Foreign Tax Credit vs itemizing the Foreign Tax paid as an itemized deduction for taxes paid.
Hi Paul -
Reviewing my 2011 Federal & State taxes, it appears that itemizing my Foreign taxes paid works better this year than completing Form 1116 for the tax credit. Your accountant is/was correct in having to allocate Foreign income in proportion to Foreign taxes paid. My brokerage 1099 after uploaded into TurboTax seems to list those countries where I paid Foreign Taxes as "Various" rather than listing the actual amounts paid for each country. The detailed print out shows the correct country detail so it's possible that my tax program is only taking the summary totals from page 1 of the report. The Turbo Tax program should be looking for a specific list of Countries for both the income (assume dividends & capital gains) and the Foreign Taxes paid. I may have to input this detail in by hand.
For now the program concludes that my Foreign taxes paid do not qualify this year and the Foreign Tax Credit is carried forward in a table covering 10 years. Because the total Foreign taxes I paid is above the $600.00 threshold but still a relatively small amount, for me its better to use the amount of my Foreign Taxes paid as an itemized deduction (on Schedule A) rather than try to apply for the Form 1116 credit.
I expect when/if I do a sale that generates a large capital gain from one or more of my foreign holdings, it might be worth the effort to itemize the gains by country so the foreign taxes paid (for that year and perhaps for any carry forward from previous years) can be used as a dollar for dollar credit. For me to do this, I would have to supplement my already detailed 1099 (58 pages) with the Country by Country information. I suspect my largest Foreign earnings are from Canada, so to that would not be too hard. Still, with my current activity it might only save me $100 at most.
Therefore, for simplicity, I have elected to itemize these foreign taxes paid in the same area used for state & other taxes paid. In Turbo Tax, you must be sure to opt in for this type of treatment for your Foreign Taxes Paid or you will not receive the benefit of the deduction. I think by default, the system will just carry forward your foreign tax paid amount(s) especially if the 1099 statements state "various" for the country specific detail.
FWIW, I may play around adjusting the detail to reflect my Canadian income vs Canadian Foreign tax paid and then list everything else as "various" to see if there is some benefit. Once you enter the detail by country in TurboTax it might proceed to complete Form 1116 and arrive at a $ credit. I still think the benefit is small.
EKS
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