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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1734
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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I am helping a relative fill out their 1040 tax form for 2012

Resolved Question:

I am helping a relative fill out their 1040 tax form for 2012 and need help filling out form 1116 - Foreign Tax Credit. They are US citizen, resident of foreign country. They have rental property outside US as well as interest income from banks outside US (all considered passive income?). Schedule E has been filled for the rental properties, and interest income has been reported on 1040.

Is gross income reported in Part I line 1a rental income + interest income?

Where do they claim expenses directly related to the rental income (maintenance, repairs, management fees, insurance) - is it line 2?

Are property taxes and mortgage interest for these rental properties claimed on a different line from expenses - is it line 4b for the mortgage interest?

What happens to the Foreign Tax Credit carryover when a spouse passes away (they have been joint filing for years) - does it need to be recalculated for the remaining spouse's portion or can it be carried over as is? A general example: Carryover from 2005 - $1500, Carryover from 2006 - $1000/ both spouses filed jointly to US those years.

They did not file form 1116 with 2011 tax form. No taxes were owed to US in 2011 (they have been filing 1040 ever year regardless of whether money is owed or not) - should they amend 2011 tax form with 1116 anyway?

They have US pension that is taxed in the foreign country, do they need to fill out another form 1116? The income tax paid to foreign country is a combination of US income and income earned in that foreign country - can they only claim a portion of that tax on form 1116?

Thank you so much for your help. I tried to call the IRS International Line but it seems that the number is XXXXX longer in service.
Submitted: 10 months ago.
Category: Tax
Expert:  Anne replied 10 months ago.

Anne :

Thank you for using justanswer

Anne :

When you fill out the Form 1116 for rental property, you check box "a" for passive income

Anne :

Then you enter the information as it is requested in part 1

Anne :

You will group the rental income and the interest together under passive income

Anne :

The expenses for the rental are recorded in part II

Anne :

You will group the expenses together (including mortgage interest, taxes, etc) in part II

Anne :

(your expenses for rental on the form 1116 should match what you put on the Sch E)

Anne :

The foreign loss carryover will not be affected , as the spouse can continue to use it. After that it would pass to the estate and/or the heirs

Anne :

 


truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.

Customer:

Hello, thank you for the help. I'm not ready to rate yet as there are still some things I am concerned about in the original question that you did not answer.

Let's say they had to file income tax for the foreign country they are residing in (same country the rental properties are in). They have to pay taxes on both US-based (pension and dividends) and foreign-based income (rental and interest) that is being reported on the same US 2012 tax form. As a general example, let's say they had to pay $1000 in taxes to foreign country based on income regardless of source. When reporting this number on 1116, what should they do? Can they only claim a portion of this tax paid on the form and where should it be reported?

If they did not file form 1116 with 1040 for 2011, are they required to append this information or would this be voluntary (ie. something to consider if it would be beneficial for future FTC carryover)?

Thank you for the help!

Anne :

Hi

Anne :

When you file the Form 1116, you will notice that on page 1, if you follow the lines all the way down, what you wind up with is a % of the foreign tax you paid to the other country. This means that you will not get a $ for $ straight 100% credit, but you will get the % of foreign income vs US income

Anne :

Since you can only file the same TYPE of income on one form 1116 , you will probably need to file at least 2 form 1116's

Anne :

one for the rental and dividends (since they are both considered "passive income"

Anne :

and the other form 1116 for the pension which is considered "general category income"

Anne :

You may certainly amend their return for 2011 and add the 1116's

Anne :

This will, in all probability, create a carryforward, since this credit is based on the US/Foreign income ratio

Anne :

I will tell you that in 27 years of preparing taxes, I don't think ANY of the clients I have prepared this form for have ever been in a position to use the full carry forward $ amounts

Anne :

I do not say this to discourage you. I file the forms for every client that qualifies, since the credit will lower the US tax they must pay. I just want you to understand that it will never be a $ for $ credit

Anne :

I must leave the forum for awhile

Anne :

I will check back with you when I return.

Customer:

Thanks for the response Anne. I really appreciate your help.
I just want to make sure that I understand everything. I understand that the final FTC is determined by a formula that gives a percentage based on various factors.

What I want to know is where to put the information of tax paid to foreign country on the form. For the moment I have put the tax (let's say $1000US) in Part II, Country A, under column (r) [other foreign taxes paid or accrued].

The $1000US tax paid to foreign country was calculated from worldwide income.

Customer:

I need to make clear that the amount of the tax paid to foreign country was determined from a combination of income derived from US-source and foreign country.

The pension income is coming from the US and they have rental income and expense in the States as well, but they had to pay foreign income tax on these incomes because their residence is in the foreign country. Is it okay to claim FTC on this or no?

Let's say 40% of their gross income comes from the States and 60% comes from foreign country - they were taxed $1000US when filing taxes for the foreign country. When filling in 1116, Part II, in section of foreign taxes paid do they write $1000 or do they only write 60% of $1000? In addition, if 30% of their income is general income and 70% is passive income, if they fill out two 1116 sheets, should the tax paid be split accordingly?

Customer:

I hope that makes my previous question a bit clearer! Thank you for the assistance!

Anne :

You put the taxes paid at the bottom of the first page in PART II

Anne :

Please note that they will ask for both foreign and the equivalent $ amount in US currency

Customer:

Okay! I already have the amount in both foreign and US currency. :-)

Anne :

I understand your concerns re: the type of income. Its sort of a pain that you have to fill out more than 1 Form 1116 if you have more than 1 type of income, such as in this case. You have passive (rental) and other (pension)

Anne :

Great!

Anne :

Nice we're both here now

Anne :

Please read over my latest post and see if you have any further questions

Customer:

Yes! Sorry about that- I kept coming in and out during the day.

Anne :

That's ok........I did too

Anne :

just one of those days

Customer:

I'm not sure if your post got cut off, but do I need to put only a percentage of the tax in part II based on the income? Like 70% of the total foreign tax paid for passive income and and 30% of tax paid for general income in Part II?

Anne :

In part II at the bottom, you will enter the actual $ amount paid in tax....the full 100% The form takes care of the proration, so you don't want it prorated 2x

Customer:

It's okay to fill out two forms but I just want to make sure that it is okay to write in the US pension income. Should I include US-income from rental in form 1116 along with the foreign rental property?

It seems that the basis is I need to write down any kind of gross income that was taken into consideration by the foreign country income tax regardless or source? Is this correct or not?

Anne :

whoa........stop here for just a second please

Customer:

Oh okay, that was what I needed to know, Anne. And do I put it in column 'R' as it is not tax withheld at source?

Anne :

I'm confused now

Anne :

yes

Anne :

isn't all of the rental property held outside of the US?

Anne :

and I just always use date 12/31/2013

Customer:

They have a combination of rental property outside US and inside US. When I filled out the form, I thought I should only write down the income from foreign property.

Anne :

yes you're correct

Anne :

but I caught that reference

Anne :

didn'

Anne :

wanted to make sure I hadn't missed something

Customer:

When they fill out paperwork for the foreign country income tax, they are taxed on their worldwide income - so I am confused what to write and what to claim on FTC. The pension comes from the US. From what I understand it isn't possible to claim the US pension on FTC..? Yet the final tax amount was based on this...? I'm not sure if I'm making sense to you. :-(

Customer:

What I wanted to know was if when writing in column 2, if filling in the tax paid, if what is written should only be a percentage based on the income that actually came from foreign sources.

Anne :

do they live in Canada?

Customer:

Yes

Anne :

give me a minute here.......we have a tax treaty with Canada, maybe that will answer our question

Customer:

okay

Anne :

The pension ?is US based, correct

Anne :

and they're paying CA tax on it

Customer:

Yes.

Customer:

They pay CA tax on other US-based income too.

Anne :

ok........I apologize that I didn't pick up that this was US based pension

Anne :

that changes the handling of this income

Anne :

If you live in a foreign country and receive a pension/annuity paid by a U.S. payor, you may claim an exemption from withholding of U.S. Federal Income Tax (FIT) under a tax treaty by completing Form W-8BEN and delivering it to the U.S. payor. You must report your U.S. Taxpayer Identification Number (TIN) on Form W-8BEN for it to be valid for treaty purposes.

Anne :

What I just sent you is how you handle the pension, so that it will ONLY be taxable to CA,

Customer:

Okay. Just to let you know, the pension currently does not have any tax being withheld from it.

Anne :

Then I would say to leave it alone

Anne :

its already being handled correctly

Customer:

It still needs to be written as income on the 1040 though?

Anne :

the 1116 form is solely for foreign based income

Anne :

yes

Anne :

it still needs to be reported

Customer:

Okay, so on form 1116, Part II, I just put in the entire money paid to CA tax regardless of whether that tax was put on income coming from the US or in CA?

Anne :

No

Anne :

Since the pension was US based, it is not considered "foreign income"

Anne :

The 1116 form was to help people that pay tax to the US AND to a foreign country

Anne :

that's not the case on this particular type of income

Anne :

it is solely US based income

Anne :

also, since they're not paying tax on it to the US, there's no tax to net the foreign tax paid with....not in this category

Customer:

So what should be put in part II? CA's tax is like the 1040, all income is reported and tax owed is determined from all worldwide income. If they paid total $1000 - what should actually be put in part II?

Anne :

Ok.....if I have this correct, they are only paying tax in BOTH the US and CA on the rentals and other passive income

Anne :

this qualifies for the credit

Anne :

However, there's no US tax paid on the pension (which would be correct....as per the W8BEN mentioned above)

Customer:

Though there is no tax withheld from the pension, when entering it into 1040, that income is also considered part of the gross income to be taxed?

Anne :

so you just include the pension on the US income (no credit)

Anne :

yes

Anne :

and since its US sourced, and they're paying tax on it only in CA, there is no credit to file)

Anne :

that didn't quite sound right

Anne :

sorry

Customer:

Sorry, I'm still really confused.

Anne :

well, I didn't explain this part very well

Anne :

Once you claim the W8BEN so that you do not have to pay US tax on your US sourced income.....this is the same thing as "treatyng out" the income

Anne :

So, while you report it on line 16, you also report the exact same amount as a negative figure on line 21 and attach a copy of the W8BEN

Customer:

Ooooh- I didn't know that. But if they have been receiving pension for a long time now w/out withholding, is it still necessary to attach W8BEN?

Anne :

Have they been having to pay tax on the $ amount once you take into account their deductions and exemptions

Customer:

Are you talking about just one year or several years in a row?

Anne :

I mean every year

Anne :

What they are doing is claiming a treaty position

Anne :

have they ever paid US tax on the pension income?

Customer:

They have not had to pay tax for several years now because there have been losses and high expenses for rental so the yearly income has been too low to be taxed? (From what I understand - I need to look at their old files).

Customer:

They have never had tax withheld on the US tax income.

Customer:

I'm assuming that they turned in a WBEN before. Do they need to send one in every year?

Anne :

That's only part of it

Anne :

yes

Customer:

Or just one time?

Anne :

its a simple form, and allows you to subtract the pension from their US income

Anne :

I would send a copy of the form every year

Customer:

Okay, and it should be turned in with the 1040? Is it something that comes from the company providing the pension or is it something they fill out? I need to ask them about it.

Anne :

You can use the first one you made and just copy it every year

Anne :

You get the form from the IRS web site

Anne :

Here's the form

Anne :

its really fairly simple

Customer:

Okay. If for some reason they did not turn on in last year (but did not put in a subtraction in line 21), should they append their file?

Anne :

that really depends on how far you want to take this

Anne :

If they came to me, I would have to go back and amend the returns and claim the treaty position...........and I can tell you it would not be among the top ways I'd like to spend the next few days

Anne :

But I'm and EA and I have no choice

Customer:

Okay. I understand. I'm not sure 100% what the previous years returns are like, but I just wanted to ask to make sure.

Customer:

I am still confused what to write in 1116, Part II though?

Anne :

You're claiming the 1116 on the foreign rentals............so you write the $ amount that was paid to CA in Part II of the Form1116

Customer:

The amount paid to CA fed tax was a sum that included the US income too though. How do I do the calculations?

Customer:

They take the entire worldwide income and come up with a number for tax owed. This is the part I keep tripping up on.

Anne :

You should only be claiming the credit on the property that is in CA..........

Anne :

you may have to do some sort of worksheet for yourself to separate the CA rentals and the US rentals

Customer:

Okay, so I guess I will have to do some number crunching on the CA fed tax side then?

Anne :

sure looks that way

Anne :

You may bookmark this page and come back if you have any further questions........even after you rate/pay

Anne :

I wish you well.........its not that it's that hard to do.........once you understand it............there's just alot of different angles to it

Customer:

Okay, I will do that. I think I have enough information to go forward for now but I will probably come back tomorrow with additional questions if that is okay with you.

Anne :

I'll be in and out, but you know I'll chekc

Anne :

check

Anne :

chat rooms are not forgiving for typos

Customer:

ha ha, no worries. Anyway, thank you so much for the help. I will rate now and come back tomorrow.

Anne :

You may come back as many times as you need to........and I always appreciate the rating

Anne :

but people need to know they can come back

Customer:

Okay, if I rate it says it will close the chat. It's still okay to come back as long as I have this page bookmarked right?

Anne :

I've never seen the customer side, but you should NOT have to close it

Anne :

I have many customers that come back on the same thread

Customer:

Sorry, just to be on the safe side I will have to hold off from rating you for now, but I will definitely be giving you an excellent rating tomorrow. Thank you again.

Anne :

no Problem.............I just want you to understand the answer ....that's the most important thing to me

Anne :

till tomorrow then

Customer:

Okay! Thank you! Good night. Good bye for now.

Anne :

Till tomorrow

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1734
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Anne and 7 other Tax Specialists are ready to help you

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