Secure a foreign tax credit carry forward?

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Flobes
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Secure a foreign tax credit carry forward?

Post by Flobes » Mon Mar 16, 2015 5:19 pm

I have a $242 foreign tax credit available.

My total tax liability is $9.

I want to carry forward the balance.

My return is close to complete via TaxAct, and I queried their technical support about this matter. They advised I had the default of no 1116 for the <$300 credit. And instructed how to do a work-around to force a Form 1116 which is requisite to garner a carry forward. However, that produced an automated 1116 which actually reduced my foreign tax credit to $3.

Is it possible to get the unused foreign tax credit to carry forward? If yes, what needs to be done? If not, please explain. I'm a newbie to carry-forwards as well as to Form 1116.

kaneohe
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Re: Secure a foreign tax credit carry forward?

Post by kaneohe » Mon Mar 16, 2015 6:02 pm

You can carryforward by generating the 1116. Read about it here http://www.irs.gov/pub/irs-pdf/p514.pdf click on the carryover link.
You might end up worse off short term but if you expect your tax/income to increase in the future, you will be better off by doing the carryforward.

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Flobes
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Re: Secure a foreign tax credit carry forward?

Post by Flobes » Mon Mar 16, 2015 6:20 pm

Thanks for the reply, kaneohe.

TaxAct's workaround generated a 1116. And it reduced the available foreign tax credit from $242 to $3. I'm hoping to understand why and to fix it if it's fixable.

(Short term is not a problem. I have a $9 tax liability, with a $242 foreign tax credit as well as an unusable $257 savers credit. Lots of headroom!)

kaneohe
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Re: Secure a foreign tax credit carry forward?

Post by kaneohe » Mon Mar 16, 2015 6:45 pm

You might try studying F1116 , particularly p.2. The form is comparing the foreign tax you paid on the foreign income against the US tax on that income and allowing you
the lower as a credit. If your US tax is low because your income is low, then you would not expect your FTC to be very high. Maybe you can think of ways to generate income to produce a tax that can absorb the FT as a credit. In your case, it might be useful to have a tax high enough that you didn't need to produce the1116 to carryforward the foreign tax "credit".
If filing single,you can get up to $300 FTC w/o that form. If you do generate the form tho, it might limit your credit as you saw this yr.

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Flobes
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Re: Secure a foreign tax credit carry forward?

Post by Flobes » Mon Mar 16, 2015 7:03 pm

Thanks, kaneohe.

I've been reading the link you sent. My hair hurts!

My conclusion: Low tax liability evaporates the foreign tax credit in the Form 1116 calculus. So that carry forward option is lost to me. Correct?

My focus has been getting my income on target to maximize my ACA subsidies and cost-sharing benefits, with great success. 2014 MAGI is $22 over my guesstimate (and this is the cause if my $9 payback tax liability).

Now I see (or I think I see) that this 2015 year I can do some "free" Roth conversion to make full use of these foreign and savers credits (while also covering the ACA payback of that 1099R income over my guesstimate). Correct?

PS I have an $1754 loss selling Total International in 2014. Does that qualify as a "loss from foreign sources" (line 7, Form 1116)?

talzara
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Re: Secure a foreign tax credit carry forward?

Post by talzara » Mon Mar 16, 2015 8:19 pm

Flobes wrote:My conclusion: Low tax liability evaporates the foreign tax credit in the Form 1116 calculus. So that carry forward option is lost to me. Correct?
No, it creates the carryforward.

Suppose you have $250 in foreign tax credit but have only $100 in tax liability. If you do not file Form 1116, then you can take a $100 credit against your current year's taxes, reducing them to zero. However, the remaining $150 of foreign tax credit is lost.

Suppose Form 1116 reduces your tax foreign tax credit to $50. You now have $200 in unused foreign tax credit that can be carried back for 1 year and forward for 10 years. Note: If you filed a Form 1116 last year, you must file an amended return to carry back the credit. If you did not file a Form 1116 last year, then you can choose whether to file an amended return, or start the carryover next year.

Note: You must attach a statement to Form 1116 whenever you apply a carryover from another year. Records must be kept separately for each year that a carryover is generated. Conmingling is not allowed due to the 10-year limit.

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Flobes
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Re: Secure a foreign tax credit carry forward?

Post by Flobes » Mon Mar 16, 2015 8:37 pm

Thanks, talzara.

Let's see if I understand.

So, in my case, I start my 2014 return with a $242 foreign tax credit. Filing the 1116 limits the amount I can use this year to $3. Filing the 1116 carries forward $239 as a credit until whenever I can use it, up to 10 years. Correct?

And, if 2015 plays out similarly, then its 1116 will create another carry-forward, with its own 10-year clock. Correct?

And for 2016, I could use none or one or both carry-forward credits. Correct?

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Re: Secure a foreign tax credit carry forward?

Post by CyberBob » Mon Mar 16, 2015 10:46 pm

Flobes wrote:TaxAct's workaround generated a 1116. And it reduced the available foreign tax credit from $242 to $3. I'm hoping to understand why...
From IRS Publication 514, Foreign Tax Credit for Individuals:

Limit on the Credit

Your foreign tax credit cannot be more than your total U.S. tax liability (Form 1040, line 44) multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.

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Re: Secure a foreign tax credit carry forward?

Post by kaneohe » Mon Mar 16, 2015 11:52 pm

Flobes wrote:I have a $242 foreign tax credit available.

My total tax liability is $9.

.
Just to clarify.......what line in the 1040 has the $9?

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Flobes
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Re: Secure a foreign tax credit carry forward?

Post by Flobes » Tue Mar 17, 2015 11:07 am

kaneohe wrote:
Flobes wrote:I have a $242 foreign tax credit available.

My total tax liability is $9.

.
Just to clarify.......what line in the 1040 has the $9?
Line 46 (repeated lines 47 and 55) shows the $9. I was over my ACA target by $22, leading to an "advance premium tax credit repayment" of $9.

Line 44 is 0.

I get it now: Form 1116 reduced the amount of foreign tax credit available for use by me this year, while preserving the balance for future years as a carry forward.

My $9 tax liability will be offset by $3 from the foreign tax credit and $6 from the savers credit. High finance, indeed!

kaneohe
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Re: Secure a foreign tax credit carry forward?

Post by kaneohe » Tue Mar 17, 2015 12:13 pm

Thanks for the info......was just making sure I understood your situation. Sometimes when people talk about tax liability, they mean what they owe in April when filing which, if you had withheld or paid est. taxes, could have meant that the real tax on line 44 could have been much higher allowing you to use the FTC perhaps in full.
In your situation that does not appear to be the situation so it looks like Tax Act is getting it right. High finance now but also higher education for the future :happy
You should have fun balancing ACA and FTC demands this yr ..........using Tax Act or equivalent.

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Re: Secure a foreign tax credit carry forward?

Post by mak » Tue Mar 17, 2015 1:06 pm

Not sure about Tax Act, but in Turbo Tax you could look at all the other forms that are generated which are not part of your filed return, and you would find many which have carryovers and others with carryforwards to the following year. And you would find the unused part of your credit there, which if you buy the same software the next year will automatically get carried to the next year's return. There are many such spreadsheets saved, for capital loss carries, operating loss carries, various credits, charitable contributions which must be carried, etc.

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Flobes
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Re: Secure a foreign tax credit carry forward?

Post by Flobes » Tue Mar 17, 2015 1:30 pm

mak wrote:Not sure about Tax Act, but in Turbo Tax...
Yes, those features are in TaxAct.

But in TaxAct, starting with a foreign tax credit less than $300 set a default of "no 1116 to be filed" which meant no carry-forward. Tech support provided the precise 11-step work-around to force the 1116.

TaxAct informed me that this matter has been sent to the development team to be fixed in the software for next year.

Confusion about how the foreign tax credit and carry forward and form 1116 work was all mine! Thanks to the Bogleheads, I understand it now.

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Re: Secure a foreign tax credit carry forward?

Post by 555 » Wed Mar 18, 2015 6:48 pm

The carry forward may be worse than worthless. For example you could have $250 foreign tax next time, but form 1116 just gives you $100, and your carry forward increases by another $150. And that keeps happening each year.

You'd just be wasting $6 and a bunch of time.

Forget about Form 1116. Figure out a way to generate a little more income to absorb these non-refundable credits. E.g. contribute more to Roth and less to Trad (or convert(2015) or recharacterize(2014) in that direction) but check if that has any other consequences (i.e. make sure you don't hurt your refundable credits).

But you really need to understand that a foreign tax credit carry forward will almost certainly be completely worthless to you. You'll never be able to benefit from it.

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Re: Secure a foreign tax credit carry forward?

Post by 555 » Fri Mar 20, 2015 4:41 pm

So OP, do you understand that a foreign tax credit carry forward is essentially worthless?

mak
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Re: Secure a foreign tax credit carry forward?

Post by mak » Fri Mar 20, 2015 4:46 pm

It is only worthless if he never has a tax liability in the future. Suppose his income varies, or in the future he sells a stock or rental property for a large gain, and for that year incurs a large tax liability. The carry forward could be used at that time.

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Re: Secure a foreign tax credit carry forward?

Post by Flobes » Fri Mar 20, 2015 5:02 pm

555 wrote:So OP, do you understand that a foreign tax credit carry forward is essentially worthless?
Thanks. I think I understand.

For this year and next, my income is hovering at a very low point in order to maximize ACA benefits, so my tax liability is tiny. My income will more than double in two years, with tax consequences, so the carry-forwards may become useful then.
Flobes wrote:I have an $1754 loss selling Total International in 2014. Does that qualify as a "loss from foreign sources" (line 7, Form 1116)?
This went unanswered in the thread, so I queried TaxAct customer service.

The answer is "No. It is not a loss from foreign sources if the security was held in a U.S. brokerage account."
mak wrote:It is only worthless if he never...
FWIW I'm a she. Your point about future utility of the FTC confirms my grasp of it. Thanks.

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Re: Secure a foreign tax credit carry forward?

Post by 555 » Fri Mar 20, 2015 6:18 pm

Flobes wrote:
555 wrote:So OP, do you understand that a foreign tax credit carry forward is essentially worthless?
Thanks. I think I understand.

For this year and next, my income is hovering at a very low point in order to maximize ACA benefits, so my tax liability is tiny. My income will more than double in two years, with tax consequences, so the carry-forwards may become useful then.
What I'm saying is that if you really get into the nitty gritty of how Form 1116 works, you'll discover that it is extremely unlikely that you'll ever be in a situation that you'll ever get to take advantage of a foreign tax credit carry forward, even if you have higher income with some foreign income and foreign taxes paid.

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Re: Secure a foreign tax credit carry forward?

Post by kaneohe » Fri Mar 20, 2015 8:02 pm

555 wrote:
Flobes wrote:
555 wrote:So OP, do you understand that a foreign tax credit carry forward is essentially worthless?
Thanks. I think I understand.

For this year and next, my income is hovering at a very low point in order to maximize ACA benefits, so my tax liability is tiny. My income will more than double in two years, with tax consequences, so the carry-forwards may become useful then.
What I'm saying is that if you really get into the nitty gritty of how Form 1116 works, you'll discover that it is extremely unlikely that you'll ever be in a situation that you'll ever get to take advantage of a foreign tax credit carry forward, even if you have higher income with some foreign income and foreign taxes paid.
In OP's case, it seems to be a low risk bet. Even if OP had opted not to file 1116, FTC would have been extremely low due to OP's managing income for ACA purposes.
The rest would have been lost for sure. By filing there is some hope for recovery in the future. You may be correct that the carryover never gets used but at least there is a possibility. She indicates expectations of higher income in a few yrs so perhaps then ,at least the current year's FTC can be fully absorbed w/o filing 1116.
Perhaps after that RMDs and a good stock market might bump things up enough to absorb some of the carryover before it expires. If nothing else, she will become an
expert on 1116 &FTC.

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Re: Secure a foreign tax credit carry forward?

Post by talzara » Sat Mar 21, 2015 12:57 pm

555 wrote:
Flobes wrote:
555 wrote:So OP, do you understand that a foreign tax credit carry forward is essentially worthless?
Thanks. I think I understand.

For this year and next, my income is hovering at a very low point in order to maximize ACA benefits, so my tax liability is tiny. My income will more than double in two years, with tax consequences, so the carry-forwards may become useful then.
What I'm saying is that if you really get into the nitty gritty of how Form 1116 works, you'll discover that it is extremely unlikely that you'll ever be in a situation that you'll ever get to take advantage of a foreign tax credit carry forward, even if you have higher income with some foreign income and foreign taxes paid.
If the foreign tax credit is coming from dividend withholding on mutual funds, it's not hard to absorb a foreign tax credit carryover.

Dividend withholding tends to be at a low rate. For example, foreign taxes are 5.57% of income for Vanguard Total International.

However, the allowable foreign tax credit is calculated as a fraction of your US federal tax (line 44). In other words, allowable credit is created at your average tax rate. As long as your average tax rate is higher than the dividend withholding rate, you will most likely be able to absorb carryover from previous years.

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Re: Secure a foreign tax credit carry forward?

Post by Longtermgrowth » Mon Jan 14, 2019 9:57 am

Forgive me for reviving this thread, but just wanted to make sure a situation like this:
talzara wrote:
Mon Mar 16, 2015 8:19 pm
Suppose you have $250 in foreign tax credit but have only $100 in tax liability. If you do not file Form 1116, then you can take a $100 credit against your current year's taxes, reducing them to zero. However, the remaining $150 of foreign tax credit is lost.
Falls under "Exemption from foreign tax credit limit" described right above this:
CyberBob wrote:
Mon Mar 16, 2015 10:46 pm
From IRS Publication 514, Foreign Tax Credit for Individuals:

Limit on the Credit

Your foreign tax credit cannot be more than your total U.S. tax liability (Form 1040, line 44) multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.
In Publication 514? So the above quoted "Limit on the Credit" only applies if required or choosing to file Form 1116?

talzara
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Re: Secure a foreign tax credit carry forward?

Post by talzara » Mon Jan 14, 2019 11:35 am

Longtermgrowth wrote:
Mon Jan 14, 2019 9:57 am
So the above quoted "Limit on the Credit" only applies if required or choosing to file Form 1116?
That's exactly what it says.
Exemption from foreign tax credit limit.
You will not be subject to this limit and will be able to claim the credit without using Form 1116 if the following requirements are met.
... Your qualified foreign taxes for the tax year are not more than $300 ($600 if married filing a joint return).

https://www.irs.gov/pub/irs-pdf/p514.pdf

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Re: Secure a foreign tax credit carry forward?

Post by bsteiner » Mon Jan 14, 2019 12:05 pm

555 wrote:
Fri Mar 20, 2015 4:41 pm
So OP, do you understand that a foreign tax credit carry forward is essentially worthless?
555 wrote:
Fri Mar 20, 2015 6:18 pm
... if you really get into the nitty gritty of how Form 1116 works, you'll discover that it is extremely unlikely that you'll ever be in a situation that you'll ever get to take advantage of a foreign tax credit carry forward, even if you have higher income with some foreign income and foreign taxes paid.
No one knows what the future will bring. If it's not too much of a nuisance, file the Form 1116 to preserve the possibility of being able to use the carryover. You could have foreign non-qualified dividends taxable at a higher rate in the U.S. than the foreign withholding rate.

But if it's too much work for the amount involved and the likelihood of being able to use it, then don't bother with it.

kaneohe
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Re: Secure a foreign tax credit carry forward?

Post by kaneohe » Mon Jan 14, 2019 4:46 pm

bsteiner wrote:
Mon Jan 14, 2019 12:05 pm
555 wrote:
Fri Mar 20, 2015 4:41 pm
So OP, do you understand that a foreign tax credit carry forward is essentially worthless?
555 wrote:
Fri Mar 20, 2015 6:18 pm
... if you really get into the nitty gritty of how Form 1116 works, you'll discover that it is extremely unlikely that you'll ever be in a situation that you'll ever get to take advantage of a foreign tax credit carry forward, even if you have higher income with some foreign income and foreign taxes paid.
No one knows what the future will bring. If it's not too much of a nuisance, file the Form 1116 to preserve the possibility of being able to use the carryover. You could have foreign non-qualified dividends taxable at a higher rate in the U.S. than the foreign withholding rate.

But if it's too much work for the amount involved and the likelihood of being able to use it, then don't bother with it.
Agree w/ bsteiner. One way the carry forward could be created is in the low income years in retirement. The US tax on that foreign income could be quite low due to the low tax rates in early retirement so the FTC would be low. However if you get hit by the tax torpedo caused by RMDs/SS, the rates would be higher in later retirement leading to higher US taxes on that income and a higher FTC. Whether that would be enough to absorb the carryover or not depends on the details.
With no AMT at lower income levels and lower tax rates it would harder but perhaps those will return someday.

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