# Form 1116 questions



## Carmonli (Jul 1, 2014)

All the years since I've been living overseas (since 1986), I've filed using Form 2555 to exclude my salary, and it has been pretty straightforward. I had my salary, maybe some years a small amount of interest income, and that's it. Generally I just look at the previous year's return and plug in the (hopefully) correct numbers. I usually use the Free Fillable Forms site and mail in my return.

I've just retired at the end of 2019. It occurred to me that probably using the FTC would be more beneficial to me since I will have taxable pension income going forward and I could have used the tax credits to offset that. However, I cannot understand how to fill out Form 1116 correctly. I tried using a couple of the common online sites (TurboTax, OLT, etc.) just to run the numbers, and in the only one in which I thought I was finally entering things correctly, it spit out only $2000 as a tax credit, as an offset to the over $10,000 that it said I owed. My direct conversion of income tax paid on my EOY salary slip was approximately $14,000.

Where am I going wrong in understanding how this is supposed to work? Can anyone point me to a instructions on how to fill out a sample Form 1116 for real beginners? Is it worthwhile to file amended returns for past years (changing FEIE to FTC) so I can accumulate the credits for the future?

I do plan on using an accountant to prepare my taxes next year. I just thought I would be able to do them myself now.

Thanks for any help/advice.


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## Bevdeforges (Nov 16, 2007)

Have you checked the US-Israeli tax treaty for who/how your pensions are taxed? I only ask because Israel is one of those countries where you pay no US taxes on your SS benefits if you are resident in Israel (see IRS publication 915). There may be other provisions in the tax treaty regarding other pensions (whether from the US or from Israel).


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## Carmonli (Jul 1, 2014)

I haven't checked the treaty in depth (will do so, thanks for the reminder), but I'm more concerned about the taxation on payments from my private pension here in Israel. Hence my attempts to use Form 1116.


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## Moulard (Feb 3, 2017)

Carmonli said:


> Can anyone point me to a instructions on how to fill out a sample Form 1116 for real beginners?


The link I have to an old IRS tax resource I have is down at the moment, but hunt the IRS website for a historic copy of pub 514 – I am pretty sure you can download old versions of pubs as well as forms. It used to have both a simple and complex worked example in it. From memory I think you will need to go back to 2013. No idea why they removed it from the Pub.

A word of warning It can be difficult to parse the explanation of the calculations. I spent some time building out an excel spreadsheet using the worked example. PM me if you would like a copy. It may help you to follow along.

In a nutshell, all of the lines on the 1116 are to proportionally split income, deductions, us tax owed, foreign tax paid to determine the tax credit you can use.

If foreign taxes exceed US taxes in that category, you end up owing no US tax and you can carry over the balance for 10 years. If it’s the other way, you end up owning the difference or can utilize amounts from previous years that you can carry over. 

Its not a perfect remedy, you can have lots of credits available in the general category, but still owe US tax on passive category income.

So the quick summary of instructions..

Split your global income into the various categories. If you are retired and drawing a pension of some sort, or living off of investment income, then I suspect the bulk of it will be passive.

Split your deductions into those categories if they are definitely related to that class of income and proportionally split the remainder. With the changes to deductions recently, this may not be relevant. Instead you split the standard deduction proportionally.

Income minus deductions gives you your taxable income in that category.

Next you proportionally split the US tax owned on your income and the foreign tax paid.

Rinse and repeat for every category of income.



> Is it worthwhile to file amended returns for past years (changing FEIE to FTC) so I can accumulate the credits for the future?


It may be worthwhile depending on your foreign tax profile over couple of years. If you are likely to have income that is not foreign taxed in future, but is US taxed, then have a build-up of credits can be handy.. so long as that event will occur within the next 10 years. 


> There may be other provisions in the tax treaty regarding other pensions (whether from the US or from Israel).


Watch out for the limitations of benefit articles which typically limits the benefits of other treaty articles to the amount of tax paid. Ultimately this article typically results in you paying the higher of the tax rates between the two countries.


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## Carmonli (Jul 1, 2014)

Sent a PM, thanks!


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