Announcement

Collapse
No announcement yet.

Seeing through the mist of Form 1116

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Seeing through the mist of Form 1116

    Here's something to clear your brain from some early tax season routine stuff....

    FORM 1116 can be a challenge - we all know that.

    A client has been having annual "unused" amounts of foreign tax credits, and in the most recent years the amount of foreign tax that can be shown on line 47 of Form 1040 has diminished greatly. Reasonably simple explanation: decreasing income (thank you, investments) and greatly increased medical expenses. Net tax liability is now quite low compared to what it was a mere two years ago.

    Trying to apply some logic......

    It is a fact that the current allowable foreign tax credit (less than 10% of the actual foreign taxes paid) was taken from only the 2010 credits. For years 2005-2009, although there are also carryforwards, NONE of those specific annual amounts could be used for 2010 since there were also unused 2010 amounts that will now be carried forward to 2011.

    Does that sound correct?

    The larger small gorilla in the room is that the taxable income is likely to stay the same or possibly decrease in the near upcoming years. This would appear to mean that the unused tax credits (2005-2010) may well never get used! Do they just slowly evaporate....one year at a time?? I believe there is some time left to use the remaining 2005 carryforward amounts.

    Assuming this is a quietly ticking time bomb, with the current facts the only way I see to make use of the credits would be something like a stock windfall on Sch D or perhaps the cessation of most of the large medical expenses (which are mostly from one spouse).

    Again, this is not a "how do I do it" question (thank goodness for the software!) but rather a request to anyone who has had some real world prior experience with this type situation.

    Sorry to be so long-winded... Thanks for your input!

    FE

    #2
    To use the carry over you need more than just a tax liability. You need current income taxed in 2 countries at a rate that is lower than it's being taxed at in the US. I've seen it happen once.

    Comment


      #3
      Info

      Originally posted by Davc View Post
      To use the carry over you need more than just a tax liability. You need current income taxed in 2 countries at a rate that is lower than it's being taxed at in the US. I've seen it happen once.
      FWIW: All of the income involved is passive income, reported entirely along the way on Forms 1099-DIV. It is reasonably likely that (most of) those investments will not be sold in the foreseeable future.

      Even assuming such is correct, I feel at some point the "old" credits will slowly disappear not unlike a cheshire cat smile.

      OTOH, it would be nice if Congress might tweak the $600 limit for MFJ, or at least allow $600 when more was paid during the year.

      FE

      Comment

      Working...
      X