I have a form 1116 FTC question. I'll lay out a scenario first, say family income is $90k, income taxes
are pretty high at $25k and passive income
may be $10k and say it's all bank interest. The 1116 general category form seems ok for this family, but because their 1040 line 44 tax
is only $15k they are limited to claiming only $13.5k (9/10ths) and have excess foreign general category taxes of $11.5k... The passive category income is where they are in trouble, they have $10k income (and 1/10th of the standard deduction
), but no direct foreign taxes on their interest until their end of year tax return so perhaps they have $0 as line 14 and 22 are both zero?... Then back in 1040 land line 44 with $15k tax due they have only ($13.5k general + $0k passive) at Line 47 and they have to pay the US $1.5k even though they already paid a lot more than that to the foreign country...
So at the end of their tax year they only paid maybe $200 extra tax on the end of year return as they had plenty of deductions
, work expenses and the like. Doesn't that mean some of the "income tax" levied during the year on the wages was in fact passive tax on the interest. i.e. the country taxes interest at the families full marginal rate of say 35% but where is the credit for that? It's built into the entire tax year, it doesn't show up directly when you are credited the interest. You can't just assign the end of year tax return of $200 extra tax as the passive income credit as the real tax viewed separately on $10 passive income would be $3.5k in that return, but work deductions, gifts to charities etc make that mostly disappear in the final return.