Question

Form 1116 FTC. Credit claimed a small percentage of foreign taxes paid.

Forum|Forum|1 year ago
September 18, 2024
1 reply
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I am doing ny taxes using TT desktop. After all the calculations I see the credit for FT I can claim is a small percentage of the foreign taxes paid. The rest goes to carry over, which I will not be able to claim as I will not have foreign income again.

So in a nutshell it seems to be pretty much double taxation.

Or I am missing anything?

Below is a very simplified calculation.

US Sourced Income:100000

Foreign Land sale LTCG:50000

Foreign Taxes paid:10000

Adjusted Frn Income: 20000 (50000*.4) [as per 1116 insts]

Total taxable income: 95000

Total taxes paid :18000

Std Deduction:26100

Gross Foreign Income: 50000 (same as Foreign Land sale LTCG)

Gross Income:150000

Frn Inome as % of gross:0.33

deduction attributable to frn income:8700

Adj Frn Income after above :12300([removed])

Foreign Taxes paid:10000

Ratio of adj frn income/ total taxable income0.13(12300/95000)

Total taxes paid this year18000

FTC2340(18000*.13)

Carry Over7660([removed])

Basically adjustment of foreign income and adjustment due to standard deduction taking out all the credit away.

Any comments from expert or who had been thru this street?

M

Mike9241

your situation is exceeding common. somewhat of an oversimplification but if your effective federal tax rate =

1040 line 18 divided by federal taxable income 1040 line15 is less than the foreign taxes ratio to net foreign income is less you only get the federal effective rate times the net foreign income

example somewhat oversimplified

federal income taxes 25000

federal taxable income 200000

effective federal rate 12.5%

gross foreign income 10000

gross foreign taxes 1500

expenses allocated to foreign income (1116 part I line 6) 1000

net foreign income 9000

foreign tax effective rate 16.67%

allowed FTC 12.5% * 9000 = 1125

the 1116 does the calc differently but in the end the mathematic are the same

1116

foreign taxes 1500

net foreign income 9000

federal taxable income 200000

ratio of net foreign income to federal taxable income = 4.5%

this ratio times federal income taxes 4.5% times 25000 = 1125

there is a 1-year carryback. in my experience once a taxpayer starts having a FTC c/o it generally expires. This is because they are paying a higher effective foreign tax rate than their US effective tax rate.