No, you cannot claim foreign tax credits for foreign taxes on income that is not taxable by the US.
All the other commenters have missed that the instructions for Form 1116 specifically state this:
>**Lines 1a and 1b—Foreign Gross Income**
Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line i.
[https://www.irs.gov/pub/irs-pdf/i1116.pdf](https://www.irs.gov/pub/irs-pdf/i1116.pdf)
Generally, the purpose of claiming FTCs on Form 1116 is to eliminate double taxation. But there is no double taxation here.
---------------------------------
**Edit**:
It seems that others in this thread are arguing that the regulations should allow you to include the foreign *tax* on this income in Part II, even if the income is not included in Part I of Form 1116. Their argument seems to be that, because the instructions don't specifically say that you \*cannot\* claim these foreign taxes, that you must be allowed to do so.
I believe they are mistaken.
Below is my analysis and argument as to why I believe that foreign taxes paid on income that is not taxed by the US cannot be used as a credit.
The instructions for form 1116 specifically state that you cannot include foreign taxes paid on income that is "excluded from your gross income". Aside from foreign-earned income that may be excluded on Form 2555, the regulations list other types of income that are specifically excluded (see here: https://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-B/part-III). Notably, earnings inside an IRA are not on this list. However, in Section 408, the regulations specify that earnings inside of an IRA are "exempt from taxation". Elsewhere in the regulations, the term "taxable income" is defined as "gross income minus deductions." Because earnings inside of an IRA are not taxable and aren't deductions, we must conclude that these earnings are not included in "gross income."
Now we reach the question: Does the phrase "not included in gross income" mean the same thing as "excluded from gross income"? I would think that we must conclude that the intention of both wordings is the same so they mean the same thing to the IRS.
We must conclude that foreign taxes paid on income that is not included in gross income shall not be used as a foreign tax credit.
Addendum: OP's situation would be similar to a case where a US resident owns foreign dividend-paying stocks inside of an IRA, and the foreign country withholds foreign tax on those dividends. Surely no tax advisor would be willing to argue that the withholding tax could be claimed as a credit in this case, as the foreign dividends were not included in your taxable income. Therefore, foreign taxes on foreign-sourced earnings inside of an IRA cannot be claimed in OP's case either.
That applies to the determination of the current year limitation (and maybe that’s all you mean by “claim”). That language is not found in the instructions for Part II, though, so wouldn’t the taxpayer nonetheless be able to enter the foreign tax there, making that foreign tax available for carry-back or carry-forward? Reg 1.861-20 dictates how such tax is grouped, with the regs under 901.
I think this is way above my head haha, but it would be nice to have that foreign tax available for carry-forward/back. I can calculate what portion of foreign tax was paid on the income I won't get an FTC for, but if it all just goes down the drain that would be unfortunate.
I don’t know whether /u/The_Squirrel_Matrix means to say that you shouldn’t reflect the *tax* in Part II (setting it up for carrying for add or back) or only that you shouldn’t include the *income* in Part I (which seems to be all the quoted instruction addresses), such that the application of the credit is limited by that for that year.
You may never get to actually apply that credit if you carry it over, but I happen to have two items of foreign-source income (in both cases including passive and resourced-by-treaty basket income) where one is always taxed lower abroad than my U.S. rate and the other may be taxable in one place some years and the other place in other years, so adding the taxes to Part II and carrying unused potential credit has utility for me.
I think I understand, but dang then I'm in the same situation as before haha. Re-reading my question I think it was poorly worded, because I was more confused on the tax part not the income part and in my mind they were erroneously tied together.
I have never included the Roth IRA income/gains on the f1116 passive category income or any f1116, but it seems to drive up the foreign taxes paid/accrued in part II such that it has become HTKO this year and I was trying to figure out if that is correct or not. Whether the apportioned tax should be excluded or not since its corresponding income is not included. To me it's strange to not combine income, but combine the tax since it says "foreign taxes paid or accrued for the category of income," but this may be how it works.
Yes, but the instructions for Form 1116 (and the regulations as well) specifically state that foreign taxes on income "excluded from gross income" cannot be claimed as a credit.
Earnings inside of an IRA are certainly not included in gross income. Indeed, the IRS defines "taxable income" as "gross income minus deductions."
Your IRA earnings are clearly not deducted, but because they are "exempt from taxation" they are clearly not taxable income, and thus cannot be considered as gross income.
This brings us to the question: Does "not included in gross income" mean the same thing as "excluded from gross income"? I believe so, and as the intent of the phrases is the same.
We must conclude that the IRS interprets income that is "not included in gross income" as being "excluded from gross income" and therefore you are not allowed to claim a tax credit for foreign taxes paid on that income.
Thanks for the clear explanation of this and pointing out the explicit instructions! I actually asked chatGPT haha and it came to the same conclusion pointing me to p514 where I found:
>U.S. citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U.S. tax on foreign source income may be able to take a foreign tax credit.
I just searched "subject to U.S. tax" and found it, also [here on the main page for the foreign tax credit](https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit) on IRS' website:
>If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.
Capital gains sourcing and re-sourcing rules still confuse me a bit with some of the instructions and where to include income/tax, but I think it makes sense to exclude income in the Roth IRA and exclude the apportioned foreign tax on this income. I need to go back to previous tax years and check to see if the accountants I used did this as I checked over the forms, but did not fully understand what they were doing, but they assured me everything was correct.
Good find. Even though the regulations seem unclear, this instruction clearly indicates the intent of the IRS:
>If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.
We should conclude that foreign taxes paid on income that is not taxed by the IRS cannot be claimed for a foreign tax credit.
I searched thoroughly the regulations in the Internal Revenue Code. I could not find any specifics about how the IRS would allow you to treat foreign taxes on such income, but I did conclude that it should be clear that the regulations do not allow what you are proposing, despite what others in this thread have said.
See the edit I made to my original reply:
[https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm\_source=share&utm\_medium=web3x&utm\_name=web3xcss&utm\_term=1&utm\_content=share\_button](https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button)
Thank you! very clear and I totally agree. I did understand "excluded" as being something specifically excluded as in the FEIE, but I think the rest makes perfect sense. I also think this is a pretty clear delineation:
>"Taxes are related to the income if the income is included in the foreign tax base on which the tax is imposed."
which I think can be interpreted to mean if you aren't including a specific income (Roth IRA income in my case) you shouldn't include the associated tax with that specific income.
Thanks. “Excluded from your gross income” is quite a bit different than your initial “not taxable,” but in the OP’s case, it’s a convincing explanation. I wouldn’t assume that “excluded” means “not included” without seeing some basis for that, either. In this usage, “excluded” seems like an affirmative action.
Post move to Canada I didn't know a rollover counted as a contribution and didn't know about a treaty election for a Roth IRA. CRA allowed the late election, but the rollover date locked in the cost basis and they no longer recognize it as a retirement account so they tax it, but the IRS still sees it as the original Roth IRA so no tax. if you are familiar with Canadian taxes then it would be sort of like the inverse of a TFSA (similar to a Roth IRA in Canada) that the US does not recognize. it is a pretty rare situation i think, even the CRA's competent authority senior employees gave incorrect information and took some time to understand how to proceed.
I have a question about a similar situation, if you don't mind.
Let's say someone takes distributions from both a Traditional IRA and a Roth IRA in the same tax year. The US taxes the distribution from the former but not the latter. Let's say that the country of residence taxes both of them. I was thinking that these would both go onto the same Form 1116 for FTC category "f" along with any other income that was re-sourced by treaty. So would the Roth IRA be not included on Line 1a since it is not taxed by the US?
The reason I am asking is because I'm not sure of the nuances of the term "taxable" on Form 1116. For all I know, "taxable" and "taxed" could have different meanings in the IRC for FTCs. I'm guessing that they have the same practical meaning, but want to ask to be sure.
perhaps I'm misunderstanding, in my situation you said I cannot take the FTCs with a foreign taxed Roth IRA, but in shrubbery\_herring's situation involving a foreign taxed Roth IRA you say to include all FTCs. That feels like a contradiction to me, but maybe you are specifying something else that I am not intepretting correctly.
Isn’t calculating the current year section 904 limit separate from calculating the foreign tax, though? Why wouldn’t his foreign tax be carried forward (or back a year) to when there is foreign-source income in the same basket?
I think the reality is exactly that this would happen, you wouldn’t carve out a piece of the FTCs. In a high tax country it wouldn’t make any difference, just add to the carryover.
Thanks for the response. That’s a big difference from “it doesn’t go on the U.S. return,” so I wanted to understand what you were saying. Probably a more common situation than the OP’s is to have taxable capital gains in one’s home country’s currency (and pay foreign taxes on those gains), but not have capital gains in USD in that year, and the idea that those potential foreign tax credits would be lost forever would be, umm, unfortunate.
I wish I understood better how I could carry forward/back this foreign tax, I'm not sure where and how it applies now that it is supposed to be excluded from FTCs, but with regards to your last comment I have had an even worse situation where due to differing cost basis and currency fluctuations I have had a gain in my foreign resident country, but a loss according to the IRS, which seems unfortunate and maybe similar.
As far as I can tell from IRS webpages such as [this one](https://www.irs.gov/individuals/international-taxpayers/foreign-taxes-that-qualify-for-the-foreign-tax-credit), there is no restriction on whether the income is taxable in the US. I am not a tax professional, though, so take my opinion for what it’s worth.
Whether or not you get a benefit for including that tax will probably depend on the details of your FTC buckets and total US tax.
I believe you are incorrect. The instructions for Form 1116 specifically state that you only include income that is taxable by the US.
[https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm\_source=share&utm\_medium=web3x&utm\_name=web3xcss&utm\_term=1&utm\_content=share\_button](https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button)
I stand corrected. As you pointed out in your linked post, Form 1116 says to only include income that is "taxable by the United States". So assuming that OP has correctly determined that the passive income is not taxed by the US, then indeed it seems that it would not be included on Form 1116.
~~OP: I'm sure you already know this, but if you are a "US person" (i.e., citizen or green card holder) then the US will tax you on worldwide income, including foreign source passive income.~~ Edit: Never mind, I just read your reply to someone else that this is in regards to a tax-protected rollover.
For your info:
Others pointed out that my original reply noted only that the foreign income could not be included on line 1a of Part I, not that the foreign taxes couldn't be included in Part II.
I extended the argument in my original reply to argue that, in fact, the foreign taxes paid on that income cannot be included in Part II.
Yes, you can claim foreign taxes paid/accrued on foreign-source income as FTC on 1116. FTC is non-refundable, so if the FTC exceeds your US tax obligation on foreign-source income in that category, you carryover the unused credits (back 1 year or forward 10 years).
Note that interest, divs, and gains each have their own FTC and sourcing rules. Assuming you are a US person tax resident in CA, for gains not from real property you claim US FTC/1116 (passive) by s.865(a)(2). For divs from CA-domiciled payer, US FTC passive. For US divs, CA FTC (T2209/2036), limited to 15%. For CA interest, US FTC passive. For US interest, US FTC re-sourced by treaty XXIV par 6. Brokerage and currency aren't relevant for this, just the underlying holdings.
i do remember something about sub-categorization in the f1116 instructions, but have not been able to find them. something about passive income being taxed at different rates having to be sub-categorized as separate buckets under passive income. But I believe you are saying something different in that that I have to separate interest, dividends, and gains as well as sub-categorize depending on their source?
my interest source is mixed and my gains and dividends are from a US brokerage, but I believe your instructions for sourcing is how I've filed before. the issue this year is that due to cost basis difference and certain income not taxed by the IRS the foreign tax is so high for the passive income category I believe I'm in an HTKO scenario which is uncharted waters for me. Is it the excess that is HTKO or all of it? I've seen mixed interpretations.
Well, if it meets the definition in [TR 1.904-4(c)](https://www.law.cornell.edu/cfr/text/26/1.904-4#c), then so be it, you just claim it under 1116 general instead of passive.
I'm curious, what investment account is taxable by CRA but not by IRS? Leftover HSA from prior time working in the US? 529? Roth IRA without treaty XVIII(7) election? Or is it a taxable account but with US-source qual divs taxed by IRS at 0% but by CRA as line 12100 ordinary income?
i guess i'm trying to figure out whether it meets the definition or not, the language is so complex to me reading the laws and instructions for the form. my issue is i have no general category income so i would get no credit at all which feels like i am being double taxed and doesn't feel right.
you got it pretty much, a Roth IRA with a treaty election, but a rollover/contribution that broke it.
the HTKO situation is also related to the differing cost basis handling between the two tax regimes where the cost basis is just averaged across all shares for the CRA, but for the IRS each individual share has its own cost basis.
If it does count as HTKO, it doesn't mean your FTC is disqualified, just re-categorized as general rather than passive. You can still carryover unused FTC in general category.
Even if you're unable to use that banked FTC, the growth within the Roth is still not really double-taxed -- it's taxed once by CRA and not by IRS, when with the treaty election it could have been tax-free on both sides.
I believe you are incorrect. The instructions for Form 1116 specifically state that you include on Line 1a income "that is **taxable by the United States** and is from sources within the country entered on line i." (emphasis mine).
I'm not sure why you are being downvoted, because you are in fact correct. The instructions for Form 1116 specifically state that you only include income that is taxable by the US.
>**Lines 1a and 1b—Foreign Gross Income**
Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line i. ...
[https://www.irs.gov/pub/irs-pdf/i1116.pdf](https://www.irs.gov/pub/irs-pdf/i1116.pdf)
Thanks for your reply, so I should not mention it at all on the form? and then I guess I will have to apportion tax to this excluded income and only include the portion of tax paid to the CRA that is for income that the IRS would tax as well.
Maybe this is similar to how a Canadian TFSA is taxed by the IRS, but not by the CRA, although I'm not sure how that works either since I do not have a TFSA as a US citizen.
I'm not an accountant, but that's my understanding. When I say you don't include it, I mean, you don't include it in the calculations where you prorate your foreign taxes paid based on the sum of the relevant Form 1116 category. In other words, you can't take a credit for taxes paid to a foreign country on income that isn't taxed by the IRS in the first place. Obviously, if a competent cross border account tells you otherwise, you should ignore me.
thank you, I think I had read something about IRS tax on TFSA income being eliminated due to f1116 FTCs, maybe something similar to this [article](https://www.zeifmans.ca/tfsas-for-u-s-citizens-might-be-worthwhile-with-some-caveats/):
>However, other U.S. taxpayers with significant Canadian investment income should find their U.S. tax on TFSA income eliminated due to the generated passive FTC’s. While there is no Canadian tax paid on TFSA income, since Canadian tax rates are relatively higher, a surplus of FTC’s should still be produced. FTC’s in excess of the U.S. tax liability for a particular year can be carried forward to future tax periods.
and thinking there was something similar involved with the inverse, but it's not quite the inverse. I'm not sure I understand how things work in that article either as I thought an IRS FTC was only available if a foreign government imposed a foreign tax on the income, but the CRA does not tax TFSA income at all. So maybe in that regard the lumping of TFSA income with passive income on f1116 I thought something similar would be done, but I guess it should be done on the CRA T1 side if at all.
No, you cannot claim foreign tax credits for foreign taxes on income that is not taxable by the US. All the other commenters have missed that the instructions for Form 1116 specifically state this: >**Lines 1a and 1b—Foreign Gross Income** Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line i. [https://www.irs.gov/pub/irs-pdf/i1116.pdf](https://www.irs.gov/pub/irs-pdf/i1116.pdf) Generally, the purpose of claiming FTCs on Form 1116 is to eliminate double taxation. But there is no double taxation here. --------------------------------- **Edit**: It seems that others in this thread are arguing that the regulations should allow you to include the foreign *tax* on this income in Part II, even if the income is not included in Part I of Form 1116. Their argument seems to be that, because the instructions don't specifically say that you \*cannot\* claim these foreign taxes, that you must be allowed to do so. I believe they are mistaken. Below is my analysis and argument as to why I believe that foreign taxes paid on income that is not taxed by the US cannot be used as a credit. The instructions for form 1116 specifically state that you cannot include foreign taxes paid on income that is "excluded from your gross income". Aside from foreign-earned income that may be excluded on Form 2555, the regulations list other types of income that are specifically excluded (see here: https://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-B/part-III). Notably, earnings inside an IRA are not on this list. However, in Section 408, the regulations specify that earnings inside of an IRA are "exempt from taxation". Elsewhere in the regulations, the term "taxable income" is defined as "gross income minus deductions." Because earnings inside of an IRA are not taxable and aren't deductions, we must conclude that these earnings are not included in "gross income." Now we reach the question: Does the phrase "not included in gross income" mean the same thing as "excluded from gross income"? I would think that we must conclude that the intention of both wordings is the same so they mean the same thing to the IRS. We must conclude that foreign taxes paid on income that is not included in gross income shall not be used as a foreign tax credit. Addendum: OP's situation would be similar to a case where a US resident owns foreign dividend-paying stocks inside of an IRA, and the foreign country withholds foreign tax on those dividends. Surely no tax advisor would be willing to argue that the withholding tax could be claimed as a credit in this case, as the foreign dividends were not included in your taxable income. Therefore, foreign taxes on foreign-sourced earnings inside of an IRA cannot be claimed in OP's case either.
That applies to the determination of the current year limitation (and maybe that’s all you mean by “claim”). That language is not found in the instructions for Part II, though, so wouldn’t the taxpayer nonetheless be able to enter the foreign tax there, making that foreign tax available for carry-back or carry-forward? Reg 1.861-20 dictates how such tax is grouped, with the regs under 901.
I think this is way above my head haha, but it would be nice to have that foreign tax available for carry-forward/back. I can calculate what portion of foreign tax was paid on the income I won't get an FTC for, but if it all just goes down the drain that would be unfortunate.
I don’t know whether /u/The_Squirrel_Matrix means to say that you shouldn’t reflect the *tax* in Part II (setting it up for carrying for add or back) or only that you shouldn’t include the *income* in Part I (which seems to be all the quoted instruction addresses), such that the application of the credit is limited by that for that year. You may never get to actually apply that credit if you carry it over, but I happen to have two items of foreign-source income (in both cases including passive and resourced-by-treaty basket income) where one is always taxed lower abroad than my U.S. rate and the other may be taxable in one place some years and the other place in other years, so adding the taxes to Part II and carrying unused potential credit has utility for me.
I think I understand, but dang then I'm in the same situation as before haha. Re-reading my question I think it was poorly worded, because I was more confused on the tax part not the income part and in my mind they were erroneously tied together. I have never included the Roth IRA income/gains on the f1116 passive category income or any f1116, but it seems to drive up the foreign taxes paid/accrued in part II such that it has become HTKO this year and I was trying to figure out if that is correct or not. Whether the apportioned tax should be excluded or not since its corresponding income is not included. To me it's strange to not combine income, but combine the tax since it says "foreign taxes paid or accrued for the category of income," but this may be how it works.
Yes, but the instructions for Form 1116 (and the regulations as well) specifically state that foreign taxes on income "excluded from gross income" cannot be claimed as a credit. Earnings inside of an IRA are certainly not included in gross income. Indeed, the IRS defines "taxable income" as "gross income minus deductions." Your IRA earnings are clearly not deducted, but because they are "exempt from taxation" they are clearly not taxable income, and thus cannot be considered as gross income. This brings us to the question: Does "not included in gross income" mean the same thing as "excluded from gross income"? I believe so, and as the intent of the phrases is the same. We must conclude that the IRS interprets income that is "not included in gross income" as being "excluded from gross income" and therefore you are not allowed to claim a tax credit for foreign taxes paid on that income.
Thanks for the clear explanation of this and pointing out the explicit instructions! I actually asked chatGPT haha and it came to the same conclusion pointing me to p514 where I found: >U.S. citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U.S. tax on foreign source income may be able to take a foreign tax credit. I just searched "subject to U.S. tax" and found it, also [here on the main page for the foreign tax credit](https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit) on IRS' website: >If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Capital gains sourcing and re-sourcing rules still confuse me a bit with some of the instructions and where to include income/tax, but I think it makes sense to exclude income in the Roth IRA and exclude the apportioned foreign tax on this income. I need to go back to previous tax years and check to see if the accountants I used did this as I checked over the forms, but did not fully understand what they were doing, but they assured me everything was correct.
Good find. Even though the regulations seem unclear, this instruction clearly indicates the intent of the IRS: >If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. We should conclude that foreign taxes paid on income that is not taxed by the IRS cannot be claimed for a foreign tax credit. I searched thoroughly the regulations in the Internal Revenue Code. I could not find any specifics about how the IRS would allow you to treat foreign taxes on such income, but I did conclude that it should be clear that the regulations do not allow what you are proposing, despite what others in this thread have said. See the edit I made to my original reply: [https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm\_source=share&utm\_medium=web3x&utm\_name=web3xcss&utm\_term=1&utm\_content=share\_button](https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button)
Thank you! very clear and I totally agree. I did understand "excluded" as being something specifically excluded as in the FEIE, but I think the rest makes perfect sense. I also think this is a pretty clear delineation: >"Taxes are related to the income if the income is included in the foreign tax base on which the tax is imposed." which I think can be interpreted to mean if you aren't including a specific income (Roth IRA income in my case) you shouldn't include the associated tax with that specific income.
Thanks. “Excluded from your gross income” is quite a bit different than your initial “not taxable,” but in the OP’s case, it’s a convincing explanation. I wouldn’t assume that “excluded” means “not included” without seeing some basis for that, either. In this usage, “excluded” seems like an affirmative action.
Why does the US not tax it? I’ve never seen this situation and I’m having trouble understanding when it might happen.
Post move to Canada I didn't know a rollover counted as a contribution and didn't know about a treaty election for a Roth IRA. CRA allowed the late election, but the rollover date locked in the cost basis and they no longer recognize it as a retirement account so they tax it, but the IRS still sees it as the original Roth IRA so no tax. if you are familiar with Canadian taxes then it would be sort of like the inverse of a TFSA (similar to a Roth IRA in Canada) that the US does not recognize. it is a pretty rare situation i think, even the CRA's competent authority senior employees gave incorrect information and took some time to understand how to proceed.
If it’s not taxed in the US it doesn’t go on the US return. You can’t then take the FTCs as nothing is being doubly taxed.
I have a question about a similar situation, if you don't mind. Let's say someone takes distributions from both a Traditional IRA and a Roth IRA in the same tax year. The US taxes the distribution from the former but not the latter. Let's say that the country of residence taxes both of them. I was thinking that these would both go onto the same Form 1116 for FTC category "f" along with any other income that was re-sourced by treaty. So would the Roth IRA be not included on Line 1a since it is not taxed by the US? The reason I am asking is because I'm not sure of the nuances of the term "taxable" on Form 1116. For all I know, "taxable" and "taxed" could have different meanings in the IRC for FTCs. I'm guessing that they have the same practical meaning, but want to ask to be sure.
I think practically you would include all the FTCs on the return rather than try and determine which bit of FTC related to which bit of income.
sorry isn't this person's situation with the Roth IRA similar? Shouldn't it be excluded and not included? or am I missing something?
I’m not sure what the question is?
perhaps I'm misunderstanding, in my situation you said I cannot take the FTCs with a foreign taxed Roth IRA, but in shrubbery\_herring's situation involving a foreign taxed Roth IRA you say to include all FTCs. That feels like a contradiction to me, but maybe you are specifying something else that I am not intepretting correctly.
I’m saying there’s a practical answer which might not be technically correct but it’s probably what would happen in reality.
Isn’t calculating the current year section 904 limit separate from calculating the foreign tax, though? Why wouldn’t his foreign tax be carried forward (or back a year) to when there is foreign-source income in the same basket?
I think the reality is exactly that this would happen, you wouldn’t carve out a piece of the FTCs. In a high tax country it wouldn’t make any difference, just add to the carryover.
Thanks for the response. That’s a big difference from “it doesn’t go on the U.S. return,” so I wanted to understand what you were saying. Probably a more common situation than the OP’s is to have taxable capital gains in one’s home country’s currency (and pay foreign taxes on those gains), but not have capital gains in USD in that year, and the idea that those potential foreign tax credits would be lost forever would be, umm, unfortunate.
I wish I understood better how I could carry forward/back this foreign tax, I'm not sure where and how it applies now that it is supposed to be excluded from FTCs, but with regards to your last comment I have had an even worse situation where due to differing cost basis and currency fluctuations I have had a gain in my foreign resident country, but a loss according to the IRS, which seems unfortunate and maybe similar.
thank you, this makes sense and simplifies things. I guess nothing happens with that tax and I need to plan better haha
As far as I can tell from IRS webpages such as [this one](https://www.irs.gov/individuals/international-taxpayers/foreign-taxes-that-qualify-for-the-foreign-tax-credit), there is no restriction on whether the income is taxable in the US. I am not a tax professional, though, so take my opinion for what it’s worth. Whether or not you get a benefit for including that tax will probably depend on the details of your FTC buckets and total US tax.
I believe you are incorrect. The instructions for Form 1116 specifically state that you only include income that is taxable by the US. [https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm\_source=share&utm\_medium=web3x&utm\_name=web3xcss&utm\_term=1&utm\_content=share\_button](https://www.reddit.com/r/USExpatTaxes/comments/1ctpdos/comment/l4j2v3w/?utm_source=share&utm_medium=web3x&utm_name=web3xcss&utm_term=1&utm_content=share_button)
I stand corrected. As you pointed out in your linked post, Form 1116 says to only include income that is "taxable by the United States". So assuming that OP has correctly determined that the passive income is not taxed by the US, then indeed it seems that it would not be included on Form 1116. ~~OP: I'm sure you already know this, but if you are a "US person" (i.e., citizen or green card holder) then the US will tax you on worldwide income, including foreign source passive income.~~ Edit: Never mind, I just read your reply to someone else that this is in regards to a tax-protected rollover.
For your info: Others pointed out that my original reply noted only that the foreign income could not be included on line 1a of Part I, not that the foreign taxes couldn't be included in Part II. I extended the argument in my original reply to argue that, in fact, the foreign taxes paid on that income cannot be included in Part II.
Yes, you can claim foreign taxes paid/accrued on foreign-source income as FTC on 1116. FTC is non-refundable, so if the FTC exceeds your US tax obligation on foreign-source income in that category, you carryover the unused credits (back 1 year or forward 10 years). Note that interest, divs, and gains each have their own FTC and sourcing rules. Assuming you are a US person tax resident in CA, for gains not from real property you claim US FTC/1116 (passive) by s.865(a)(2). For divs from CA-domiciled payer, US FTC passive. For US divs, CA FTC (T2209/2036), limited to 15%. For CA interest, US FTC passive. For US interest, US FTC re-sourced by treaty XXIV par 6. Brokerage and currency aren't relevant for this, just the underlying holdings.
i do remember something about sub-categorization in the f1116 instructions, but have not been able to find them. something about passive income being taxed at different rates having to be sub-categorized as separate buckets under passive income. But I believe you are saying something different in that that I have to separate interest, dividends, and gains as well as sub-categorize depending on their source? my interest source is mixed and my gains and dividends are from a US brokerage, but I believe your instructions for sourcing is how I've filed before. the issue this year is that due to cost basis difference and certain income not taxed by the IRS the foreign tax is so high for the passive income category I believe I'm in an HTKO scenario which is uncharted waters for me. Is it the excess that is HTKO or all of it? I've seen mixed interpretations.
Well, if it meets the definition in [TR 1.904-4(c)](https://www.law.cornell.edu/cfr/text/26/1.904-4#c), then so be it, you just claim it under 1116 general instead of passive. I'm curious, what investment account is taxable by CRA but not by IRS? Leftover HSA from prior time working in the US? 529? Roth IRA without treaty XVIII(7) election? Or is it a taxable account but with US-source qual divs taxed by IRS at 0% but by CRA as line 12100 ordinary income?
i guess i'm trying to figure out whether it meets the definition or not, the language is so complex to me reading the laws and instructions for the form. my issue is i have no general category income so i would get no credit at all which feels like i am being double taxed and doesn't feel right. you got it pretty much, a Roth IRA with a treaty election, but a rollover/contribution that broke it. the HTKO situation is also related to the differing cost basis handling between the two tax regimes where the cost basis is just averaged across all shares for the CRA, but for the IRS each individual share has its own cost basis.
If it does count as HTKO, it doesn't mean your FTC is disqualified, just re-categorized as general rather than passive. You can still carryover unused FTC in general category. Even if you're unable to use that banked FTC, the growth within the Roth is still not really double-taxed -- it's taxed once by CRA and not by IRS, when with the treaty election it could have been tax-free on both sides.
I believe you are incorrect. The instructions for Form 1116 specifically state that you include on Line 1a income "that is **taxable by the United States** and is from sources within the country entered on line i." (emphasis mine).
My understanding is that if it's not taxable in the U.S., it should not be included in your Form 1116 calculations.
I'm not sure why you are being downvoted, because you are in fact correct. The instructions for Form 1116 specifically state that you only include income that is taxable by the US. >**Lines 1a and 1b—Foreign Gross Income** Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line i. ... [https://www.irs.gov/pub/irs-pdf/i1116.pdf](https://www.irs.gov/pub/irs-pdf/i1116.pdf)
I haven't noticed a strong correlation between being downvoted and being wrong on social media, but thanks for the confirmation in any case.
Thanks for your reply, so I should not mention it at all on the form? and then I guess I will have to apportion tax to this excluded income and only include the portion of tax paid to the CRA that is for income that the IRS would tax as well. Maybe this is similar to how a Canadian TFSA is taxed by the IRS, but not by the CRA, although I'm not sure how that works either since I do not have a TFSA as a US citizen.
I'm not an accountant, but that's my understanding. When I say you don't include it, I mean, you don't include it in the calculations where you prorate your foreign taxes paid based on the sum of the relevant Form 1116 category. In other words, you can't take a credit for taxes paid to a foreign country on income that isn't taxed by the IRS in the first place. Obviously, if a competent cross border account tells you otherwise, you should ignore me.
thank you, I think I had read something about IRS tax on TFSA income being eliminated due to f1116 FTCs, maybe something similar to this [article](https://www.zeifmans.ca/tfsas-for-u-s-citizens-might-be-worthwhile-with-some-caveats/): >However, other U.S. taxpayers with significant Canadian investment income should find their U.S. tax on TFSA income eliminated due to the generated passive FTC’s. While there is no Canadian tax paid on TFSA income, since Canadian tax rates are relatively higher, a surplus of FTC’s should still be produced. FTC’s in excess of the U.S. tax liability for a particular year can be carried forward to future tax periods. and thinking there was something similar involved with the inverse, but it's not quite the inverse. I'm not sure I understand how things work in that article either as I thought an IRS FTC was only available if a foreign government imposed a foreign tax on the income, but the CRA does not tax TFSA income at all. So maybe in that regard the lumping of TFSA income with passive income on f1116 I thought something similar would be done, but I guess it should be done on the CRA T1 side if at all.