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Foreign Tax Credit (India) - allocating income and taxes

Forum|Forum|1 year ago
October 8, 2024
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I have foreign source income (India) from three sources - Rental, Interest and Dividend.
Tax financial year is from April to March in India. For credit using Form 1116 I have to report taxes paid on each source.

How do I allocate the income and taxes for foreign tax credit purpose
- Do I add up the foreign income from Jan to December and allocate the taxes paid from two different financial years of the foreign country to report on form 1116?
- Foreign tax is on the combined income but Form 1116 asks for taxes on each source - I am assuming I would allocate to each source from the total taxes paid using a fraction each source is out of total taxable foreign income.

- is there an IRS document that goes into these details where the financial year is different?

Best answer by pk12_2

@skal Namaste ji

For the US Tax Year 2023 ( assuming that what is talking about ), you have allocate the incomes from Jan 1st through Dec 31st of 2023 --- it is easy to do for rental income, Interest and dividend. However, for the taxes imposed / levied / paid ( foreign taxes ) by India is a bit messy. Generally you have to use the average income tax from the tax year 2022 ( Apr. 01 2022 through Mar 31st 2023 ) for the months Jan, Feb and March and then use the average rate of tax from 2023 ( Apr. 01 2023 through Mar 31st 2024) for the months Apr. through Dec 2023.

As far as I am aware , IRS docs/ rules do not take this issue into account ( it is kind implied in talking about taxpayers/ entities with a tax year different than calendar year and use of accrued accounting basis ). The nearest reference is Instructions for form 1116 ( most direct ) and Pub 519 & Pub 54

Namaste ji

pk

A

Anonymous_

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pk12_2Answer

Employee

@skal Namaste ji

For the US Tax Year 2023 ( assuming that what is talking about ), you have allocate the incomes from Jan 1st through Dec 31st of 2023 --- it is easy to do for rental income, Interest and dividend. However, for the taxes imposed / levied / paid ( foreign taxes ) by India is a bit messy. Generally you have to use the average income tax from the tax year 2022 ( Apr. 01 2022 through Mar 31st 2023 ) for the months Jan, Feb and March and then use the average rate of tax from 2023 ( Apr. 01 2023 through Mar 31st 2024) for the months Apr. through Dec 2023.

As far as I am aware , IRS docs/ rules do not take this issue into account ( it is kind implied in talking about taxpayers/ entities with a tax year different than calendar year and use of accrued accounting basis ). The nearest reference is Instructions for form 1116 ( most direct ) and Pub 519 & Pub 54

Namaste ji

pk