IRS Form 1116 walkthrough (Foreign Tax Credit)

[@rbhusana]

I have to fill out 1116 for a Trust that made $5,000 interest at a US bank, and $3,400 in dividends from a Canadian company (that did issue a 1099-div though) Canada held $534 in tax. Because the total tax bill was computed with the QDTW, and line 5>0, and line 21>22, it says i must adjust the amount on line 1a, unless the trust meets the adjustment exception outlined in section 904(b) . I have read section 904b, and , gosh, what are the adjustment exceptions for Trusts?

[@teachmepersonalfinance]

I'm not 100% sure, but it seems that Section 904(b) and Treasury Regulations 1.904(b) both refer to calculating your income tax bill without deducting personal exemptions to lower the tax liability. However, I'm not sure what else is applicable to your tax situation. I definitely think that you should work with a tax professional to navigate this form and properly report your tax liability.

[@LaV593]

Do I need to convert the foreign currency to usd in and use that conversion on this form?

[@chrisbolster8541]

Hi, I have a question. My foreign source income is all passive (dividends) and I don't meet the adjustment exemption criteria. IRS guidelines state that when calculating line 1a on Form 1116, income taxed at 0% must be excluded and income taxed at 15% and 20% is adjusted based on multipliers. But the guidance doesn't say whether the specified tax rates are US (which I believe is more likely) or foreign. This left me wondering whether I should include foreign dividends on line 1a that are taxable in the US, but for which foreign withholding did not occur due to a tax treaty (i.e., they are effectively taxed at 0% abroad, but ARE taxable in the US). I have done a lot of searching on this topic, but haven't found sources that specifically address this issue. I'd greatly appreciate any perspective (or links) you can offer!

[@teachmepersonalfinance]

It appears that the 0%, 15%, and 20% tax rates would be U.S. tax rates, as those are the tax brackets that apply to qualified dividends and capital gains (i.e. holding periods longer than 1 year). Ordinary dividends would still be taxed at ordinary income tax rates. If I were in this position, I would probably proceed with this position. If the IRS disagrees, they'll send you a notice with a recalculation, and you can have a nuanced conversation about foreign dividends. But I don't think that would happen here.

[@isabellegraham]

Great help! leaving in France, I need to know how to feel out Form1040. Income from retirement from French social security and rents to show on line 1a? or not.

[@teachmepersonalfinance]

For pensions and rental income, you would check Box c above (passive income), then list your French pension and rental income on Line 1a.

[@isabellegraham]

@@teachmepersonalfinance Thank you. Do I also put that amount on Form 1040 ligne 1a?

[@teachmepersonalfinance]

@@isabellegraham Not necessarily. Form 1040, Line 1a consists of W-2 income that you would earn as an employee. Generally, pension income goes on Lines 5a and 5b (total pension versus taxable amounts). Rental income is usually calculated on Schedule E, so that you can factor in deductions and other costs. That income then is incorporated into Schedule 1, Line 5. When you've completed all of Schedule 1, you would enter Line 10 from Schedule 1 (which includes rental income as well as income from a lot of other sources), onto Line 8 of your Form 1040. Below are links to additional articles and videos on W-2, Schedule E, and Schedule 1: IRS Form W-2, Wage and Tax Statement Article: www.teachmepersonalfinance.com/irs-form-w-2-instructions/ Video: kzbin.info/www/bejne/bKG0d2Vvp9ecsMU IRS Schedule E, Supplemental Income Article: www.teachmepersonalfinance.com/irs-schedule-e-instructions/ Video: kzbin.info/www/bejne/o3mrXmOHqqdme7c IRS Schedule 1, Additional Income and Adjustments to Income Article: www.teachmepersonalfinance.com/irs-schedule-1-instructions/ Video: kzbin.info/www/bejne/ioawn5idotOceqs

[@BABJI1954]

Please explain how married filing jointly IRS tax return deal with the 1116 foramat

[@teachmepersonalfinance]

A married couple filing a joint return would use IRS Form 1116 in the same manner that a single person would. From the form instructions, here is some clarification on a joint return: Joint return. If you file a joint return, you can claim the credit based on the total foreign income taxes paid or accrued by you and your spouse. Combined income. If foreign tax is imposed on the combined income of two or more persons (for example, spouses), the tax is allocated among, and considered paid by, these persons on a pro rata basis in proportion to each person's portion of the combined income, as determined under foreign law and Regulations section 1.901-2(f)(3)(iii). Combined income with respect to each foreign tax that is imposed on a combined basis (and combined income subject to tax exemption or preferential tax rates) is figured separately, and the tax on that combined income is allocated separately. Example. You and your spouse reside in Country X, which imposes income tax on your combined incomes. Both of you use the “u” as your functional currency. Country X apportions tax based on income. You had income of 30,000u and your spouse had income of 20,000u. Your filing status on your U.S. income tax return is married filing separately. You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U.S income tax return. Your spouse can claim only 40% (20,000u/50,000u).

[@okonomi8415]

I have foreign tax credit carried forward into the current year 2023-24 tax filing. I have no foreign taxes paid in the current year. How do I claim the foreign taxes from prior year ?

[@teachmepersonalfinance]

You are supposed to carry the credit back one tax year (for 2021 tax year, if your credit is from the 2022 tax year), then apply it forwards, if there is any credit remaining. You may need to amend your prior year tax return, if applicable. You would need to calculate the credit carryover on Schedule B of Form 1116: www.irs.gov/pub/irs-pdf/f1116sb.pdf

[@rubywang5665]

Could you please help to solve the following issue? If the foreign income is 200K, after I applied the exclusion 120K from 2555, how should I fill out form 1116 then?

[@teachmepersonalfinance]

According to the instructions, you would enter your foreign income in Line 1a, but you would not include any income that you excluded on IRS Form 2555. So if you excluded $120K, you should enter $80K in Line 1a.

[@jose052570]

I have a 1099-R form for a lump sum distribution of a retirement plan. Federal agency in Puerto Rico.

[@teachmepersonalfinance]

I'm not sure that there's enough information here to give you a good answer, but I can point you in the right direction. IRS Publication 570, Tax Guide for Individuals With Income From U.S. Possessions (www.irs.gov/pub/irs-pdf/p570.pdf) contains information about properly reporting income from Puerto Rico. Generally, rules can depend on whether or not you are considered a bona fide resident of Puerto Rico, and whether you are required to file both a U.S. tax return and a Puerto Rico tax return. Generally, the U.S. and Puerto Rico have a mutual agreement to avoid double taxation, which is also covered in Publication 570.

[@robertgonzales7857]

Foreign Tax Credit is exactly that to me. Foreign. I need to file one of these for someone but I have no idea how to do so. I'm on minute 9 of the video so let's see how this goes..

[@teachmepersonalfinance]

If you have any specific questions, hit me up!

[@walidhubbi4550]

In the form I received from my broker, there is an item "foreign tax paid" is $650. Because this amount is greater than $600, I have to file form 1116. This is "passive category income." If this amount is $600, I don't have to file From 1116. I have to file form 1116 to pay about $15 less tax. It seems to me I have to spend about a day to complete this form. Is there a way to make this insanity palatable?

[@teachmepersonalfinance]

You don't have to complete this form at all, if you don't wish to claim the foreign tax credit. But in your situation, it appears that if you want to claim the credit for taxes paid, then yes, you have to complete this form. Completing this form would allow you to claim a *tax credit,* which is a dollar for dollar reduction in your tax bill (i.e. you would save $650 in taxes, not $15). You also might have the option (in certain situations) to include taxes paid as a deduction on Schedule A instead of taking the tax credit. Ultimately, this would likely be a lesser tax benefit than the tax credit (particularly if you're better off taking the standard deduction). But it's an option. IRS Schedule A, Itemized Deductions Article: www.teachmepersonalfinance.com/irs-schedule-a-instructions/ Video: kzbin.info/www/bejne/Y2i8hqqHa7Zkgqs Playlist: kzbin.info/aero/PLYHzJrFFCrpy1rgmUyp_4JMBnBvphyqB6

[@walidhubbi4550]

@@teachmepersonalfinance Thanks for the reply. However, if I claim only $600 foreign tax credit, then I don't have to file Form 1116. If I want to claim the actual $650 foreign taxes paid, then I have to file Form 1116. When I file Form 1116, the amount I could claim is less than $400. Could I claim $600 and not file Form 1116? The amount of foreign tax paid on qualified dividend is $650. Thanks again.

[@teachmepersonalfinance]

@@walidhubbi4550 I don't know enough about your tax situation to know how you should proceed. However, the IRS website contains information about how to calculate the credit and when you would need to use IRS Form 1116: www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-how-to-figure-the-credit

[@walidhubbi4550]

@@teachmepersonalfinance Thank you for you reply. It is interesting that if the foreign tax you paid on dividend is not more than $600 then you don't have to file Form 1116. If it is $601 then you have to file Form 1116. If the foreign tax paid on dividend is less than $600, can you deduct the whole amount? I must be misunderstanding something. Thanks anyway.

[@teachmepersonalfinance]

@@walidhubbi4550 You can claim the foreign tax credit without using the form under these circumstances: 1. Your only foreign source gross income for the tax year is passive income, as defined in Publication 514 under Separate Limit Income. 2. Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return). 3. All of your gross foreign income and the foreign taxes are reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 4. You elect this procedure for the tax year.

[@DaneHildreth]

My wife and I are U.S. citizens, but live (temporary residence) in Mexico while teaching abroad. Are we able to file for this Tax Credit on our teaching income?

[@teachmepersonalfinance]

From what I've read online, it appears that Mexico and the United States have a double taxation treaty in place, that would allow you to claim a foreign tax credit on your U.S. tax return for Mexico income tax that you've paid. Here's a link to a site with more details: www.cpasforexpats.com/post/us-mexico-tax-treaty

[@NishmaShah02]

My husband is working in USA and I was working in india for 6 months before moving to USA on H4 visa. We applied for double taxation in USA. We were asked to fill 1116 tax document. What documents do we have to submit for my wife's income in india for her income in india? If she has filed tax in india, will my husband get exemption in USA?

[@teachmepersonalfinance]

I do not have enough information to be able to answer your question, and I am not an expert on the India/US tax treaty. However, this article seems to do a pretty decent job of laying things out. As with most countries, it seems that any taxes you pay to India would be credited to your U.S. tax return. The example in the article shows that this could happen even if you end up with a negative U.S. tax liability (which turns into a credit that you can carry forward to future tax years). I hope this article helps you better understand how this might impact your tax situation. www.cpasforexpats.com/post/us-india-tax-treaty

[@teachmepersonalfinance]

Please feel free to check out our article, where we've written step by step instructions to help you walk through this tax form! www.teachmepersonalfinance.com/irs-form-1116-instructions/ If you’re looking for tutorials for other IRS Forms that you can file directly through the IRS website, check out our free fillable forms page: www.teachmepersonalfinance.com/free-fillable-tax-forms/