How To Enter Form 1116 In TurboTax & Claim Foreign Tax Credit?

By claiming the foreign tax credit, US citizens can save significant money on their taxes. It is a money-saving credit offered by the IRS that helps you eliminate the double taxation burden. Now, the role of IRS Form 1116 is to help you calculate the foreign tax credit amount you can claim. You’ll be doing this while filing the US income tax return.

So, if you’re using TurboTax, you may want to know how to enter Form 1116 in TurboTax. Follow this guide to file Form 1116 TurboTax and claim your foreign tax credit.

Table of Contents

Understanding IRS Form 1116

Now, firstly, it’s essential to know what exactly is the purpose of IRS Form 1116. If we keep it simple, US citizens can use Form 1116 to claim the Foreign Tax Credit, which can help reduce their income tax liability. However, before you proceed with completing Form 1116 on the taxes, here are some criteria you must meet:

You need to have foreign tax liability either accrued or paid during the present tax year.
Taxes need to be assessed on your income.
The tax needs to be imposed on a single individual.
Your taxes need to be legally originated in any foreign country.

Also, note that you cannot include your taxes that are due in your foreign taxes paid amount. Furthermore, before you finish filing Form 1116, all of your foreign taxes paid must be changed to US dollars.

Is It Essential To File Form 1116 In Order To Claim The Foreign Tax Credit?

Well, suppose you’re someone who is planning to use the foreign tax credit. In that case, it is usually required that you file Form 1116. However, there are some exceptions where you are able to use the foreign tax credit without filing Form 1116. This will only work if any of the following applies to you:

Your foreign taxes for the current year aren’t crossing the $300 limit.
Passive income is your only foreign income source for the present tax year.
All foreign taxes and gross foreign income are reported on a payee statement like Form 1099-INT or 1099-DIV. After this, you select the procedure for the current tax year.

In most cases, this will apply to individuals with small incomes for which they are paying foreign tax.

Claiming Foreign Income On The Tax Return

According to the IRS, every US citizen, as well as US resident aliens, must report and pay their taxes for worldwide income. This applies to both who satisfy the requirement for a substantial presence test and own a US Green Card. However, you must be aware of these specific implications if you’re a taxpayer. So, let’s check what these implications are.

Options Available To Avoid Double Taxation

IRS offers you a choice for avoiding double taxation, which includes:

Deduct the foreign taxes on Schedule A, such as other standard deductions.
Use Form 2555 in order to claim the FEIE (Foreign Earned-Income Exclusion). This allows you to exclude a part or whole of foreign-earned income from your US taxes.
Use Form 1116 in order to claim the FTC (Foreign Tax Credit). This allows you to eliminate taxes you paid to some other country from the amount you owe the IRS.

While you can choose FEIE to save on your taxes, it is suggested you use FTC as, in most cases, it helps you lower the US tax liability the most.

What Is The Eligibility For Foreign Tax Credit?

Now, if you’ve selected the FTC (Foreign Tax Credit), you need to confirm whether you have eligibility or not. So, the tax you pay to countries other than the US only qualifies for the FTC in the following cases:

For when you pay taxes on your income to a provincial or local government.
You’ve already accrued or paid the tax.
You didn’t gain from paying your tax.
For when you were obligated legally to pay your tax.

Other than that, there are a few taxes that you can include in the FTC:

A tax you pay to a sanctioned country.
A tax on income that is not part of the US gross income.
You pay sales, luxury, real estate, or value-added taxes to a foreign government.
Taxes on foreign gas, oil, and mineral income.
A tax from international boycott operations.
Social Security taxes accrued or paid to some foreign countries, and the US having a Social Security agreement with them.
Taxes that are part of an event for a foreign tax splitting.

How To Enter Form 1116 In TurboTax?

Firstly, if you want to enter Form 1116 in TurboTax, you need to check when it will become available in your account. To do this, you can use this tool, which will help you know when the tax forms will be available in your TurboTax account.

Once you get the form in TurboTax, you must enter both deduction and credit in the same place. Here are the steps you need to follow to enter Form 1116 in TurboTax.

Firstly, Open the return in your TurboTax account.
Then, type all the foreign income in the “Wages & Income” section.
After that, click on “Search” and type in your “foreign tax credit.”
Next, hit the “Jump to foreign tax credit” option.
- You can also head to “Deductions & Credits” and click on “Start” right next to the “Foreign Tax Credit” section. This will be available under “Other Taxes Paid.”
Now, you’ll be directed to a screen stating, “Do You Want the Deduction or the Credit?.” You can have to select any one option which is currently suitable for the situation.
In case you choose “Take a Credit:”
- When on the screen, click on “Continue.” Then hit the “No” option in order to fill out your Form 1116.
- After that, a screen will appear showing “Country Summary.” You need to tap “Add a country.”
- Now, as the screens appear, you need to answer all the questions about your taxes, expenses, and foreign income.
- Once you finish that, you’ll be directed back to the previous screen, “Country Summary.” Also, click “Add a Country” in case you make income from other countries. But if not, simply hit the “Done” button.
- Again, answer all the questions on the screen and continue till you get to the “Foreign Tax Credit Summary” Screen. Once you finish that section, you can press “Done.”
In case you choose Itemized Deduction:
- Type in the foreign taxes you paid on the next screen. You’ll find this in your tax return section, “Deductions & Credits.” This will be under the “Other Deductible Expenses” section.

Usually, it’s better to take credit instead of a deduction. TurboTax can assist you in choosing between both as you pass this section. So, if you select the credit, your TurboTax account will attach Form 1116, Foreign Tax Credit, as per what the situation demands.

Conclusion

Entering Form 1116 in TurboTax makes it easier to claim Foreign Tax Credit. Make sure you attach this form while filing your taxes to the IRS to save quite a sum of your money on taxes. If you struggle to enter or file your Form 1116 in TurboTax, let MWJ Consultancy professional technicians help you.

Our support team is available 24/7 to fix all the errors with your TurboTax account. For further assistance, call us at +1 877 469 0298 or send your request to info@mwjconsultancy.com.