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Foreign Tax Credit (or deduction)

Foreign Tax Credit (or deduction). Form 1040 Line 47 Pub 4012 G-2 Pub 4491 Page 242. Foreign Tax Credit Interview. Always do a complete interview BEFORE starting the return Review prior year return – any FTC? Review 1099-INT, -DIV or K-1s – any FTC? If more than $300 ($600 MFJ)

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Foreign Tax Credit (or deduction)

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  1. Foreign Tax Credit (or deduction) Form 1040 Line 47 Pub 4012 G-2 Pub 4491 Page 242 NTTC Training 2013

  2. Foreign Tax Credit Interview • Always do a complete interview BEFORE starting the return • Review prior year return – any FTC? • Review 1099-INT, -DIV or K-1s – any FTC? • If more than $300 ($600 MFJ) • Discuss options with client • May be better to go to paid preparer NTTC Training 2013

  3. Foreign Tax 1099-INT or DIV • Nonrefundable credit – 1040 Line 47 • 1099-INT or 1099-DIV boxes 6 & 7 NTTC Training 2013

  4. Foreign Tax on K-1 • Box number varies by form • Must be coded as passive income • See back of K-1 for codes NTTC Training 2013

  5. Foreign Tax Credit • Nonrefundable credit • No benefit if there is no income tax NTTC Training 2013

  6. Foreign Tax Credit • Simplified foreign tax credit method • Foreign tax must be from 1099-DIV, 1099-INT or K-1* ONLY (all others disqualify) AND • Total foreign tax is ≤ $300 ($600 MFJ) • If not, cannot use simplified method * K-1: tax relating to passive income only (interest or dividends) NTTC Training 2013

  7. Excess Foreign Tax Credit • No carryback or carryover of the unused credits with simplified method • Line 47 credit exceeds • Line 46 tax • Client should consider full Form 1116 with paid preparer NTTC Training 2013

  8. Foreign Tax Credit • If simplified method requirements are met • Link from Form 1040, line 47, to Form 1116 OR • Add Form 1116 NTTC Training 2013

  9. Foreign Tax Credit – Form 1116 • Input amount in top of Form 1116 • Can use scratch pad if multiple sources • No other entries on Form 1116 NTTC Training 2013

  10. Foreign Tax Deduction Too much foreign tax to use simplified method? • May claim an itemized deduction for all the foreign income taxes (cannot split) • Input amount on Sch A, Line 8 • Describe as Foreign Tax • No benefit if not itemizing • Benefit of deduction is less than of credit! NTTC Training 2013

  11. Foreign Tax Quiz Jerry, single, has a mutual fund that reported $455 of foreign tax on 1099-DIV What are his options? • Full Form 1116 with paid preparer • If itemizing, he can claim a deduction for the $455 • Simplified method is not an option! NTTC Training 2013

  12. Foreign Tax Quiz What if Jerry is married and that is all of his foreign tax for 2013 What are his options? • Claim the whole amount as a FTC (better choice) • If itemizing, he can claim a deduction for the $455 NTTC Training 2013

  13. Foreign Tax Credit or Deduction – QR • Is there a foreign tax credit on the return? • Was any foreign tax reported on forms 1099 or K-1? • Is the total amount within the simplified method limits • Verify correct credit shown on Line 47 or deduction claimed on Schedule A NTTC Training 2013

  14. Foreign Tax Credit or Deduction – Exit Interview • Show client where foreign tax credit was claimed • Explain why no benefit (no tax) • Or show where deduction was claimed • Or explain did not itemize NTTC Training 2013

  15. Foreign Tax Credit or Deduction Comments? Questions? NTTC Training 2013

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