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A married couple has a foreign tax credit carryover from…

A married couple has a...
A married couple has a foreign tax credit carryover from 2014. How can this credit be utilized as an offset against their regular current tax or tax in the future?
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Answered in 20 minutes by:
3/9/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,340
Experience: Taxes, Immigration, Labor Relations
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A foreign tax credit carryover may be ONLY used against US tax liability on the foreign sourced income.

If, because of the limit on the credit, you cannot use the full amount of qualified foreign taxes paid or accrued in the tax year, you are allowed a 1-year carryback and then a 10-year carryover of the unused foreign taxes.

This means that you can treat the unused foreign tax of a tax year as though the tax were paid or accrued in your first preceding and 10 succeeding tax years up to the amount of any excess limit in those years.

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Customer reply replied 5 months ago
Is this a catch 22 situation? The foreign source income is usually taxed by the foreign country, then your taxed in the U.S.
a second time, so how can you get to use this credit? What can one invest in that would not be taxed by the foreign country , so then you could pay the tax in the U.S and use the credit carryover to offset it. Am I on the right track?
Second question on this topic, if you have a large credit , how do you arrive at the amount of the credit you are able to offset against your regular tax?

Is this a catch 22 situation?

In some circumstances - yes.

But a foreign source income may be taxed higher or lower in a foreign country.

Some foreign sourced income might be excluded from taxation in a foreign country - but still taxable in the US.

It depending on your foreign country - if it is always taxed higher - chances are - you will not use the full carryover credit.

In this case - you might consider a foreign tax deduction instead of claiming a credit.

if you have a large credit , how do you arrive at the amount of the credit you are able to offset against your regular tax?

If you carry unused foreign taxes to a year in which you chose to deduct qualified foreign taxes, you must compute a foreign tax credit limit for the deduction year as if you had chosen to credit foreign taxes for that year.

If the credit computation results in an excess limit (as defined earlier) for the deduction year, you must treat the unused foreign taxes carried to the deduction year as absorbed in that year.

You cannot actually deduct or claim a credit for the unused foreign taxes carried to the deduction year.

But, this treatment reduces the amount of unused foreign taxes that you can carry to another year.

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Customer reply replied 5 months ago
Lets see if I understand this,
If you decide to take a deduction for the credit carry forward,you had, you might be limited based on the foreign tax credit computation, but you still will be able to carry forward the unused portion of the carryover that was not utilized
Did I get it?
Where would I find these limit computations? Are they on the form 1116? If yes, where?

That is not correct interpretation...

You may NOT deduct the credit carry forward...

but you may choose to DEDUCT foreign taxes instead of claiming a credit.

If you do so - you will deduct the full amount and nothing to carry forward.

As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.

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.

To choose the deduction, you must itemize deductions on Form 1040, Schedule A.pdf.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,340
Experience: Taxes, Immigration, Labor Relations
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Customer reply replied 5 months ago
Got it now
Thank you so much
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