Question

Foreign wages and foreign tax credit calculation

Forum|Forum|2 years ago
March 29, 2024
1 reply
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I have been living and working outside the US for almost a year which is why I'm seeking to use the FTC instead of the FEIE. After figuring out entering info in the FTC section TurboTax finishes the section by stating that my FTC is a certain amount. What is this amount? it is significantly less than the actual taxes I paid in the country I live in. It's a few hundred dollars and I paid close to 12k in taxes. This is my first year at this job and have never had significant foreign income before. I was under the impression that FTC was a dollar for dollar credit, so why isn't my credit higher?

Is it important to enter foreign income in TT's "wages & income" section? It seems like foreign income can't be entered was wages unless you elect the FEIE. I have only entered my foreign income in the FTC section.

DaveF1006

No, it isn't a dollar for dollar credit. It sounds like you were given a small credit and the rest is a carryover or carryback. Here is how the credit is calculated.

The IRS limits the foreign tax credit you can claim to the lesser of the amount of foreign taxes paid or the U.S. tax liability on the foreign income. The excess limit is created when the U.S. taxes on that foreign income are greater than the foreign taxes paid.

To describe more in detail, Now, you would like to know the reason why you weren't given full foreign tax credit. According to the IRS, Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources. Here is an example on how this works.

If your tax liability on Line 24 of your 1040 is $5000, your foreign income is $11,728, and your total income, foreign and US income, is $50,000. The foreign tax that can be claimed for this year is ($5000)($11,728/$50,000)=$1173. This is the maximum amount of credit that can be claimed this year. Any excess foreign tax credit can either be carried back to a previous year or carried forward for 10 years to offset any past or future foreign tax credit paid on foreign income. So if you had a $5000 credit, $1173 will be credited this year while $3827 will be a carryback or carryforward, or both.

Hopefully, this may give you insight way you weren't given the full amount of the credit. You might try claiming the FEIE to see which will give you a better return.

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stmichael6Author

Thanks @DaveF1006 , this is a really helpful response!

Does it make any sense that line 24 is currently $0? Turbotax does not include my foreign income (as entered in form 1116 for FTC) as part of my AGI. Additionally, TT is calculating my refund as the exact amount of taxes I paid on my US income. Seems like I have done something completely wrong here...

It looks like what is happening is that I’m being refunded all the taxes I paid and turbotax is then calculating my tax responsibility based on my taxable US income, which after the standard deduction, is around 18K. Perhaps this is why my FTC is so low. Shouldn’t turbotax be somehow combining my foreign and US income and then calculating what my tax responsibility would be in the US based on a total income then comparing it to what I paid in taxes (both to the US and to the foreign country which has a double taxation agreement with the US)?

I worked 3 months in the US (with tax deducted from my paycheck as usual) then took a job abroad and worked the remainder of 2023 in that country so I don't qualify for either physical presence (I took too many trips) or bonafide residence.

DaveF1006

Yes, there are a couple of things to address here.

It sounds like you did not enter your foreign income correctly. Entering the foreign gross income amount on Form 1116 does not report the income as income. That amount is only placed on Form 1116 to calculate the credit. You still need to report your foreign income as taxable income.