Question

Foreign tax credit is not having any effect on net tax due

Forum|Forum|5 years ago
April 20, 2021
1 reply
0 views

I have made dividend income from Canada and paid taxes for that income there.

In TT online I have created a 1099-DIV and entered both the income and foreign taxes paid.

I have gone to Estimates and Other Taxes Paid -> Foreign Tax Credit and selected Itemized Deduction. The program correctly shows the foreign tax entered in 1099-DIV and says "The amount of foreign taxes you're deducting on Schedule A amounts to $xx,xxxx". I click Continue there.

The program correctly shows the foreign tax paid in Other Deductible Expenses. But it does not lower the Federal or state tax due. In other words, the considerable foreign tax paid has no effect on the tax due. That seems incorrect. Is there something I am doing wrong?

TurboTax Self Employed Online

J

jtax

Employee

The FTC is fairly complicated. There could be several things going on here.

You can choose to get a credit or deduction. Credits are usually better because a credit reduces that tax you owe while a deduction reduces your income. Lowering income does reduce tax but not dollar for dollar.

You indicated you chose deduction. That is simpler but it only reduces your taxes if you have enough other "itemized deductions" to add up to more than the standard deduction. Since 2017 the standard deduction is so large that almost no one can itemize. (I exaggerate but you get the idea.) The SD is $12.4k (single), $24.8k (married filing jointly).

So if you don't have enough other deductions the FTC deduction won't help.

A credit could be better. But not always because you may not get to use all of the foreign tax. You are limited by your US tax liability time the ratio of foreign income to worldwide income. So if you have only modest overseas investment income you might not get it all. You can the unused over but you have the same issue in future years.

There is also the simplified FTC election. That's usually the way to go for a modest investment tax, but is limited to $300 (single)/$600 married.

For more information see this TT article. And I would recommend trying all variations to see what gives the lowest tax liability.

https://turbotax.intuit.com/tax-tips/military/filing-irs-form-1116-to-claim-the-foreign-tax-credit/L2ODfqp89

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"