# Form 1116



## byline (Dec 5, 2011)

For the old Foreign Tax Credit form (Form 1116), I entered the amount from Line 41 on the old Form 1040. On the new Form 1040, it looks like this is now Line 10 (where you subtract your Standard Deduction from your total income). Correct?

The new, shorter Form 1040 is nice and all, but the net result is that this year I won't be filing any less paperwork. I still have to fill out all the same schedules and forms as before, except for the Health Coverage Exemptions form. That one is no longer necessary, but now we have to fill out the Foreign Address form. Oh well.


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## Bevdeforges (Nov 16, 2007)

As the old saying goes, "the more things change, the more they stay the same."

Basically yes, this year you use line 10 from your 1040 whereas last year they told you to use line 41. And the net result of your FTC calculation goes on Schedule 3 of form 1040.

Hey, you knew they'd never fit the 1040 form on a postcard - never mind a half sheet of paper.


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## byline (Dec 5, 2011)

Ah, I didn't realize I had to fill out Schedule 3. But now that I look, I see you are exactly right. Thank you!

Of course, now that means I'm filling out more forms than before. *sigh*


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## byline (Dec 5, 2011)

Bev, by the way: I'm not sure what to fill in for the Foreign Tax Credit on Schedule 3. In years past, I've had to fill out four different versions of Form 1116 (General category income, Passive category income, and then two Alternative Minimum Tax versions which do the calculation from my total income amount).

So, which calculation do I report in Schedule 3? The end result (Line 30 of Form 1116) has always been 0. Or do you mean that I am reporting on Schedule 3 the same amount I calculate on Line 10 of the new Form 1040? (Sorry to be so obtuse. Financial forms are not my strong suit!)


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## Bevdeforges (Nov 16, 2007)

Oh, my experience in filling out form 1116 is virtually non-existent. If the net foreign tax credit you wind up with is 0 why do you even bother filling out the form? 

As far as I can tell, what you put on the Schedule 3 is the amount of foreign tax credit you claim. If you are doing multiple form 1116's due to the different income sources, I expect you'd add together the tax credits generated from each 1116 and put the total on the Schedule 3.

But let's see if we can flag down someone here with a bit of experience with the Foreign Tax Credit.


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## Moulard (Feb 3, 2017)

Line 48 on Schedule 3 should have the the combined total of your tax credits for either all of your normal Form 1116 or your AMT versions depending on whether you ended up subject to AMT. (the part IV, line 33 amount). That amount then ends up on the 1040 line 12.

In my opinion the new tax forms are just a smoke and mirrors solution to "size of a postcard" demand. Really no change at all once you add in the various schedules. If anything it makes things harder as you can't just rely on muscle memory.


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## byline (Dec 5, 2011)

All I can tell you is that I'm doing what paid tax preparers did before me, till they got too expensive for me to think it's worth my while. So I continued preparing the forms as they did. I know that's probably not the best answer, but I neither want, nor see the need, to devote too much of my time and energy to figure this out. Hence, following what came before.

I suspect the only reason Form 1116 came into play is because I have a tiny amount of interest income from a savings account. Or maybe previous tax preparers were taking the "cover all bases" approach. I just don't know.

Adding together all the amounts from the four versions of Form 1116 comes to (wait for it) 0. So I guess the amount I'll enter on Schedule 3 is .... 0.


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## Bevdeforges (Nov 16, 2007)

That definitely sounds like a paid tax preparer's "all things considered" "cover my butt" approach. I can understand why they do it, but if the net result is no tax credit at all, I'd just skip the 1116 - which eliminates the need to file any Schedule 3.

Oddly enough, even the IRS appreciates it when you "keep it simple."


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## byline (Dec 5, 2011)

Wow, thank you Bev! That would make my life so much simpler.

The funny thing is, my financial situation is relatively simple, and has been since I first found out about having to file U.S. returns and FBARs back in 2011. I average around $10,000 in income per year. I have a part-time job ($5,463 USD in 2018), my own freelance writing business ($2,628 USD in 2018) and a tiny amount of interest from a savings account ($133 USD in 2018).

These amounts have remained about the same since 2011. Yet three different tax preparers have done my U.S. returns more or less the same way. When the professionals got too pricey for me, I started doing my tax returns myself, using what they had done as a template.

That's why I kept on filling out the four versions of Form 1116, even though it was the biggest headache of all the forms. (Last year, the calculations on Line 19 came to .98935, .01065, .98931 and .01069. For someone whose strong suit is definitely not math, this was like pulling teeth. Though not nearly as bad as when I had a tax-free savings account and had to fill out Form 3520. Ugh!)

So, if I understand correctly, the only forms I need to complete are:

*Form 1040
Schedule 6 (Foreign Address)
Schedule B (Interest and Ordinary Dividends)
Schedule C (Profit or Loss From Business)*

My tax preparers always included a *Canadian Exemption From Self-Employment Tax statement*, so I have too:

I am exempt from self-employment tax under IRC Section 1401(c), since I am subject to social security contributions and coverage in Canada under the Canada Pension Plan, and there is an agreement between Canada and the United States respecting Social Security taxes. This agreement became effective August 1, 1984 and has not expired. This statement is made pursuant to Rev. Proc. 84-54 and 80-56.


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## Bevdeforges (Nov 16, 2007)

I would suggest including a Form 2555 to exclude your income from your part-time job and your free-lance writing. (If you were in Canada while doing the writing you are "working in Canada" no matter where your freelance fees come from.)

Of course, if your income for the year isn't up to the filing threshold . This year the filing threshold for a single taxpayer is $12,000. If your reportable income isn't at least $12,000 you don't even have to file. (The threshold was lower in earlier years.) If your income for 2018 is only $8224 like you say above, you can skip filing altogether.


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## byline (Dec 5, 2011)

Wow ... even better news. Thank you, Bev! My income is, indeed, only $8,224. I am married, filing separately. I had no idea the threshold had been raised this year. But then, I should've realized that because the standard exemption was doubled to $12,000. If I am, indeed, free of this headache, then that is a huge relief. I'm not free of the FBAR, but that task is done for this year.

Interestingly enough, the first tax preparer I hired back in 2011, to get me back into compliance, completed both Form 1116 and Form 2555. I have no idea why; he just did. (But this was back when there was far less clarity from the IRS on what we should be doing. So I have a feeling he was just covering all possible bases.) Then the two subsequent tax preparers I hired filled out Form 1116 only, no Form 2555.

It seems to me this has come up before on this forum, when I mentioned filling out Form 1116, and you and others have wondered why I was filling that one out and not Form 2555. The only reason was because I was following in the footsteps of my last tax preparer and doing it the way he did it. I felt like I was more or less bound to stay on that same path.

Anyway, I guess there's something to be said for making so little money. I feel like celebrating!


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## byline (Dec 5, 2011)

Ah, I was feeling celebratory too soon. This says I should file because I'm married, filing separately, so the minimum threshold is $5.


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## byline (Dec 5, 2011)

The IRS's chart on page 10 agrees with the article I linked above.


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## andie17 (Feb 21, 2017)

I agree with Bev, you should not need to file the 1116 forms; however if you paid foreign tax you could complete the 1116 and carryover the unused foreign tax for a future year. I have been doing this for several years for a couple of family members, but as Caadian tax is almost always going to be higher than US tax, there will likely never be a need for this carryover anyway.

To me it is much simpler and likely more accurate to use a good tax software. I have been using Taxact for many years, and it used to be be very reasonably priced, but has increased in price significantly over the years, particularly for people that have a couple of investments and/or some small amount of self-employed income. If you qualify (and it appears that you do), you can go to the IRS website and look at freefile options and select Taxact, which will take you to their website.

Last year I was able to "adjust" the amount of SE tax owing to zero, and still file my return online, but if you find this too cumbersome, you can simply "override" the tax owing to zero and then print the return and mail it ( you cannot file online with an override).

https://www.taxact.com/support/2120...ecurity-agreement-expatriate?hideLayout=False

Regardless of whether you adjust or override the SE tax or fill out your return manually, it is possible the IRS may request more information or send you a tax owing notification, which will necessitate you sending a "certificate of coverage" obtained from CRA.


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## byline (Dec 5, 2011)

According to the IRS's chart, which I linked above, I do have to file because I am married, filing separately, and the minimum threshold for that is $5.

As for using TaxAct, I posted about this in another thread: When I first started doing my tax returns on my own, rather than through paid tax preparers, I tried TaxAct. But their result was that I owed self-employment tax for my writing business, even though the U.S. has a treaty agreement with Canada, and I had never owed U.S. taxes before (I owe, and pay, Canadian taxes on that business). A customer service rep informed me that there was a way to correct it, but it was more complicated than it was worth to make that go away on their forms, so I ended up filling out the forms myself.

That Canadian Exemption From Self-Employment Tax statement I mentioned earlier has been included with my U.S. tax returns starting with 2008 and all subsequent returns, and the IRS has never sent me any kind of notification of tax owing. So as far as I can tell, it works. Or the amount I make may be so minimal that it doesn't warrant their attention.


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## byline (Dec 5, 2011)

OK, now I have another question: On the old Form 1040, I reported my business income on Line 12. I reported it separately from my wages (Line 7) and interest income (Line 8a).

On the new Form 1040, there's still a line for taxable interest, but I don't see a line to report business income. Do I total it with my wages on Line 1, and then also report it separately on Schedule C? Or do I not report it all on Form 1040? The latter choice seems odd, since my previous 1040s all reported my total income for that tax year.


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## Moulard (Feb 3, 2017)

For what its worth it is quite common to file both the Form 2555 and 1116. Two common scenarios include...

1) you want to exclude earned income, and take a tax credit for foreign taxes paid on passive income which cannot be excluded on Form 2555.

2) Your earned income is above the limits of Form 2555 and you want to take foreign tax credits for that portion of your income that was above that limit.

Typically (but, as Bev will always point out, not always), if foreign tax rates are higher that US rates, the accumulation of tax credits can be better from a tax planning perspective.


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## Bevdeforges (Nov 16, 2007)

Sorry, I didn't see that you were married, filing separately. That does mean that you have to file. Used to be the threshold was something like $400, but I saw that $5 threshold this year. I really wonder what's going on with that.

On your other question, if you're going to file a Schedule C, you'd put the net income on Schedule 1. (Oh, those new numbered schedules!)

But, depending on what your gross revenues are from your freelance business, you could simply report it as salary income if it all fits in under the allowance on the Foreign Earned Income Exclusion form. As long as your freelance income before any deductions fits in under the $100K or so allowance, just lump it all in together as "salary income" on both the 1040 and also on the form 2555. If you're excluding it all anyhow, there's no real need for them to know what your expenses were - and you have the statement about your coverage under the Canadian social security system.


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## andie17 (Feb 21, 2017)

My point was you could use tax software to simplify so you would not need to worry about which line something needs to transfer to, etc. I have generally used the desktop version of Taxact, which provides opportunity for more manual control, such as double clicking an amount on a form and changing (overriding) that amount --very quick and simple. Then you could print the return and send it in as before.

I see that the online version does not provide such manual control to override anything, but as you were told by a Taxact rep and as per the link I included previously, there is a way to adjust the tax to zero. The procedure is not quite as obvious as the instructions from Taxact, but once found, it is very simple, and if you are interested, I will provide that info.


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## byline (Dec 5, 2011)

Thanks, Bev! I have never claimed business expenses here in Canada because they are so minimal. My husband did the calculations years ago and found that it was a whole lotta trouble resulting in no tax credit. So I stopped doing that.

The only freelance writing I have done (and this has been going on for years now) is for a weekly newspaper. They actually issue me a T4A slip showing my income for the year. It's straight income, no deductions. So naturally, in Canada, I report that separately from my wages (for which I'm issued a T4 slip), from which all the deductions are taken by my employer.

Back when Form 1040 was longer, and I reported my business income separately, that naturally put Schedule C into play. But here's the thing: My total income, from both wages and business income, is only $8,091 USD ($5,463 in part-time wages plus $2,628 in income from my writing business). It would make life so much simpler if, per your recommendation, I simply enter that total on Line 1 and skip Schedule C altogether.


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## byline (Dec 5, 2011)

andie17 said:


> The procedure is not quite as obvious as the instructions from Taxact, but once found, it is very simple, and if you are interested, I will provide that info.


Thanks! I have an e-mail from TaxAct, back when I was going through this in 2016, explaining how to do it. At the time, it seemed more convoluted than it was worth.

Honestly, if I can do as Bev recommends and simply report my total income on Line 1 of Form 1040, that really is the simplest approach, by far. No more worrying about what goes where ... especially for such a meager income of $8,091 USD ($5,463 in part-time wages plus $2,628 in income from my writing business).


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## TheDualRedpen (May 9, 2020)

I'm just popping by to say thank you to Byline and Bevdesforges for this thread. It is one of the best helps I've found because Byline's situation is so similar to my own. After spending almost all of my husband's tax return last year getting me into compliance, I vowed to do my return this year on my own. I'm not one usually given to conspiracy theories, but these forms and instructions are so convoluted worded one has to wonder if they aren't worded to drive us into the arms of high priced accountants every year. And I say that as a self-employed bookkeeper who loves accounting!

Anyway, I don't make enough (yet) to pay taxes here in Canada, either, so I'm not going to fill out two different versions of Form 1116 just because the accountant did. They both obviously zeroed out. How silly and such a waste of time and paper. Thank you for this insight!


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