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Foreign tax carry forward

I spent all of 2010 living in Europe, so for 2010, I filed in both the US and the foreign country, paying the latter a ginormous sum of money. Both returns were prepared by an accountant, and I took the entire FEIE (my income was around $130k), and a foreign tax credit for the rest, so I obviously owed the US zero in 2010. In 2011, I returned to the US.

I'm now preparing my 2011 return, and I am reading about carry forward of unused foreign tax credits. Obviously, I have unused foreign tax credits from 2010 since US rates are lower than the other country's, but can they be used to reduce my US tax in 2011?

Because I stayed in the foreign country for less than half of 2011, I do not owe the foreign country any tax at all for 2011. Does that mean the credits can't be used? From my (admittedly very cursory) reading of Pub 514, it sounds like carry forward of foreign tax credits can only be done if one has foreign earned income subject to foreign tax, which I do not have.

If carry forward were possible, I'd probably engage an accountant again this year, but I suspect that it's not permitted. Am I wrong on that score?

Reply to
John Smith
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That's my accounant's interpretation that she applies to my modest carryforwards from one year when I paid Quebec tax on some income. (Helpful tip: if you don't live in Quebec, be sure not to do that.)

Reply to
John Levine

I think there's more to it than that. You can use the foreign tax credit only for income from that country and that category. So if in the future you have income from South Africa, you can't use the European country FTC carry-forward.

Reply to
removeps-groups

According to Pub 514, carryforward has to be applied to the same category, but not the same country.

Requiring that it be applied to the same country would be incredibly burdensome. I have income from a global stock market ETF that passes through income from about 30 countries. In the tax info, in the space for the country, it says "various".

Reply to
John Levine

You are right, you get no benefit.

Imagine that in 2010 you lived and worked in Taxylvania, where the income tax rate was 90%, and earned $100,000. Your U.S. tax would have been $15,000, but your FTC was $90,000. You could take only $15,000 of it, so you carry forward $75,000.

Now in 2011 you live and work in Freedonia, where there is no income tax. Your U.S. tax is $15,000, but you can use the $75,000 tax credit carryover to pay zero.

Now in 2012 you work in the USA. If you work through Form 1116 you will see that regardless of foreign taxes paid, your allowed credit is zero. You compare the taxes paid plus carryover ($60,000) to the allowable credit (zero) and take a FTC of zero.

In my personal case, it might actually make a difference. My wife lives in Canada and we had a small FTC carryover this year and will probably have a larger one in the next couple years. If she were to increase contributions to her retirement plan in Canada, it would reduce her Canadian taxes paid but not our US taxes owed. In that case, we could use the FTC carryover if her Canadian taxes paid were less that the allowed FTC for that year.

Reply to
Hank Youngerman

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