Question

Foreign Tax Credit

Forum|Forum|3 years ago
March 23, 2023
1 reply
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Per IRS, "You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes".

I have $650 in foreign taxes paid from 1099-DIV. This puts me over the $600 MFJ exception from not having to file form 1116. Form 1116 reduces my FTC by half. Can I choose to only take $600 in foreign taxes paid as a credit and ignore the remaining $50 which then removes form 1116 from my tax return?

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DMarkM1

No. According to the IRS instructions here you can be exempt from the Foreign Tax Credit limit when the tests below are met. It appears tests 2 and 3 are applicable; all your qualified foreign taxes as reported on 1099.

Your only foreign source gross income for the tax year is passive income, as defined in Publication 514 under Separate Limit Income.
Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return).
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).
You elect this procedure for the tax year.

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J

JohnD425Author

This then creates some dilemma regarding FTC carryovers.

1. Since carryback of one year is mandated, can I apply less than the total carryover so not to trigger form 1116 in 2021? If not, then triggering form 1116 in 2021 will produce additional carryovers (which then cascades to a whole bunch of prior years).

2. If I sell some foreign stocks to reduce my 2023 foreign taxes paid on form 1099-DIV to sub $600, any carryforward then puts me back over $600. That seems like an unintended consequence. Am I stuck here until my entire carryforward is used up?

It looks like the best answer here is to choose to deduct foreign taxes paid in 2022, not claim any FTC for the year and then sell some foreign stocks to reduce foreign taxes paid to sub $600 in 2023.

DMarkM1

If you make the election to claim the tax credit without filing a form 1116 to avoid the foreign tax credit limitation then you cannot carry forward or back from or to any foreign taxes from the year. However the carryovers for other years are unaffected and the 10-year clock continues.

Here is the IRS reference (see the general instructions section and also the line 10 instructions "Restrictions").

So if you do not make the election to claim the foreign tax credit without filing the form 1116 in 2022 and you have credit which you can carryback to 2021, but 2021 was a year you made an election to claim without a form 1116, then you cannot carryback to that year. So the rest is carryforward for up to 10 years.

For tax year 2023, if the foreign taxes paid and shown on 1099s is below 600 (MFJ) not including any carryovers then you can make the election for 2023 and none of the carryforwards are used and continue forward. The 10 year limitation still applies starting with the year an 1116 was actually filed showing the carryover amount.

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