Foreign taxes: Form 1116 or Schedule A?

It's your choice, but don't forget option C: directly as a credit on Schedule 3.

Ira Smilovitz, EA

Limited Rules for Claiming the FTC Directly on Line 48 of Schedule 3:

Line 48 Foreign Tax Credit If you paid income tax to a foreign country or U.S. possession, you may be able to take this credit. Generally, you must complete and attach Form 1116 to do so. Exception. You don?t have to complete Form 1116 to take this credit if all of the following apply.

1. All of your foreign source gross income was from interest and dividends and all of that income and the foreign tax paid on it were reported to you on Form 1099-INT, Form 1099-DIV, or Schedule K-1 (or substitute statement).
2. The total of your foreign taxes wasn't more than 0 (not more than 0 if married filing jointly).
3. You held the stock or bonds on which the dividends or interest were paid for at least 16 days and weren?t obligated to pay these amounts to someone else.
4. You aren?t filing Form 4563 or excluding income from sources within Puerto Rico.
5. All of your foreign taxes were: a. Legally owed and not eligible for a refund or reduced tax rate under a tax treaty, and b. Paid to countries that are recognized by the United States and don?t support terrorism.

My college age daughter and I just did her taxes in free Turbotax. Her foreign tax credit comes from a mutual fund in an account set up by her grandfather but we had to do form 1116 anyway because the credit was more than her total tax due (zero) so we had to carry it forward. To Turbotax's credit, once I lied and said we have more 1116 info to enter, it was pretty easy to do the carryforward including the numbers from prior years.

The instructions don't mention that, although I suppose that having more 1116 credit than your total tax due is not very common.

R's, John

It's even less common to ever be able to use a foreign tax carryover which originated from passive income. (speaking from years of experience)

Ira Smilovitz, EA