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Client (US resident) with foreign salary and taxes paid in…

Client (US resident) with foreign...
Client (US resident) with foreign salary and taxes paid in foreign currency - Part II of 1116 form for some reason adds taxes paid only in US $ (line "o" through "r") - it does not take taxes paid in foreign currency (lines "k" through "n"). I do not understand why a person would not get a credit for taxes paid (obviously from foreign salary taxes would be withheld in foreign currency - and why would the form 1116 contains lines that don't "participate" in calculations. Read 1116 instruction - did not help.
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10/4/2017
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 4,185
Experience: 3+ decades of varied tax industry exp. Tax Biz owner
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Hello. Thank you for choosing this Q&A service for assistance. My name is Angela. I will be assisting you.

In order to deduct the foreign taxes paid, the currency must be converted over to US dollars. SEE BELOW:

-----------------------------

For U.S. tax-reporting purposes, you must convert any foreign currency you earn into U.S. dollar equivalents. Most people use the yearly average exchange rate between the U.S. dollar and the foreign currency they receive to calculate this. The IRS lists a few yearly exchange rates on the Yearly Average Currency Exchange Rates Translating Foreign Currency into U.S. Dollars page of its website.

Note that there is no “official” exchange rate you are obliged to use for this calculation. Any posted, “consistently used” exchange rate—like those utilized by major banks—is acceptable.

REFERENCE SOURCE:

https://www.nolo.com/legal-encyclopedia/how-i-value-foreign-income-us-tax-purposes.html

Link to Yearly average Currency Exchange Rates Translating Currency into U.S. Dollars Page:

https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

If the above information clarifies matters for you, I ask that you please take the time to scroll to the top of the page and select 3 or more stars to positively rate my response so that I can receive credit for assisting you. A 5 star rating is greatly appreciated. Thank you in advance.

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Customer reply replied 4 months ago
You can refer me to somebody else - as you again answer generically and things I do know

I will opt out and release the question back into the queue.

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Customer reply replied 4 months ago
ok
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,192
Experience: Taxes, Immigration, Labor Relations
Verified

When we calculate a foreign tax credit - that credit is limited by the US tax liability on that foreign income.

Just an illustration example - assuming the same income is taxed in the US and in a foreign country

If US tax liability for instance $5000, but a foreign tax liability is $8000 on the SAME income - your US foreign tax credit will be ONLY $5000 - that effectively eliminates US tax liability on THAT income.

If however US tax liability for instance $8000, but a foreign tax liability is $5000 on the SAME income - your US foreign tax credit will still be $5000 - but an additional US tax liability is remaining $3000 - that effectively eliminates double taxation of the same income - but will not fully eliminate US tax liability on THAT income.

All calculations are done on form 1116 - thus if you have income from foreign sources and income from US sources - your US tax liability is prorated - and a foreign tax credit is calculated only on income from foreign sources.

Unused portion of the foreign tax credit may be carried forward to following years.

In some situations more beneficial could be to claim a deduction of the full amount of foreign taxes instead of calculating a foreign tax credit - that option might be very valuable if you are a resident of the state with high state income tax.

Let me know if you need any clarification this matter.

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Customer reply replied 4 months ago
I do understand all that you said - however when i input the data - this happens: Part II of 1116 form for some reason adds taxes paid only in US $ (line "o" through "r") - it does not take taxes paid in foreign currency (lines "k" through "n"). I do not understand why a person would not get a credit for taxes paid (obviously from foreign salary taxes would be withheld in foreign currency - and why would the form 1116 contains lines that don't "participate" in calculations
Basically, system does not take as a credit taxes paid in foreign currency - only PAID in US dollars

If you upload the form - I will take a look more precisely.

But all amounts paid in foreign currency must be converted into USD - and all calculations are done in USD

All lines are generally participating in calculations - but which amount to use is based on conditions - so if you follow constrictions - you woudl see these conditions.

If you are likely using a tax preparation software - there are some worksheets and comparison in the background but that doesn't means these amounts are not used.

But again - just upload the form - be sure to remove all personal information - and I will be more specific to your calculations.

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Customer reply replied 4 months ago
It's generic 1116 form - if you re-read my initial question you'll see what i mean

I do not see any amounts... is that correct?

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Customer reply replied 4 months ago
When i enter amounts in section pertianing to foreign currency they do not flow anywhere
Customer reply replied 4 months ago
please, re-read my original question

I am not clear why you said - it does not take taxes paid in foreign currency (lines "k" through "n").

I feel that is misleading statement...

According to instructions - Generally, you must enter in Part II the amount of foreign taxes, in both the foreign currency denomination(s) and as converted into U.S. dollars, that relate to the category of income checked above Part I.

So these are SAME amounts - just "o" through "r" are represented in USD - but "k" through "n" - in foreign currency - but these are SAME amounts - not different.

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Customer reply replied 4 months ago
i need just to duplicate entry - first in foreign currency and then in USD? As they say "paid in USD" and they were not paid in USD

Correct -

You will list amounts in foreign currency as taxes were paid.

Then - convert into USD based on conversion rates at the time taxes were paid.

Then - will continue all calculations in USD.

"paid in USD" - you are taking too literally...

Foreign taxes paid or accrued - depending which method you are using - most likely PAID.

Then - same amount is expressed "In foreign currency" AND "In U.S. dollars"

Lev
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Experience: Taxes, Immigration, Labor Relations
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Customer reply replied 4 months ago
Got it, thanks
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