Foreign tax credit for K1 (split) ?

[MA_EUR 1]

Hi @Wuozopo,

 

I have seen your replies on this topic on numerous discussions. I wanted to thank you as it has been extremely helpful for me.

 

I was wondering if you could quickly go through my situation to check if all makes sense. I will be permanently moving to the US (K-1 Visa) in 2023. You can assume that I will become a tax payer in 2023 (substantial presence test). Therefore, I will need to file taxes in 2024 for the 2023 fiscal year. I will do this jointly with my wife. As, I come from a high-tax country, I would like to use the Foreign Tax Credit (Form 1116) to offset high taxes I paid for fiscal year 2023. I am from a country that the US has a tax treaty with (including social security tax treaty). 2 question from my end. Question 1: Are the following calculations correct?

• Foreign Gross Income of $55000 and Total US Income (including partner's) of $130000. Total Worldwide Income is then $185000.
• Total US Tax Liability (Excluding Social Security) is around $46000. I will have paid $17000 in taxes (excluding social security) in my home country. 
• Foreign Tax Credit Limit would be = ($55000/$185000)*$46000 = $13675. The foreign income was 30% of the worldwide income, and thus total tax credit limit is 30% of US Taxes (excluding Social Security). 
• Since, I have already paid $17000 in foreign taxes, I will only be able to reduce taxes by $13675. Then, there is a $3325 foreign credit limit unused. 

 

Question 2: I know that you can either carry over or carry back this unused foreign tax credit. Carrying it over will not be very beneficial as I don't expect to have any foreign income in the next 10 years. So I looked at carrying it back, however, that seems a bit strange in my opinion. My wife and I will only have filed jointly in 2024. It seems strange that I can look back - including her income - to fiscal year 2022 and reduce taxes there as well. Especially that I have only become a US tax resident in 2023. Without giving the numbers, the credit limit for fiscal year 2022 would be more than the outstanding $3325. Does this mean, I could get the $3325 back? 

 

I'm pretty confident I got everything right for fiscal year 2023 and the form 1116. However, the carry back is not really clear to me. 

 

Thanks a lot for your input. I really appreciate it and again you have been super helpful for me already!!

 

Thanks!

 

 

Edited October 11, 2022 by MA_EUR

[MA_EUR 1]

I discovered an error in the calculation above. Actually the US taxes would be around $33000 in 2023. Therefore, the Foreign Tax Credit Limit is $9810. In case I cannot carry back and since, my foreign income is relatively small compared to the total income (only 30%), then I might be better of using Foreign Income Exclusion instead... 

Edited October 11, 2022 by MA_EUR

[Penguin_ie 5,994]

*****  post split from other thread by other member about another issue.  Please ask questions about your own case in your own thread. *****

[Wuozopo 4,293]

12 hours ago, MA_EUR said:

You can assume that I will become a tax payer in 2023 (substantial presence test). Therefore, I will need to file taxes in 2024

The point of substantial presence (or greencard test) is it allows you to file as a resident alien on a Form 1040 instead of a nonresident alien on a Form 1040NR (with higher tax rate). Substantial presence doesn’t mandate you file if you otherwise don’t need to.
 

Thinking of only you entering on a K1 who has to marry, then file for work authorization and a greencard. How long into 2023 will that take to even file? The point I’m making with the time talk is you may not even be authorized to work in the US by the end of 2023. So if no US income, you may not be required to file income tax.  So keep that possible option in mind. 
 

If you choose to file jointly with the spouse for 2023, then worldwide income earned will be reported. 

 

12 hours ago, MA_EUR said:

i  was wondering if you could quickly go through my situation to check if all makes sense.
 

 Are the following calculations correct?

Nothing quick about taxes  And I don’t have enough information. 

While I understand you are debating Foreign Income Exclusion or Foreign Tax Credit,  I think you are a year premature in your planning. 2022 tax laws, rates, etc are not even finalized so guessing about 2023 is way early. I haven’t even seen 2022 forms yet, and certainly not 2023.

• Are you basing these precise calculations on 2021 forms? 2022?
• Does your projected $185k 2023 joint income only include salaries? Will your spouse get a raise ?
• Got any interest, dividends, capital gains/losses? Mine vary widely from year to year.
• Did you already take the projected 2023 $27,700 standard deduction off the income before estimating taxes on a tax rate that won’t even be accurate for 2023?

You’re trying to come up with some very specific numbers on a bunch of suppositions so I can’t really verify anything for you quickly or otherwise.

And as to the Foreign Tax Credit Form 1116. I usually comment on things I (or my wife) have personally worked through. We have not done a Form 1116, nor intend to. My wife, the tax person, looked at the option some 10 years ago and said it hurt her head just reading it. So you are way ahead of our knowledge on that one.  
 

My only recommendation to you is buy a TurboTax disk 15 months from now and install the software on a computer. Then come January 2024, you can do many versions of your taxes with accurate numbers and pick the one that gives you the lowest tax liability. If you get a visa soon and marry in 2022, then you could bump this up a year.

[MA_EUR 1]

Thanks for all the feedback I really appreciate it.

• After this post, I did deep dive more into the form 1116 and it made more sense. I altered my calculations and even accounted for potential raises, 401k contribution and the standard tax deduction. 
• However, like you pointed out above, I also came to the realization that it does not matter what I will do in 2024 right now. I will have to see then what makes the most sense after all has happened. 

I'll definitely take your note with me to get TurboTax to ease some of the calculations. 

 

Again, appreciate your input. Thanks!

[Wuozopo 4,293]

6 hours ago, MA_EUR said:

I'll definitely take your note with me to get TurboTax to ease some of the calculations. 

The reason I like to install TurboTax on a computer vs online is because you can try so many options and just save with different file names. You don’t have to change the one file you are doing online to try something else. And  you pay one price upfront for as complicated a return as needed without being advised your “free” online requires additional fees. You will find TurboTax Basic (cheap one) will do all you need, but TurboTax Deluxe is more readily available and  is often on sale for the same price at retailers during the month of January. And with your deep dives into IRS materials, you don’t need the extras Turbo will offer like audit defense or let an accountant assist you. It’s just an upsell thing like “you want fries with that?”  And yes, software does all your calculations quickly which is what I like. And that it downloads from our investment company so that data does not have to be manually entered.