Foreign Tax Credits - How much can one really use on 1040 ?

denisharlock · Post by **denisharlock** » Mon Mar 02, 2009 1:59 pm

Regarding those residents of the US who have had CDN withholding tax held by Canada.

Can you give us a guideline on how other US income affects the amount of the withholding tax that can be retreived ? That 1116 form is brutal !

Ignoring Section 217 declarations, other links suggest that if one has $0 US income, one cannot get any benefit. $150k income gives ? full benefit ?
Please comment.

Thanx

nelsona · Post by **nelsona** » Mon Mar 02, 2009 2:29 pm

The 1116 calculations, which should always be done using software, follow these principles:
1. You cannot get more foreign tax credit than you actaully paid in foreign tax.
2. You cannot get more in tax credit than the US tax that you paid on that income.

3. The US tax you pay on foreign income is based on the EFFECTIVE taxrate you pay, not the marginal.

so, if you owed no foreign tax, of course, you can't get any credit. If none of your foreign income is reportable, then no foreign tax can be credited.
And if your foreign income is, say, 10% of your total income, then you can expect that the foreign tax credit will be no more than 10% of your overall US income tax.

So, a person making $60K taxable income (after all dedcutions) is paying about $8K in tax. That is about a 12% taxrate. So, if from an RRSP withdrawal, you only report $10K of income, you are only going to get $1200 tax credit. Even if your RRSP withdrawal was $20K and only $10K taxable in US, and your withholding was $4000.

And just to be clear, the tax credit doesn;t get back any Cdn withholding, that is gone. It simply lowers your uS tax.

KevMontana · Post by **KevMontana** » Wed Mar 04, 2009 9:37 pm

Excellent response..I may get it yet :lol: Still kind of startled that my 16 K CDN when added to my US salary for a 48K total USD...produced only a $600 credit. But I kind of see the WHY a little clearer finally...

Best,

Kev

denisharlock · Post by **denisharlock** » Fri Mar 06, 2009 2:38 pm

Yes - the information made sense.

In the same vein -

From other posts, I note that sometimes you can use the unused portion of a foreign tax credit as a deduction on Sch A. If your foreign tax credit was $600 and $400 was usable, can you deduct the $200 on schedule A ?

Thanx again.

nelsona · Post by **nelsona** » Fri Mar 06, 2009 3:26 pm

No no. You can only carryforward/back unused foreign credits for use as a credit in other years. You cannot use both foreign credits and foreign deduction in same year.

When I suggest using deduction, it is INSTEAD of credit, not combined with credit.