Form 1116 carry-over

[Gretel]

I never dealt with form 1116 and am at a loss. New client, qualifies form the foreign earned income exclusion, no taxes paid. He has W-2 wages since a number of years. Included with the tax return is a carryover worksheet that lists form 1116 with the explanation "General limitation inc overall foreign source loss" but no form 1116 included or any other further information.

I looked over form 1116 but could not see a space for a loss carry over entry (like I know from other forms with carry over). I believe I need to know when this loss originated and what from. I also believe that form 1116 should have been filed. Any advise is appreciated. Client must have had income from a foreign country and taxes withheld some years back. I will talk to my client after I understand a little better what I am looking for.

[Gretel]

Thanks, I located that statement in my software but none was attached to the 2016 tax return, neither was form 1116. Doesn't this already preclude the TP from the carry-over unless the 2016 tax return is amended?

[Gretel]

Mystery getting bigger

I don't really expect any response, just wanted to let know whoever is interested what happened next.

Client drops off 2015 tax return that shows a form 1116 loss carry-over of a much higher amount than was carried on the carry-over worksheet in 2016. Again, no form 1116 attached. I looked at all items attached to the 2016 tax return, trying to make sense with the difference in the amount, but cannot.

Both years show a negative taxable income and have no form 1116 attached. In addition, client who actually understands these things somewhat, says they never ever paid foreign taxes. Mystery, mystery...

[Rapid Robert]

Client drops off 2015 tax return that shows a form 1116 loss carry-over of a much higher amount than was carried on the carry-over worksheet in 2016. Again, no form 1116 attached. I looked at all items attached to the 2016 tax return, trying to make sense with the difference in the amount, but cannot.

Both years show a negative taxable income and have no form 1116 attached. In addition, client who actually understands these things somewhat, says they never ever paid foreign taxes. Mystery, mystery...

Since you say you've never worked with Form 1116, I hope I'm not about to tell you things you already know. Although you probably didn't mean to, I think you made a great pun when you said in your first post that you are "at a loss".

There can be a carryforward/carryback of a foreign tax CREDIT, but that does not sound like your situation. There is also a provision as described in Pub 514 under the heading "Recapture of Prior Year Overall Foreign Loss Accounts", which involves tracking and "recapturing" overall foreign LOSSES in future years, I suspect that is what your worksheet is tracking -- the loss, and the subsequent recapture of that loss against U.S. source income.

Per the pub, "You must recapture the overall loss regardless of whether you chose to claim the foreign tax credit for the loss year." So this might help explain why the worksheet is produced every year, even when no Form 1116 is being filed or tax credit being claimed.

I don't claim to be a F1116 expert, but one thing that finally helped me, after a number of years, is when I finally realized the concept is pretty much exactly the same as that used for the "other state tax credit" between U.S. states. F1116 does the same thing at the country level. If you have double-taxed income, it calculates a credit equal to the lesser of the foreign tax paid, or the U.S. tax that applies just to the amount which is double taxed. The complexity comes in because you have to calculate all the applicable U.S. taxes against just a portion of your total income. Including an allocation of deductions and cap gains rates and all the rest, that becomes very complex.

HTH.

[Gretel]

Thank you so much, Rapid Robert, this is highly appreciated. This explained what this "credit" could be, except that client never paid any foreign taxes. This also encourages me to delve into the instructions for form 1116. I really would like to understand the difference in the amount, for my sake. I have avoided form 1116 like the plaque and encountered only small credits from investment income that could go directly on form 1040. However, next year I will have to deal with this for another client.