Foreign tax credit

Forum|Forum|1 year ago
January 14, 2025
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Hi,

I am a US citizen residing in California. I am selling my property (land) in India. India provides two ways of calculating the Long Term Capital Gains (LTCG) tax. If I use inflation indexation from the year of my purchase (2004), I need to pay 20% tax whereas if I don't use indexation (& use the original purchase price), I need to pay only 12.5% tax.

I understand that I will need to pay the remaining (20 - 20 or 20 - 12.5) in US federal tax return (assuming 20% as LTCG federal tax rate). I also understand that I will need to pay additional California tax (like 10-11%) on this income. Now the question that I have is

If I pay 12.5% tax to Indian government, can I use the California tax payment to offset the remaining 7.5% (20 US LTCG tax rate - 12.5% paid in India) on my Federal return? If yes, what's the procedure in TurboTax?

Thank you!

Anish Vaidya (TurboTax customer for 25 years)

Mike9241

state income tax deduction for federal income tax purposes is limited to $10,000 through 2025. you must be able to itemize for 2025. state income taxes are deducted on schedule A.

the Foreign Tax can be taken as either a deduction on schedule A or as a credit against Federal taxes. As a credit how much foreign tax credit you can use depends on your effective (average) federal income tax rate and not the capital gains rate.

it is not possible to say what the overall effect will be.

while 12.5% sounds better than 20% they are based on different numbers. Thus we have no way of knowing which produces the lowest tax in India.