Foreign tax credit LIMIT

Forum|Forum|5 years ago
May 21, 2020
3 replies
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Foreign companies that pay dividends deduct foreign taxes, e.g. Canadian companies deduct 15% . However, when the taxes exceed $600 (for couples) , the tax code has a foreign tax credit LIMIT that is calculated on Form 1116. Can I ignore this limit and claim 100% of the foreign taxes I paid since the income is from dividends (passive income)?

Credit

Best answer by pk12_2

@BlackPanther2020 , your understanding is correct. As you mentioned the problem with using form 1116 is that it limits the allowable credit for the year based on the ratio of foreign income to your world income ( in a round about way) but it does allow carry back and forward for the unused portion of the claimed/recognized foreign taxes paid. That is why I suggested that you work out your amount of credit both ways and see which is more beneficial in your particular case ( and what you expect your future scenario to be ). It all depends on your specific facts and circumstances.

Is there more I can do for you ?

pk12_2

Employee

@BlackPanther2020 , the safe harbor of $600 ( when filing MFJ) in foreign taxes paid on passive income allows bypassing form 1116 and its computations. Outside the safe harbor one must use form 1116. On the other hand as an example if the total foreign taxes paid is $800, it may be more better to claim on $600 and thus avoid the limits imposed by form 1116. You have to work it out both ways to see which helps you more -- there is no requirement that you must claim all the foreign taxes paid -- you try to maximize the credit.

Do you need more help on this ?

BlackPanther2020Author

@pk12_2 thanks for your response. If I pay $1,000 in foreign taxes on my dividend, I understand that you're saying I have two options.

1. Claim the $600 without form 1116.

2. Use the form to calculate some other value that may be less than $1,000.

Is there a way to claim the entire $1,000 in one year without having to claim a portion and roll forward the remainder? The problem with rolling forward the remainder is that I may pay ~$1000 in foreign taxes EVERY year, so I'll never be able to use the roll forward amounts.

pk12_2Answer

Employee

Is there more I can do for you ?

rogge1722

Employee

In order to prevent carryovers or if they exist, to eliminate them, is to increase foreign income but not foreign taxes paid. There are about 18 countries that do not withhold taxes on dividends. A few examples are the UK, Hong Kong, Singapore and Bermuda. In most cases, the stocks are in the form of American Depository Receipts. (ADR’s) or look for mutual funds/ETF’s that are specific to those countries which do not withhold taxes.

If possible, reduce your Canadian income so that the foreign tax paid is minimal.

A large foreign income will result in an increase in the foreign tax credit limit. The current year foreign tax paid will be minimal and the remaining amount will draw down from the carryovers.

woodwardann

I am unable to take a Foreign Tax Credit of $42 in 2020 due to software. It generated a Form1116 but NOT

Schedule for Simplified Method on 1040.

pk12_2

Employee

@woodwardann , I don't know where exactly you are in your data entry -- what I remember is that when in credits/deductions , you select that you have foreign tax credits and then it guides you into whether you want foreign tax credit or deduction and thereafter lets you choose "simplified method" -- this should result in NO form 1116 and/or schedules. The amount of the credit then should show up on schedule 3 in the top half where it deals with non-refundable credits ( it just reduces your tax liability but not below zero, implying that if your tax liability is already zero then the credit does nothing for you ).

Please tell me more about the situation so I can duplicate and see what/where Turbo is making error--yes ?

Terryho99

I am really confused. I only have $561.00 in foreign tax. MFJ. It says I must file form 1116. Doesn't ask me if i want the simplified method. How do I bypass to use the simplified method?