I started doing T-IRA to ROTH IRA conversions and my marginal rate of conversion is lower because as I am paying more US taxes I capture more of the foreign tax credit for that year. So, in the 10% bracket, I really only pay about 8% marginal, and in the 15% bracket, I really only pay about 12% marginal. However, I can never use all of my foreign tax credit in any one year (unless I convert at higher tax rates), so I will just lose it forever at some point as the carryovers expire.
I wish I had read this explanation more carefully when it was posted... I just spent time today to revisit Form 1116 from my 2018 tax return and the crux of the issue is indeed when the US effective tax rate (before credits) is lower than the tax rate paid on foreign dividends.

My US tax rate is around 3% (since most of my early retiree income is made of long-term capital gains fitting under the 15% bracket) and the foreign dividends are auto-taxed at 9% (*). So... the tax credit gives me back 3%, therefore 6% of the foreign taxes are carried over, and this will happen again & again. I do Roth-convert, but up to the top of the 10% tax bracket, it doesn't seem to make sense for me to go higher. There is simply no way I'll get to an effective tax rate higher than 9% (before credits).

I think there is some kind of (relative) light at the end of the tunnel though. My taxable account might get depleted in the coming decade (since I spend it first), before I get to SS/RMDs. When the Int'l $ will be nearly depleted in taxable, the accumulated carry-over will finally be used as credits (to the extent of my tax rate by then). I strongly suspect some of the carry-over will expire first because of the 10 years rule though... Also, I will not get any FTC on the Int'l $$ accumulated in tax-advantaged... :(

(*) Actually, my position in emerging markets is taxed higher than my position in developed markets. This reinforces my strategy to sell emerging first (shifting it first to tax-advantaged over time, to reduce both foreign taxes and unqualified dividends).

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Sat Dec 28, 2019 7:10 am

boomer_techie wrote:
Fri Dec 27, 2019 2:34 pm
What is the purpose of the "adjustment exception"? I've been trying to add form 1116 to my tax spreadsheet and can't figure out the reason for the adjustments. In what conditions does this reduce the tax due? And where do the constants in the line 18 worksheet come from? I notice they change slightly every year.
The adjustment is required for those with more than 20k of foreign source qualified dividend income and/or in the higher tax brackets (32% and above). The idea (my interpretation) is that those with higher incomes shouldn't be able to receive a credit that offsets tax at 32% and above while only paying tax on the dividends that created the credit at 15 or 20%. I'm not sure how the 20k limit came about other than it "seems" like a lot of foreign dividends. By the way, note that the 20k is NOT inflation adjusted.

My guess is that the exception to the adjustment is just to give a break to all but the higher income taxpayers who still have to file F1116. Similar to the 300/600 exception, just at a different level. As best I can tell, the exception almost always helps the taxpayer and never hurts.

The constants result from dividing the 15% and 20% QDI rates by the top tax bracket for the year. So in 2018: 15/37 = .4054; 20/37 = .5405. In 2017 the top rate was 39.6%: 15/39.6 = .3788; 20/39.6 = .5051. They won't change for 2019, nor in the future until the brackets change, QDI is taxed differently, or Congress changes the way the credit is calculated.

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Re: Never-Ending Foreign Tax Credit Problem

Post by siamond » Sat Dec 28, 2019 10:48 am

One more thought. The issue is 100% centered on foreign dividends. The issue doesn't apply to capital gains obtained by selling shares from corresponding funds. Which is kind of weird, but it is the way it is.

So... If international companies would be kind enough to catch up with the US trend of shifting dividends to stock buybacks, the issue might somewhat mitigate itself over time. This would also help with those pesky unqualified dividends. One can hope...

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Sat Dec 28, 2019 11:06 am

livesoft wrote:
Thu Dec 26, 2019 10:44 am
I write this to tell you that I had more than $1000 in FTC in 2018 although Form 1116 calculated that my maximum limit would be over $1500. So while I don't know if what I wrote can apply to you, I think it is something to carefully consider.
I noticed you mentioned in another thread that your spouse is still working. Have you modeled what will happen to your FTC if she stops working? Based on some of your other posts it seems quite possible you might end up in the same situation as kramer, siamond, Bfwolf and me.

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Re: Never-Ending Foreign Tax Credit Problem

Post by livesoft » Sat Dec 28, 2019 11:15 am

Chip wrote:
Sat Dec 28, 2019 11:06 am
Have you modeled what will happen to your FTC if she stops working? Based on some of your other posts it seems quite possible you might end up in the same situation as kramer, siamond, Bfwolf and me.
We will replace her income with Roth conversions, so our AGI and taxes will likely be similar. However, in 2020 we lose a $2500 in education tax credits while also losing a $20,000 a year expense.

Furthermore, I typically sell shares of one of our int'l funds held in taxable to help meet expenses each year, so I don't expect any big increases in foreign taxes paid either. Only the future will tell for sure though whether we end up in the same situation as y'all.
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Re: Never-Ending Foreign Tax Credit Problem

Post by grabiner » Sun Dec 29, 2019 12:55 am

siamond wrote:
Sat Dec 28, 2019 10:48 am
One more thought. The issue is 100% centered on foreign dividends. The issue doesn't apply to capital gains obtained by selling shares from corresponding funds. Which is kind of weird, but it is the way it is.
The reason is that the foreign tax credit is based only on double-taxed income. If a US-based mutual fund sells a foreign stock, or a US investor sells a mutual fund holding foreign stocks, the foreign country doesn't tax the capital gain.
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Re: Never-Ending Foreign Tax Credit Problem

Post by boomer_techie » Sun Dec 29, 2019 6:13 pm

Chip wrote:
Sat Dec 28, 2019 7:10 am
The constants result from dividing the 15% and 20% QDI rates by the top tax bracket for the year. So in 2018: 15/37 = .4054; 20/37 = .5405. In 2017 the top rate was 39.6%: 15/39.6 = .3788; 20/39.6 = .5051.
Thanks! I've updated my spreadsheet to calculate these numbers instead of using constants. This will be my hint in the future as to what is happening with the adjustment.

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Tue Jun 23, 2020 12:25 am

Chip wrote:
Wed Dec 25, 2019 12:47 pm
I'm glad this thread was resurrected. I missed it the first time around.

I am in the same situation as the OP, kramer and siamond: early retiree with significant QDI taxed at low rates; foreign QDI < 20k. I carried over about 8% of foreign taxes paid in 2017, 30% in 2018. I estimate about 70% carryover for 2019. I will hit RMDs and max social security before those carryovers start aging out. At that point it appears I'll start drawing down the carryovers, as kaneohe mentioned.

I haven't modeled what will happen if dividends grow enough to cross the 20k QDI threshold. I suspect it will be a problem. There is a check box in Turbotax that allows one to force the qualified dividends "adjustment". When I do that on my 2018 return I end up at 100% carryover of foreign tax paid, vs. the 30% carryover without the adjustment.

I think this is an important issue for reasonably high earners (high 22% bracket or above) who are saving a high percentage of income and plan to retire early without pensions. Foreign tax credits may be easily claimed in full while they're working but then limited after early retirement. At that point there may be significant capital gains exposure on the international funds held in taxable, so no easy way out.

triceratop's tax efficiency spreadsheet, by necessity, assumes full claiming of the foreign tax credit. That assumption requires careful examination by anyone who is considering a lengthy early retirement with significant amounts of international funds in taxable.
There is a check box in Turbotax that allows one to force the qualified dividends "adjustment".
Can you point me to the location of the check box? Or does the check box only appear when you have more than 20K QDI?

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Tue Jun 23, 2020 12:41 am

grabiner wrote:
Thu Dec 26, 2019 9:53 pm
livesoft wrote:
Thu Dec 26, 2019 10:44 am
Bfwolf wrote:
Wed Dec 25, 2019 8:44 pm
I've only skimmed this thread, but I appear to be in the same boat, so if there's a solution I don't know about, please let me know. I use Turbotax, and in 2018 it said I could take a ~$100 FTC even though I had paid ~$800 of foreign dividend tax that year, not to mention the ~$1,100 of carryover from prior years. Since I'm semi-retired and put much of my income I do earn into a solo 401k in order to get my income low enough for ACA subsidies, my 1040 line 11a is only ~$300. This seems to be what prevents me from being able to take most of the FTC.
I would be concerned that one's entries to TT created this inability to use the full FTC. That is, by filling out Form 1116 you were limited in the amount of FTC that you could take. I know that when my FTC was limited, I then read the Form 1116 instructions and figured out where the tax-prep software was incorrect. Since then though I have switched to HRBlock Deluxe where I did use my knowledge from reading the Form 1116 instructions and other research to get the Form 1116 filled out to my benefit.
I haven't used TurboTax in several years, but it at least used to use the less favorable treatment of the itemized deduction for charitable contributions (although you could correct it). TurboTax prorated charitable contributions equally across US and foreign income, while you are allowed to deduct them against only US income. TaxAct, which I have used in recent years, deducts charitable contributions against US income.

The only other error I know of with TurboTax is an inherent issue with all tax software. If you deduct state income tax, you are supposed to prorate based on how much US and foreign income was taxed by the state, not by how much was taxed on your federal return. No tax software can get this right because you fill out your federal Form 1116 before doing your state taxes; in the past, I have gone back and corrected Form 1116 after doing state taxes.

But both of these are minor effects, and are less likely to matter now that most taxpayers take the standard deduction. Taxpayers who take qualified charitable distributions avoid the issue with charitable contributions, as these distributions are subtracted from IRA withdrawals, and thus reduce US-source income.
On the second issue with TurboTax can you please explain how you go back and correct Form 1116 after doing state taxes? You say this effect is minor. Who would be affected by the inherent issue in Turbotax? Also why does the IRS not flag the return as incorrect?

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Tue Jun 23, 2020 12:56 am

House Blend wrote:
Thu Dec 26, 2019 10:40 am
Chip wrote:
Wed Dec 25, 2019 12:47 pm
I think this is an important issue for reasonably high earners (high 22% bracket or above) who are saving a high percentage of income and plan to retire early without pensions. Foreign tax credits may be easily claimed in full while they're working but then limited after early retirement. At that point there may be significant capital gains exposure on the international funds held in taxable, so no easy way out.
A significant option in this scenario (early retirement/low taxes/limited ability to claim FTC/unable to successfully carryforward) is to increase your Roth conversion target so that more/all of the FTC can be claimed.

Even in the case where you have some QDI taxed at 0% and 15% rates (and the expectation that a Roth conversion would be taxed 27% Federally), the marginal tax cost when the conversion allows more FTC can be in the 19% to 21% range.

Here, the marginal tax cost as you vary the conversion amount in this scenario is *not* piecewise constant. Instead, it is a ratio of two polynomials (until the FTC is 100% claimable).

There are many parameters that can affect the precise tax cost, so the analysis is going to be much more case-specific than usual.

And there isn't much point in working this out to 6 decimal places, since you will have to decide how much to Roth convert at a time when you can only make rough guesstimates of how much foreign tax you will pay or how much in QDI you will have.
Thank you for pointing out the strategy of increasing your Roth conversion target so that more/all of the FTC can be claimed. I will have to model this in TurboTax.

On the Vanguard Foreign Tax Paid form Vanguard reports both the Foreign Income and the QDI Eligible Foreign Income. TurboTax in filling out Form 1116 asks how much of the Total Ordinary Dividends from 1099-DIV were from Foreign Sources.

Where does the QDI Eligible Foreign Income come into use? Either in Form 1116 or elsewhere?

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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Tue Jun 23, 2020 5:16 am

palanzo wrote:
Tue Jun 23, 2020 12:25 am
There is a check box in Turbotax that allows one to force the qualified dividends "adjustment".
Can you point me to the location of the check box? Or does the check box only appear when you have more than 20K QDI?
In Forms mode, go to the "1116 Comp Wks". In Part I there is a box labeled "Foreign Qualified Dividends and/or Capital Gains Adjustment Smart Worksheet". Within that box is the check box to force the adjustment.

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Tue Jun 23, 2020 10:44 am

Chip wrote:
Tue Jun 23, 2020 5:16 am
palanzo wrote:
Tue Jun 23, 2020 12:25 am
There is a check box in Turbotax that allows one to force the qualified dividends "adjustment".
Can you point me to the location of the check box? Or does the check box only appear when you have more than 20K QDI?
In Forms mode, go to the "1116 Comp Wks". In Part I there is a box labeled "Foreign Qualified Dividends and/or Capital Gains Adjustment Smart Worksheet". Within that box is the check box to force the adjustment.
Thank you. And that is only needed if your Foreign Qualified Dividends exceed 20K? Is that correct?

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Re: Never-Ending Foreign Tax Credit Problem

Post by abuss368 » Tue Jun 23, 2020 10:48 am

restingonmylaurels wrote:
Wed Feb 15, 2017 8:36 am
I imagine any VG investor with some foreign equity exposure may be experiencing the same problem I am. The issue is that VG foreign stock funds pay foreign tax. To avoid double taxation on that foreign income, the IRS allows for a foreign tax credit for US taxpayers. The allowable foreign tax credit is only for the percentage of foreign income to total worldwide income. For example, if I have foreign income from my VG fund of $1000 and $10,000 in total income from my VG funds (the other $9000 from the US), that means only 10% (1000/10,000)of the foreign tax credit can be used against US taxes. The unused foreign tax credit can be carried forward up to 10 years (or back one).

The issue that I am seeing is that, because my foreign investment income in relation to my US investment income is never very high, every year I am having to carryforward part of the foreign tax credit. The carryforward is getting larger and larger and I cannot foresee a case where my foreign income would be high enough to ever use it. This essentially means I am being double taxed (in the US and in the foreign country) on parts of my VG fund income.

Has anyone determined a way to get out of this seeming death spiral, so that they can fully utilize all of the foreign tax credit carryforward before it expires?
Are you filing the simplified credit if MFJ and under $600 foreign tax credit?
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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Tue Jun 23, 2020 11:19 am

palanzo wrote:
Tue Jun 23, 2020 10:44 am
Thank you. And that is only needed if your Foreign Qualified Dividends exceed 20K? Is that correct?
I believe it also comes into play if you are in the 32% ordinary income tax bracket.

But I'm almost certain that TurboTax will check the box if it is required.

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Tue Jun 23, 2020 12:10 pm

Chip wrote:
Tue Jun 23, 2020 11:19 am
palanzo wrote:
Tue Jun 23, 2020 10:44 am
Thank you. And that is only needed if your Foreign Qualified Dividends exceed 20K? Is that correct?
I believe it also comes into play if you are in the 32% ordinary income tax bracket.

But I'm almost certain that TurboTax will check the box if it is required.
Yes it would also come into play at 32%. I will change some numbers and see what TurboTax does.

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Re: Never-Ending Foreign Tax Credit Problem

Post by grabiner » Tue Jun 23, 2020 7:59 pm

palanzo wrote:
Tue Jun 23, 2020 12:41 am
grabiner wrote:
Thu Dec 26, 2019 9:53 pm
livesoft wrote:
Thu Dec 26, 2019 10:44 am
Bfwolf wrote:
Wed Dec 25, 2019 8:44 pm
I've only skimmed this thread, but I appear to be in the same boat, so if there's a solution I don't know about, please let me know. I use Turbotax, and in 2018 it said I could take a ~$100 FTC even though I had paid ~$800 of foreign dividend tax that year, not to mention the ~$1,100 of carryover from prior years. Since I'm semi-retired and put much of my income I do earn into a solo 401k in order to get my income low enough for ACA subsidies, my 1040 line 11a is only ~$300. This seems to be what prevents me from being able to take most of the FTC.
I would be concerned that one's entries to TT created this inability to use the full FTC. That is, by filling out Form 1116 you were limited in the amount of FTC that you could take. I know that when my FTC was limited, I then read the Form 1116 instructions and figured out where the tax-prep software was incorrect. Since then though I have switched to HRBlock Deluxe where I did use my knowledge from reading the Form 1116 instructions and other research to get the Form 1116 filled out to my benefit.
I haven't used TurboTax in several years, but it at least used to use the less favorable treatment of the itemized deduction for charitable contributions (although you could correct it). TurboTax prorated charitable contributions equally across US and foreign income, while you are allowed to deduct them against only US income. TaxAct, which I have used in recent years, deducts charitable contributions against US income.

The only other error I know of with TurboTax is an inherent issue with all tax software. If you deduct state income tax, you are supposed to prorate based on how much US and foreign income was taxed by the state, not by how much was taxed on your federal return. No tax software can get this right because you fill out your federal Form 1116 before doing your state taxes; in the past, I have gone back and corrected Form 1116 after doing state taxes.

But both of these are minor effects, and are less likely to matter now that most taxpayers take the standard deduction. Taxpayers who take qualified charitable distributions avoid the issue with charitable contributions, as these distributions are subtracted from IRA withdrawals, and thus reduce US-source income.
On the second issue with TurboTax can you please explain how you go back and correct Form 1116 after doing state taxes? You say this effect is minor. Who would be affected by the inherent issue in Turbotax? Also why does the IRS not flag the return as incorrect?
I go back to the form itself, to make the corrections.

Suppose that the software reported $16,000 of "other deductions not definitely related", which included $8000 of state income tax, on Form 1116 Line 3a. If 1/8 of your income was foreign, then you would reduce your foreign taxable income by $2000 because of this on Line 3g.

Now, suppose that after filling out your state tax from, you find that 90% of the state income tax was imposed on the US income; that is, your federal US-source income is 90% of your state gross income, and the state does tax the foreign-source income. (This is the formula in the IRS instructions.) You would now report $800 of "expenses definitely related to the foreign income" on Line 2, which reduces your foreign taxable income by $800. You would reduce the entry on Line 3a to $8000, and thus reduce the entry on Line 3g to $1000.

You would also need to attach a statement explaining why expenses were directly related. In TurboTax, my statement said "Form 1116 Line 2: State income tax (portion on foreign income)".

The IRS will not flag a failure to do this because it has nothing specific to match against. The IRS knows from Schedule A that you deducted state income tax, but not how it was allocated between US and foreign income. (The state tax might even be entirely on US income, because the state didn't tax the foreign income, or because the state tax was a 2019 payment on your 2018 tax when you had no foreign income.) And the failure to make this correction usually decreases your credit, as in the example above: by making the correction, you increased your foreign taxable income by $200, and thus increased the fraction of your income tax you can take as a credit.
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Re: Never-Ending Foreign Tax Credit Problem

Post by House Blend » Wed Jun 24, 2020 6:57 pm

palanzo wrote:
Tue Jun 23, 2020 12:56 am
House Blend wrote:
Thu Dec 26, 2019 10:40 am
A significant option in this scenario (early retirement/low taxes/limited ability to claim FTC/unable to successfully carryforward) is to increase your Roth conversion target so that more/all of the FTC can be claimed.
....snip....
Thank you for pointing out the strategy of increasing your Roth conversion target so that more/all of the FTC can be claimed. I will have to model this in TurboTax.

On the Vanguard Foreign Tax Paid form Vanguard reports both the Foreign Income and the QDI Eligible Foreign Income. TurboTax in filling out Form 1116 asks how much of the Total Ordinary Dividends from 1099-DIV were from Foreign Sources.

Where does the QDI Eligible Foreign Income come into use? Either in Form 1116 or elsewhere?
This has already come up in responses to your other queries.

In general, you may need the "QDI Eligible Foreign Income" in order to determine whether you are required to adjust your Form 1116 to account for the fact that QDI is taxed by the US at lower rates than ordinary income. If your Foreign QDI is less than $20,000 and (oversimplifying) you are in the 24% bracket or lower, then you don't have to make this adjustment. And it is to your advantage to not make the adjustment.

Probably TurboTax was able to figure out you met the conditions, and so it didn't need to ask for the information.

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Mon Jun 29, 2020 2:52 pm

grabiner wrote:
Tue Jun 23, 2020 7:59 pm
palanzo wrote:
Tue Jun 23, 2020 12:41 am
grabiner wrote:
Thu Dec 26, 2019 9:53 pm
livesoft wrote:
Thu Dec 26, 2019 10:44 am
Bfwolf wrote:
Wed Dec 25, 2019 8:44 pm
I've only skimmed this thread, but I appear to be in the same boat, so if there's a solution I don't know about, please let me know. I use Turbotax, and in 2018 it said I could take a ~$100 FTC even though I had paid ~$800 of foreign dividend tax that year, not to mention the ~$1,100 of carryover from prior years. Since I'm semi-retired and put much of my income I do earn into a solo 401k in order to get my income low enough for ACA subsidies, my 1040 line 11a is only ~$300. This seems to be what prevents me from being able to take most of the FTC.
I would be concerned that one's entries to TT created this inability to use the full FTC. That is, by filling out Form 1116 you were limited in the amount of FTC that you could take. I know that when my FTC was limited, I then read the Form 1116 instructions and figured out where the tax-prep software was incorrect. Since then though I have switched to HRBlock Deluxe where I did use my knowledge from reading the Form 1116 instructions and other research to get the Form 1116 filled out to my benefit.
I haven't used TurboTax in several years, but it at least used to use the less favorable treatment of the itemized deduction for charitable contributions (although you could correct it). TurboTax prorated charitable contributions equally across US and foreign income, while you are allowed to deduct them against only US income. TaxAct, which I have used in recent years, deducts charitable contributions against US income.

The only other error I know of with TurboTax is an inherent issue with all tax software. If you deduct state income tax, you are supposed to prorate based on how much US and foreign income was taxed by the state, not by how much was taxed on your federal return. No tax software can get this right because you fill out your federal Form 1116 before doing your state taxes; in the past, I have gone back and corrected Form 1116 after doing state taxes.

But both of these are minor effects, and are less likely to matter now that most taxpayers take the standard deduction. Taxpayers who take qualified charitable distributions avoid the issue with charitable contributions, as these distributions are subtracted from IRA withdrawals, and thus reduce US-source income.
On the second issue with TurboTax can you please explain how you go back and correct Form 1116 after doing state taxes? You say this effect is minor. Who would be affected by the inherent issue in Turbotax? Also why does the IRS not flag the return as incorrect?
I go back to the form itself, to make the corrections.

Suppose that the software reported $16,000 of "other deductions not definitely related", which included $8000 of state income tax, on Form 1116 Line 3a. If 1/8 of your income was foreign, then you would reduce your foreign taxable income by $2000 because of this on Line 3g.

Now, suppose that after filling out your state tax from, you find that 90% of the state income tax was imposed on the US income; that is, your federal US-source income is 90% of your state gross income, and the state does tax the foreign-source income. (This is the formula in the IRS instructions.) You would now report $800 of "expenses definitely related to the foreign income" on Line 2, which reduces your foreign taxable income by $800. You would reduce the entry on Line 3a to $8000, and thus reduce the entry on Line 3g to $1000.

You would also need to attach a statement explaining why expenses were directly related. In TurboTax, my statement said "Form 1116 Line 2: State income tax (portion on foreign income)".

The IRS will not flag a failure to do this because it has nothing specific to match against. The IRS knows from Schedule A that you deducted state income tax, but not how it was allocated between US and foreign income. (The state tax might even be entirely on US income, because the state didn't tax the foreign income, or because the state tax was a 2019 payment on your 2018 tax when you had no foreign income.) And the failure to make this correction usually decreases your credit, as in the example above: by making the correction, you increased your foreign taxable income by $200, and thus increased the fraction of your income tax you can take as a credit.
Thank you for explaining how to do this Grabiner. I will go back and play with this in TT as I model 2020 taxes.

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Mon Jun 29, 2020 2:54 pm

House Blend wrote:
Wed Jun 24, 2020 6:57 pm
palanzo wrote:
Tue Jun 23, 2020 12:56 am
House Blend wrote:
Thu Dec 26, 2019 10:40 am
A significant option in this scenario (early retirement/low taxes/limited ability to claim FTC/unable to successfully carryforward) is to increase your Roth conversion target so that more/all of the FTC can be claimed.
....snip....
Thank you for pointing out the strategy of increasing your Roth conversion target so that more/all of the FTC can be claimed. I will have to model this in TurboTax.

On the Vanguard Foreign Tax Paid form Vanguard reports both the Foreign Income and the QDI Eligible Foreign Income. TurboTax in filling out Form 1116 asks how much of the Total Ordinary Dividends from 1099-DIV were from Foreign Sources.

Where does the QDI Eligible Foreign Income come into use? Either in Form 1116 or elsewhere?
This has already come up in responses to your other queries.

In general, you may need the "QDI Eligible Foreign Income" in order to determine whether you are required to adjust your Form 1116 to account for the fact that QDI is taxed by the US at lower rates than ordinary income. If your Foreign QDI is less than $20,000 and (oversimplifying) you are in the 24% bracket or lower, then you don't have to make this adjustment. And it is to your advantage to not make the adjustment.

Probably TurboTax was able to figure out you met the conditions, and so it didn't need to ask for the information.
Thank you for explaining this House Blend. With the steep decline in International dividends so far this year it does not look like an issue for 2020. For 2019 I was close to the situation described above.

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Re: Never-Ending Foreign Tax Credit Problem

Post by Northern Flicker » Tue Jun 30, 2020 1:21 am

I call it the FTC hamster wheel. We've been on it since 2015. One year the carryover was small enough that it may have been optimal to drop it and not carry it forward so that subsequent years would get the exemption from filing form 1116. I only did a deep dive into this to figure that out when our carryover had a big increase last year, but the benefit of that strategy was not enough to consider amending 3 years of taxes to implement it.
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Re: Never-Ending Foreign Tax Credit Problem

Post by nalor511 » Tue Jun 30, 2020 1:27 am

Northern Flicker wrote:
Tue Jun 30, 2020 1:21 am
I call it the FTC hamster wheel. We've been on it since 2015. One year the carryover was small enough that it may have been optimal to drop it and not carry it forward so that subsequent years would get the exemption from filing form 1116. I only did a deep dive into this to figure that out when our carryover had a big increase last year, but the benefit of that strategy was not enough to consider amending 3 years of taxes to implement it.
You can get off, potentially, with a Roth conversion

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Re: Never-Ending Foreign Tax Credit Problem

Post by palanzo » Tue Jun 30, 2020 1:31 am

nalor511 wrote:
Tue Jun 30, 2020 1:27 am
Northern Flicker wrote:
Tue Jun 30, 2020 1:21 am
I call it the FTC hamster wheel. We've been on it since 2015. One year the carryover was small enough that it may have been optimal to drop it and not carry it forward so that subsequent years would get the exemption from filing form 1116. I only did a deep dive into this to figure that out when our carryover had a big increase last year, but the benefit of that strategy was not enough to consider amending 3 years of taxes to implement it.
You can get off, potentially, with a Roth conversion
But won't FTC start up again after that assuming the foreign dividends are still there?

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Re: Never-Ending Foreign Tax Credit Problem

Post by Northern Flicker » Tue Jun 30, 2020 2:31 am

nalor511 wrote:
Tue Jun 30, 2020 1:27 am
Northern Flicker wrote:
Tue Jun 30, 2020 1:21 am
I call it the FTC hamster wheel. We've been on it since 2015. One year the carryover was small enough that it may have been optimal to drop it and not carry it forward so that subsequent years would get the exemption from filing form 1116. I only did a deep dive into this to figure that out when our carryover had a big increase last year, but the benefit of that strategy was not enough to consider amending 3 years of taxes to implement it.
You can get off, potentially, with a Roth conversion
Roth conversion of what? The foreign tax credit applies to a taxable account.
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Re: Never-Ending Foreign Tax Credit Problem

Post by Chip » Tue Jun 30, 2020 9:03 am

Northern Flicker wrote:
Tue Jun 30, 2020 2:31 am
Roth conversion of what? The foreign tax credit applies to a taxable account.
I believe the idea is that if the FTC is limited due to a low US tax rate one could increase income and US taxes via Roth conversions.

nalor511
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Joined: Mon Jul 27, 2015 1:00 am

Re: Never-Ending Foreign Tax Credit Problem

Post by nalor511 » Tue Jun 30, 2020 11:53 am

palanzo wrote:
Tue Jun 30, 2020 1:31 am
nalor511 wrote:
Tue Jun 30, 2020 1:27 am
Northern Flicker wrote:
Tue Jun 30, 2020 1:21 am
I call it the FTC hamster wheel. We've been on it since 2015. One year the carryover was small enough that it may have been optimal to drop it and not carry it forward so that subsequent years would get the exemption from filing form 1116. I only did a deep dive into this to figure that out when our carryover had a big increase last year, but the benefit of that strategy was not enough to consider amending 3 years of taxes to implement it.
You can get off, potentially, with a Roth conversion
But won't FTC start up again after that assuming the foreign dividends are still there?
Yes, but the FTC excess carries forward 10 years, so you could increase your income whatever amount necessary to capture the full thing every X amount of years you choose, if it's important to you

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