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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Can you use a foreign tax carryforward deduction (not credit)

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Can you use a foreign tax carryforward deduction (not credit) in a year you do not have foreign income? US citizen , worked abroad, paid foreign taxes on earned income, have large carryforward but will not have any more foreign earned income. Thanks. XXXXX understand it the credit is not available in the above circumstance.

LEV :

Hi and welcome to Just Answer!


You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes. However - you may not claim both during the same year.


If you cannot claim a credit for the full amount of qualified foreign income taxes you paid or accrued in the year, you are allowed a carryback and/or carryover of the unused foreign income tax. You can carryback for one year or carryover for 10 years the unused foreign tax.


If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.
If you choose to claim a credit and have a carryover amount - that amount may not be converted to deduction.


If you claim an itemized deduction in a year for qualified foreign taxes, you can choose instead to claim a foreign tax credit for that year by filing an amended return on Form 1040X within 10 years, if claiming the foreign tax credits results in a refund of income tax to you.

Customer:

the question remains can you deduct [say in this example tax year 2013] as an itemized deduction the foreign tax expense that has been carried forward even though you have no foreign earned income for tax year 2013. I have a foreign tax credit carryforward of 50,000 on 2012 return but stopped working overseas in 2012 and will have no foreign sourced income in 2013. I've read the publ 514 from IRS and it is just not clear.

LEV :

If foreign taxes were paid in 2012 - you may not deduct these taxes on your 2013 tax return.
What you may do - you may choose to use a foreign tax deduction instead of foreign tax credit on your 2012 tax return.

Customer:

thank you that is the crux of the question - can I DEDUCT [itemized on sched A] my 2012 carryover to 2013 even though no foreign earned income on 2013. I know I can't take a credit on 1116 unless I have foreign income in that same year. Sorry I am having trouble phrasing the question.

LEV :

You may NOT deduct on your 2013 tax return - foreign taxes that were paid in 2012.
You may not convert carryover foreign tax credit into deduction.
You may only amend your previous tax return and claim deduction instead of credit - that is your only option.

Customer:

so if unusable as carryforward would make all kinds of sense to amend 2012 and maybe even 2011? or they are forfeited? small part of them available from the 2010 carydforward and some also from 2011 carryforward.

LEV :

If you choose to claim a foreign tax credit - any unused carryover amounts may be ONLY used as a credit - you may not convert them into deduction in later years.
However - you may choose either to claim a deduction or a credit in the year foreign taxes were paid (or incurred if you selected so).
If it would be more beneficial for you to claim a credit or deduction - that should be verified by preparing tax return both ways and compare.
You may go back and amend your past tax return up to 10 years in this case.

Customer:

I see - 2012 it was more beneficial to claim credit looked at in isolation--- but now knowing the carryforward is unusable going forward it possibly would be more beneficial to amend 2012 [or at least analyze it] ... thanks.

LEV :

Yes - if you have large amount of foreign taxes paid in 2012 - you may choose deduction instead of the credit.
Also - depending on your state - that deduction might be used on your state income tax return - that is something you need to consider when compare these options.

Customer:

thanks. you've been very helpful

LEV :

I am glad to be helpful.

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