Foreign tax credit - Do not enter any income already reported on Form 1099-INT

Question

I have a question regarding the foreign tax credit:

I am entering the amount for wages (roughly 30K) but there's also approximately 10K of interest income. If I only enter 30K for wages, I get "x" amount of foreign tax credit which lowers my tax due to the U.S. a certain amount. However, I also PAID taxes on the Canadian interest. If I also add the interest as a separate line item, I get a bigger tax credit which lowers my U.S. tax due even more. I feel like I should be able to add the interest income as well but the page says: Enter gross income you received from sources within Canada. Do not enter any income already reported on Form 1099-INT, Form 1099-DIV, Form 2555, or Schedules K-1.

But again, if I don't enter the foreign interest, TurboTax calculates a lower foreign tax credit even though, again, I also paid taxes on the foreign interest. What am I missing?

rogge1722 · Accepted Answer

hi @pk12_2 Yes. The question is the same as before. Please see below in bold/italics:

The interest income is from Canadian banks. But TurboTax says on form 1116 "Do not enter any income already reported on Form 1099-INT" but I have also paid tax on this interest income. If I can't report it on form 1116, my foreign tax credit will be lower and I will be taxed again on this income in the U.S.

Interest income from Foreign sources is reported as interest income as part of your world income ( with NO 1099-INT ) -- you tell TurboTax that this is interest without a 1099-INT -- it will accept that data.

If I go to enter this income as part of my "world income" as you stated above under the "foreign income and exclusion" section , TT gives me 4 options and none of them seem appropriate to enter interest income:

A regular form W-2 from your employer

A Form 1099-MISC or other self-employment income
A statement from my foreign employer (could be cash)
An IRS Schedule K-1 from a business partnership

So the question is, how exactly do I enter this interest income so that I can claim a FTC against it? The issue as I stated earlier is that when you are on form 1116 for FTC purposes, TurboTax says "do not enter any income you already reported (for example on form 1099-INT, 1099-MISC, etc."), so I need to enter this interest income in a way that I can then claim additional FTC as I paid Canada almost 20% tax on this foreign interest.

You have foreign earned income and foreign interest to claim credit. From your posting, you are working thru the FTC interview to process the foreign earned income. When you finish, you will have the credit posted on Copy 1 , general category income.

To process the Interest, you need to go to the income section and bring up a blank 1099-INT form. Insert the payer's name , the amount in box 1 and the tax withheld in box 6. TT will then post the amount on Schedule B to report the income. TT sees the amount in box 6, so when you enter the FTC interview the second time, TT will present the screens that are designed to process the interest. TT will generate Copy 2, passive category income and display the credit.

Copy 1, part 4 is the summary. Verify the credit for earned income is the greater amount.

pk12_2 · Answer

@astral101 , thought we had this discussion earlier ( may be my aging memory fails ) -- please forgive if I am wrong.

(a) Wages of 30K --- is this earned while in Canada ( i.e. tax home Canada ) or while working at a location the USA. If the latter, then you report your wages earned as self-employed -- reported on Schedule-C. Here to ameliorate the effects of double taxation ( and pre the US-Canada Tax Treaty ) you use form 1116 ( under Deductions & Credits tab, near the bottom of the dropdown list ) by selecting Foreign Tax Credit. Make sure you select " General Category". Now enter the net foreign source income from Schedule-C and the taxes you paid to Canada on this income. TubroTax will compute your FTC and transfer to Schedule-3 and onto Form 1040. Note unless your tax home is Canada you CANNOT use Foreign Earned Income Exclusion on form 2555 -- you can only use Foreign Tax credit or Deduction ( with SALT limitation )

(b) Interest/ Dividend --- note that if these are US sourced and also taxed by Canada, your form 1116 will be category "Resourced By Treaty" else ( i.e. if these are foreign sourced), you use category "Passive". In either case you have to make sure that the "foreign Source income" line reflects the income that is being taxed by both US and Canada. The Foreign Tax for this may have to be allocated if the foreign country ( Canada in your case ) does not have a specific rate/ amount on this category of income.

Does this help you or am I confusing the situation more ? If you want a more specific answer ( not the generalities above ) then you need to provide me with specifics of your income, tax home etc.

Will circle back once I hear from you --yes ?