• New:  some international tax paid is now reported on Form 1065 Schedule K-3.  To determine if a taxpayer’s K-3 is out-of-scope, refer to https://ta-nttc.tiny.us/Scope-Manual. 
  • Foreign taxes paid by a taxpayer can either be claimed as a credit, entered (directly or indirectly) on Form 1116 and flowing to Line 1 of Schedule 3, or as a deduction, entered on line 6 of Schedule A (“Other taxes”). The taxpayer must make one choice or the other; the amount of foreign taxes paid cannot be split between the credit and the deduction.
  • If the total foreign tax paid by taxpayer EXCEEDS $300 ($600 for a joint return), claiming the credit is normally out-of-scope, because it requires completing a full Form 1116, which is out-of-scope. (Tax-Aide tax preparation uses only the simplified method of claiming the credit.) The exception is when there are two or more counselors with International certification.
  • When claiming a credit is out-of-scope, the taxpayer has two options:
    • Use a paid preparer or tax software to prepare the return, claiming the full credit on Line 1 of Schedule 3.
    • Treat the entire amount of foreign taxes paid as an itemized deduction on line 6 of Schedule A, “Other taxes”, as described on page 83.
      • The Schedule A option, of course, has no value to the taxpayer for the federal return unless they’re taking an itemized deduction rather than the standard deduction.
      • Note for CA state returns: No CA deduction is permitted for foreign income taxes, so this option has no value for the CA return.
  • Pub 514, Foreign Tax Credit for Individuals, is the definitive guidance on this topic.

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