Foreign Tax credit calculation on firm 1116

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CecileB
Posts: 3
Joined: Wed Jun 10, 2020 10:35 pm

Foreign Tax credit calculation on firm 1116

Post by CecileB » Wed Jun 10, 2020 10:44 pm

I’m a US citizen working in Canada since July 2019. This is my first time filling my 1040 form with non-US income. I calculated the taxes I paid in Canada (Federal + Provincial taxes) and reported it on my foreign tax credit 1116 tax form. However, after following the IRS instructions, filling all the lines and doing all the calculations, it seems that only half of the amount I actually paid in Can taxes on my Can salary is applied to the Foreign Tax credit (meaning that I still owe taxes to the IRS whereas I already paid them here). Is it normal or am I making something wrong?

nelsona
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Re: Foreign Tax credit calculation on firm 1116

Post by nelsona » Thu Jun 11, 2020 12:58 pm

That is normal. 1116 is designed to only give credit at the effective rate of tax, while the income is added at the marginal rate.

You might wish to use form 2555 instead, to exclude the income.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

CecileB
Posts: 3
Joined: Wed Jun 10, 2020 10:35 pm

Re: Foreign Tax credit calculation on firm 1116

Post by CecileB » Thu Jun 11, 2020 4:00 pm

Thanks for the clear answer! My worries are confirmed now... I’ll have to pay double taxes I’m afraid (at least it’s how I feel as I’m already paying the taxes from my Can income to Can). I can’t use the 2555 form, as I spent 6 months in the US in 2019. Hopefully next year...

nelsona
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Re: Foreign Tax credit calculation on firm 1116

Post by nelsona » Thu Jun 11, 2020 9:31 pm

Yes, you will find that the less your income is split between the two countries, b=the better 1116 will work.

But also remeber that if you have moved to canada, you can still use 2555 if you wait until you meet the PPT test, and prorate the amount for the year. You can exclude 1/2 the maximum, if you spent 1/2 the year outside US, as long as in the 12-month period beginning when you left, you are our 330 days.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

CecileB
Posts: 3
Joined: Wed Jun 10, 2020 10:35 pm

Re: Foreign Tax credit calculation on firm 1116

Post by CecileB » Fri Jun 12, 2020 9:33 am

That's great to know! Thanks. I will definitively look into 2555 (I'm definitively in Can for 330 days straight).

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