# Form 1116



## byline

Question: I'm a U.S. citizen who has lived in Canada for many years now. In previous years, I have had my U.S. tax returns prepared for me by professional tax preparers. However, the cost has gotten too steep, especially for someone with my very small income.

I started out with TaxAct, but after running into a roadblock there, now I am manually filling out my 2015 U.S. tax return. My income situation is that I can enter the Standard Deduction, which is $6,300 for someone who is married, filing separately. On Line 48 (foreign tax credit) of Form 1040, it says to attach Form 1116 if required, but I don't see any explanation for that requirement.

Last year my tax preparer did prepare four different versions of Form 1116 for me to file: general (for my earned income), passive (for interest on my savings account), and then general and passive again under Alternative Minimum Tax.

My situation is fairly simple: I have $5,300 USD in income from my part-time job, $2,239 USD in income from my writing business, and $107 USD in interest from my savings account. I know I need to file Schedule B (interest) and Schedule C (sole proprietorship), plus Form 8965 (health coverage exemptions). Since I qualify for the Standard Deduction, am I required to file Form 1116?

NOTE: I see on the instruction form for Form 1116 that a filer qualifies if "your total creditable foreign taxes are not more than $300." After filing my 2015 Canadian return, my balance owing is $256 USD. It sounds to me like I don't have to file Form 1116.


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## byline

A bit more info: I'm starting to think that my tax preparer from last year unnecessarily filled out the four versions of Form 1116. On my 2014 Form 1040, for Line 48 (foreign tax credit) he entered nothing. And yet there are those four different versions of Form 1116 attached.

So the only conclusion I can draw is that he inputted my basic income information, which is quite similar to this year's, and for whatever reason (maybe because I have a non-U.S. address) his software a kicked out the four versions of Form 1116. If they were required, then surely there would be an entry by Line 48. But there's not.

I'm hoping someone with a lot more experience with this can confirm whether or not I need to file Form 1116 this year. I don't think so ... but I'd like to feel more confident about that.


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## BBCWatcher

Read the instructions again for IRS Form 1040 Line 48 (2015 edition). They say you don't have to use Form 1116 if *all* of the following conditions apply. (They don't all apply in your case.)

You are not required to take a Foreign Tax Credit for your passive category income. Zero is allowed on Line 48. However, it would probably be in your interest to do so. You won't know until you take a trip through that form.


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## byline

BBCWatcher said:


> Read the instructions again for IRS Form 1040 Line 48 (2015 edition). They say you don't have to use Form 1116 if *all* of the following conditions apply. (They don't all apply in your case.)
> 
> You are not required to take a Foreign Tax Credit for your passive category income. Zero is allowed on Line 48. However, it would probably be in your interest to do so. You won't know until you take a trip through that form.


Yes, I see now that it says all conditions must apply; not just one or more. And, looking back at all my tax returns going back to 2010, they all included Form 1116 (except for, I just now noticed, 2013).

On last year's tax return, nothing was noted on Line 48. Not even 0. Dunno why. Going back to my 2010, 2011 and 2012 tax returns (prepared by a different tax preparer), he entered NONE on that line.

Thanks for your reply! It helps, though I can't say I'm thrilled at the prospect of filling out more forms ... especially this one, which seems the most byzantine of them all. The two Foreign Tax Credit forms (general and passive) make sense, more or less. But then he also did a second set of Alternative Minimum Tax forms, with different numbers, which I find baffling.


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## Stargazer

I tried to do 1116 by hand once and got so frustrated. Turbotax can handle it well and will also tell you if you have any carryover foreign tax credits.


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## byline

Stargazer said:


> I tried to do 1116 by hand once and got so frustrated. Turbotax can handle it well and will also tell you if you have any carryover foreign tax credits.


I tried doing this through TaxAct, but right now it insists I owe a self-employment tax. I refuse to submit that form as long as that's there, because I know I don't owe it. I'm reluctant to open another can of worms with different software. However, if I find that my wee little mind can't work out what to me is very cryptic language, then I may go the Turbotax route. Thanks!


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## Stargazer

byline said:


> I tried doing this through TaxAct, but right now it insists I owe a self-employment tax. I refuse to submit that form as long as that's there, because I know I don't owe it. I'm reluctant to open another can of worms with different software. However, if I find that my wee little mind can't work out what to me is very cryptic language, then I may go the Turbotax route. Thanks!


If you're paying taxes to Canada on self-employment income (CPP, etc) then the treaty exempts you from having to pay it to the US. You might have to get a letter from the CRA though.


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## byline

Stargazer said:


> If you're paying taxes to Canada on self-employment income (CPP, etc) then the treaty exempts you from having to pay it to the US. You might have to get a letter from the CRA though.


I am paying CPP. There's no letter from the CRA with last year's tax return, just this Statement 3, Canadian Exemption From Self-Employment Tax: "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 Rv. Proc. 84-54 and 80-56."

Would a photocopy of my payment statement from CRA (which will probably be arriving soon) suffice?


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## Stargazer

byline said:


> I am paying CPP. There's no letter from the CRA with last year's tax return, just this Statement 3, Canadian Exemption From Self-Employment Tax: "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 Rv. Proc. 84-54 and 80-56."
> 
> Would a photocopy of my payment statement from CRA (which will probably be arriving soon) suffice?


Well I don't know. If they didn't hassle you last year, maybe just include the same statement? If they want more info, they can always ask, and I know you can get an official letter from the CRA if it becomes necessary.


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## byline

Stargazer said:


> Well I don't know. If they didn't hassle you last year, maybe just include the same statement? If they want more info, they can always ask, and I know you can get an official letter from the CRA if it becomes necessary.


Good point. Thanks!


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## byline

Can anyone explain, in simple language, what to do on Lines 16 and 17 of this form? I am completely baffled. I have absolutely no clue, reading the bewildering instructions, how to calculate this adjustment for my general income. The amount on Line 15 is not 0 or a loss. So what do I do?

On my 2014 return the amount on Line 15 was 1063, and my tax preparer calculated the adjustment as -552, but I have no idea how he came up with that figure.


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## Stargazer

byline said:


> Can anyone explain, in simple language, what to do on Lines 16 and 17 of this form? I am completely baffled. I have absolutely no clue, reading the bewildering instructions, how to calculate this adjustment for my general income. The amount on Line 15 is not 0 or a loss. So what do I do?
> 
> On my 2014 return the amount on Line 15 was 1063, and my tax preparer calculated the adjustment as -552, but I have no idea how he came up with that figure.


I don't know what you should put, but on my last 1116 i have nothing on line 16 and so 17 is the same as 15.


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## Stargazer

Also what is your reason for doing 1116 rather than 2555 (foreign earned income exclusion)? I believe you may be stuck with doing it this way for a while because it can be hard to switch back once you start, per IRS rules.


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## byline

Stargazer said:


> I don't know what you should put, but on my last 1116 i have nothing on line 16 and so 17 is the same as 15.


That's true for me on three of the four Forms 1116 (general, passive, and then general and passive Alternate Minimum Tax) prepared for me in 2014. But for this first one having to do with the general income category, there is that adjustment made.

I guess I will have to contact my tax preparer (who, by the way, didn't sound overly thrilled to talk to me the other day; I was asking him how he determined certain calculations, but he interpreted that as me asking him to tell me how to do my taxes).


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## byline

Stargazer said:


> Also what is your reason for doing 1116 rather than 2555 (foreign earned income exclusion)? I believe you may be stuck with doing it this way for a while because it can be hard to switch back once you start, per IRS rules.


All I can tell you is the for the U.S. tax returns I have dating back to 2010, all of which were prepared for me by professional tax preparers, they all have Form 1116. I have wages, plus my own writing business, plus interest from a savings account.


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## Stargazer

byline said:


> That's true for me on three of the four Forms 1116 (general, passive, and then general and passive Alternate Minimum Tax) prepared for me in 2014. But for this first one having to do with the general income category, there is that adjustment made.
> 
> I guess I will have to contact my tax preparer (who, by the way, didn't sound overly thrilled to talk to me the other day; I was asking him how he determined certain calculations, but he interpreted that as me asking him to tell me how to do my taxes).


You can get good free advice at the Serbinski tax forums. Or maybe offer to pay your former tax preparer for a tutorial on how he did your taxes.


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## Stargazer

I was reading your post again. You have NO Canadian income? Then why do you need toddo 1116 or 2555 at all? Did you re-source it to Canada?


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## byline

Stargazer said:


> You can get good free advice at the Serbinski tax forums. Or maybe offer to pay your former tax preparer for a tutorial on how he did your taxes.


Thanks, I may try those forums. I have e-mailed the question to my tax preparer, but he is in a completely different province, so I doubt that he'd be willing to go for a tutorial, paid or otherwise.



Stargazer said:


> I was reading your post again. You have NO Canadian income? Then why do you need toddo 1116 or 2555 at all? Did you re-source it to Canada?


All of my income is Canadian. In my initial post I converted all of the Canadian amounts into U.S. dollars because we are required to convert income to U.S. dollars when reporting it on this form.


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## Stargazer

byline said:


> Thanks, I may try those forums. I have e-mailed the question to my tax preparer, but he is in a completely different province, so I doubt that he'd be willing to go for a tutorial, paid or otherwise.
> 
> 
> 
> All of my income is Canadian. In my initial post I converted all of the Canadian amounts into U.S. dollars because we are required to convert income to U.S. dollars when reporting it on this form.


Got it. Well that tax guy many not be the best anyway, it is funny to me he prepared AMT forms.Turbotax generates AMT foreign tax carryovers for me but no 1116 forms for AMT. 

Ask in the Serbinski forums. There is a very knowledgeable poster there called nelsona. Can be grouchy on occasion but really knows his stuff.


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## byline

Stargazer said:


> Got it. Well that tax guy many not be the best anyway, it is funny to me he prepared AMT forms.Turbotax generates AMT foreign tax carryovers for me but no 1116 forms for AMT.


This is part of why I am so confused. In groupings of years, my tax returns have been done differently ... mostly, but not always, because different people are doing them. In 2013, the same tax preparer who did my 2014 return didn't include Form 1116 at all.

In years 2008-2010, when I was catching up to my newly discovered situation with U.S. tax reporting, my tax preparer (someone totally different, and far more expensive) completed both Form 1116 and Form 2555 for all three of those years. I have no idea why, and I was so gobsmacked at the time that I didn't ask. I was just relieved to have someone who could help me get caught up.

In 2011 and 2012, I had a different tax preparer through H&R Block. Much more reasonably priced (but then she's the one who insisted that I, and all her other clients with TSFAs, had to fill out Form 3520, so that's when that headache started for me). Anyway, in 2011 and 2012, she prepared Form 1116 for me in the general income category only (not passive), and she did two versions, the second being Alternative Minimum Tax. Form 2555 wasn't included at all.

In 2013 and 2014, I had yet another tax preparer through H&R Block because my previous one retired. In my 2013 return, I don't see any Form 1116 at all. And then we come to the 2014 return, which has the four different versions of Form 1116. Oddly enough, the 2014 Form 1116 (for general category income) is the only one of all of these that has that adjustment on Line 16. All the others from the previous years carry through the same figure from above, with no adjustment on Line 16.

As I noted before, my financial situation has changed very little over the years. In 2012 I started my part-time job, so that changed things up a bit. But during this entire time I have had my freelance writing business, and for most of that time I have had my savings account. My first three catch-up returns are consistent with one another, as are my 2011 and 2012 returns. But then 2013 and 2014 are markedly different from their predecessors, and from each other. I don't have a clear sense of why they are so different, other than they came from a different tax preparer.



Stargazer said:


> Ask in the Serbinski forums. There is a very knowledgeable poster there called nelsona. Can be grouchy on occasion but really knows his stuff.


Thanks, I will check it out. I'm fine with grouchy, as long as the advice is sound. The only thing I ask is, use small words, big pictures. And please don't get on my case because I don't have an accounting mind. Some of us just are not equipped that way.


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## Stargazer

Were these tax preparers cross-border experts?

Do you still have the TFSA?


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## BBCWatcher

To answer the question briefly, Line 17 should be self explanatory since it's just math (addition). Line 16, if it's not zero, would be a negative number to adjust for a variety of losses, such as capital losses. If you didn't have any of the losses described in excrutiating detail in the instructions then Line 16 should be zero. Blank in this case also means zero.


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## byline

Stargazer said:


> Were these tax preparers cross-border experts?


They all claim to be. Of all of them, I'd say my first tax preparer was the closest. But I live in a very small Canadian province, so expertise of this kind (in any field) is somewhat hard to come by.



Stargazer said:


> Do you still have the TFSA?


No. After a couple of years of unhappily dealing with Form 3520, I emptied it out and closed the account.



BBCWatcher said:


> To answer the question briefly, Line 17 should be self explanatory since it's just math (addition). Line 16, if it's not zero, would be a negative number to adjust for a variety of losses, such as capital losses. If you didn't have any of the losses described in excrutiating detail in the instructions then Line 16 should be zero. Blank in this case also means zero.


Thanks for this. That's what I thought (though, as you note, I had trouble wading through all the excruciating detail of the instructions, so I wasn't certain). I don't have any losses, so I have no idea how he came up with that adjustment. I will leave that line blank. Live and learn!


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