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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1542
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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Here. I have unused foreign tax credits and I want to use

Customer Question

Customer: ***** ***** here. I have unused foreign tax credits and I want to use them against deferred income earned outside the US. Is this possible when I take the deferred income out?
JA: Thanks. Can you give me any more details about your issue?
Customer: It was earned income in Canada and was taxed in the year earned. Now I am going into retirement and will start taking the deferred income. Can I use the previous tax credits from Canada against the US the taxes on the deferred when I get paid in retirement?
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Submitted: 1 year ago.
Category: Tax
Expert:  Arthur Rubin replied 1 year ago.

Thank you for using Just Answer.

I should have known this, as it's a common enough occurrence that countries have different tax years, but I had to check the forms again. It should work, provided it was taxed in Canada no more than 10 years ago. Foreign tax credit carryovers expire in 10 years. The calculation of the limits on form 1116 lines 1-7 and 15-21 (US tax due to foreign income) and lines 8-14 (foreign tax available for credit) are independent.

You'll have to attach a statement relating to line 10 stating (if accurate) that you had no Canadian income taxed in the US in the intervening years. Otherwise, you'd need to prepare forms 1116 for the intervening years. Fortunately, the statute of limitations for filing amended returns based on the foreign tax credits is 10 years.

If it's more than 10 years, I'm afraid you're out of luck, according to the forms, instructions, and regulations. You might be able to make an equitable case, but I know of no successful case.

Customer: replied 1 year ago.
The deferred income was taxed in Canada less than 10 years ago.
We did, however, have Canadian income taxed in the U.S. in the intervening years.
Form 1116 was prepared during these years & filed with US federal income tax.
Can we use the accrued foreign tax credit when we take out the deferred income with was Canadian income?
Expert:  Arthur Rubin replied 1 year ago.

The (now 5) categories of income each have there own form 1116 and carryover. The categories are now passive (including most investments), general (including wages), 901(j), income re-sourced by treaty, and lump-sum distributions.

Suppose the deferred wages were taxed in Canada in 2008 (for the purpose of argument). On your 2008 form 1116, you report the tax on line 8, but only the wages taxable in the US on line 1a. (You will probably be audited as the tax might be greater than the income, but that is the proper way to report it.) In any intervening years in which you had Canadian general category income, you would have needed to prepare a general category 1116 to calculate the credit allowed and carryover.

Because of the special statute of limitations (code section 6511(d)(3), which you might need to bring to their attention), you can amend your tax returns back to 2005 to change the foreign tax credit calculations, or to change between electing the foreign tax credit or a deduction for foreign taxes. (Note that a recent court case determined that carrybacks, such as recalculated NOL carrybacks, cannot be carried further back. This is not binding on you, but it is indicative of the way the IRS and some courts will consider the matter.)

I think, to be more specific, I would need to know the amounts in question and what you filed on forms 1116 in the intervening years.

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