Use Simplified election to compute AMT Foreign Tax Credit for US tax return?

Hello:  I am a US citizen living in the UK, and I have income from my work at a UK university (beginning in 2018).  I am currently filing my US tax returns using Turbotax, and it is asking me to decide whether to elect the simplified limitation election to figure my AMT Foreign Tax Credit (and the election I make this year will hold for future years, hence my post).

For 2018 it probably won’t make a difference since my income is likely too low to attract AMT.  The question is what election I should make that is likely to help me in the future, where the most likely scenario is as follows:  My main (maybe even only) source of foreign income in the future would be wages from my work in the UK, not investment income (and hopefully my income would be quite a bit higher than now).  I may also have occasional part-time work in the US.  Given this likely future scenario for me, does anyone have insight into whether the simplified or other method is likely to be better for me?

I’ve read the IRS instructions and searched this forum but I’m not able to figure out what’s likely to be better in my situation.  Could anyone tell me what the pros and cons are of the two options especially given my likely future scenario?  Thank you.

I must stress, the following is a non-professional opinion.

Form 1116 can be a very complicated form given the right individual circumstances. Form 1116AMT will multiply that complication (for simplified line 17 of 1116AMT matches line 17 of form 1040, etc.). For those reasons, I will not labour on the pros and cons of  'why one way may be the best way''.

What are your long term residency plans for living abroad?

For long term planning, do not use the simplified method.

For short term planning (1 or 2 years living abroad), try both ways within TurboTax to see which gives you the best result. You are probably correct in your assessment of AMT liability, in which case there is no need to use the simplified method.

Thank you, theOAP - I appreciate your help and your candor that you’re not a professional.  While I’m new to this forum, I’ve used forums extensively so will not take anything that is said as gospel (although the combined wisdom and varying perspectives of forum contributors in a good forum can come close!). 

In response to your question, I’m likely to be in the UK for 5+ years. 

Even if it’s too difficult to apply the issue to my specific case, I’m hoping to understand the general implications better.  For instance, would not using the simplified version give me the flexibility to carry forward unused FTCs?  Is that the reason to avoid the simplified method for LT planning, or is there some other reason?  I’d also appreciate hearing any other ways in which the election could make a difference.

Although I’m a fan of simplicity in general, I’m not too concerned about the computational complexity of not using the simplified method, as long as TurboTax can handle it.

Before we start this, could we please confirm some basics. I'm not doubting your comprehension of 6251 and 1116, but just want to make sure we both understand how this all works.

In response to your question, I’m likely to be in the UK for 5+ years.
I have income from my work at a UK university. 
My main (maybe even only) source of foreign income in the future would be wages from my work in the UK, not investment income. I may also have occasional part-time work in the US.

I do not use TurboTax and have no idea why TurboTax has decided you should file 6251 and a 1116AMT. If you have no exceptional circumstances which would require 6251, the reason could be an income which exceeds the AMT threshold for your filing status. So, what has brought about the TurboTax determination? What sources of income do you have which have triggered AMT, and what sources of income will trigger AMT in the future? One common example is the exercise of stock options.

Even if it’s too difficult to apply the issue to my specific case, I’m hoping to understand the general implications better.  For instance, would not using the simplified version give me the flexibility to carry forward unused FTCs?  Is that the reason to avoid the simplified method for LT planning, or is there some other reason?

I'll assume you are aware that the way a 1040 1116 is computed is substantially different from the way the 1116AMT is computed.

The Simplified Limitation Election for 1116AMT is related to line 8 of 6251 and line 17 of 1116AMT. It requires line 17 of the 1116AMT to arbitrarily duplicate the amount used on the 1040 1116 line 17, and not use a figure for line 17 as computed for 1116AMT. In simple terms (for my benefit) use of the 1040 1116 figure allows an alternative if, due to normal 1116AMT calculations, those AMT calculations result in a 'Zero' amount on Line 17, 1116AMT (or a less advantageous amount), and therefore, no foreign tax credit for that basket (or results in a tax credit to avoid or reduce a final AMT liability).

As you've pointed out, NOT using the simplified method allows the use of carryover/carry back excess credits.

I've filed 1116AMT for a number of years. On one occasion, I did use (need) the carry forward of excess credits from a number of prior years. It was a great benefit to be able to do so. In all other years, the normal calculation of 6251 and 1116AMT has never resulted in any AMT liability - BUT, I had no sources of income which triggered the need for an AMT calculation other than an income that exceeded the AMT threshold.

OR - are you positive TT is not asking (via bad wording) at this point whether you want to take a deduction (Schedule A) instead of using FTCs? Using a deduction instead of the credits is sometimes referred to as a 'simplified method'. (And taking the deduction is also not desirable for someone resident abroad.)

Thanks for taking the time to provide this very helpful post, theOAP.

To clarify:  The TurboTax question was not about foreign tax deduction versus FTC.  The question was clearly worded and asked whether I wanted the Simplified limitation election for the AMTFTC (and warned about the one-time nature of the election).

Also to clarify, TurboTax says that I do not owe AMT for 2018.  I do not have any AMT tax preference items such as stock options - the only item that would get added back for AMT income is the single standard deduction.  My current AMT Income is below the single AMT exemption amount of $70K, so it’s clear that I do not owe AMT for 2018.  My (UK) income may go up in a few years beyond the exemption amount.

Perhaps what’s going on is that TurboTax, in order to figure out whether or not I owed AMT, had to pick either the normal or simplified method to complete the AMT calculation, and hence I was asked the question.  And upon further reflection, it appears that since I don’t have to file a 6251 with my 2018 tax return, there is no need for me to make an official choice with the IRS on Simplified limitation election or not (even if one had to be assumed for AMT calculation purposes).  There is an older thread on the Bogleheads forum that makes a similar point, in the post by grabiner (you have to cut and paste the link): https://www.bogleheads.org/forum/viewtopic.php?p=2417916#p2417916 [nofollow]   Do you agree with this line of thinking?  If so, it means that I can kick this particular can down the road until I actually have to file a 6251.  And would I be correct in assuming that the first year to make the election on whether to take the simplified method or not is the first year I’d have to FILE a 6251, even if there was no AMT payment due?

At that point, if there is an AMT due, I can certainly check whether the normal or simplified method would yield a lower AMT.  But it’s more likely that I’d have to file a 6251 with no AMT actually due (at least assuming the current TCJA provisions for AMT continue).  In that case, I see a benefit of not doing the simplified election, due to the possibility of FTC carryovers.  But I do not see any clear countervailing benefit to the simplified method.   Am I missing anything here?

Finally, I noticed that you file 1116AMT even though you are not subject to AMT.  Why is that, and would I need to do the same if I elect the non-simplified method after I first file a 6251? 

Thanks again for your help.

Also to clarify, TurboTax says that I do not owe AMT for 2018.  I do not have any AMT tax preference items such as stock options - the only item that would get added back for AMT income is the single standard deduction.  My current AMT Income is below the single AMT exemption amount of $70K, so it’s clear that I do not owe AMT for 2018.  My (UK) income may go up in a few years beyond the exemption amount.
Perhaps what’s going on is that TurboTax, in order to figure out whether or not I owed AMT, had to pick either the normal or simplified method to complete the AMT calculation, and hence I was asked the question.

I find this situation with TT most curious. As you have surmised, perhaps the new standard deductions give a difference, and subsequent division, between line 17 and line 18 of 1116AMT results in a less than favourable outcome for the normally computed limitation. Still, it's most curious the question is asked unless that less favourable situation arose, which in your case, it appears it would not.

And upon further reflection, it appears that since I don’t have to file a 6251 with my 2018 tax return, there is no need for me to make an official choice with the IRS on Simplified limitation election or not (even if one had to be assumed for AMT calculation purposes)........ If so, it means that I can kick this particular can down the road until I actually have to file a 6251.  And would I be correct in assuming that the first year to make the election on whether to take the simplified method or not is the first year I’d have to FILE a 6251, even if there was no AMT payment due?

I would see no reason to make a choice regarding 'Simplified' prior to a situation where a 6251 was required. On a personal basis, unless for some reason I needed the net foreign source taxable income to align, or for some other reason (see post above),  between 1040 1116 and 1116AMT, I would never select the 'Simplified' election. Perhaps the professionals would know. For someone with long term foreign source income, the carryover/carry back facility is far too valuable (more on this later).

There is an older thread on the Bogleheads forum that makes a similar point, in the post by grabiner (you have to cut and paste the link): https://www.bogleheads.org/forum/viewtopic.php?p=2417916#p2417916  Do you agree with this line of thinking?

I've looked at the comment from grabiner and generally agree, but beware: Bogleheads are most concerned with US based mutual funds (Vanguard) and for many, the foreign investments that are taxed abroad within the Vanguard wrapper. US expats with no prior Vanguard account before residing abroad, no US bank account, and no US address will not have mutual funds (PFICs), so are coming from a different circumstance; mainly, a return composed of predominantly foreign sourced income.
 

At that point, if there is an AMT due, I can certainly check whether the normal or simplified method would yield a lower AMT.  But it’s more likely that I’d have to file a 6251 with no AMT actually due (at least assuming the current TCJA provisions for AMT continue).  In that case, I see a benefit of not doing the simplified election, due to the possibility of FTC carryovers.  But I do not see any clear countervailing benefit to the simplified method.   Am I missing anything here?

Are we both missing something here? I have no knowledge of any reason to elect the 'Simplified' method for the average punter. As I said above, perhaps the professionals do know why.

Finally, I noticed that you file 1116AMT even though you are not subject to AMT.  Why is that, and would I need to do the same if I elect the non-simplified method after I first file a 6251?

I'm a survivor of the 2003 (or was it 2004?) AMT witch hunt. Obscure AMT regulations that had been disregarded for years were suddenly enforced. One was the situation where an US expat with income above the AMT threshold, and who used the passive basket for FTC, automatically owed AMT tax. There was a provision in the 1116AMT passive form that only allowed 90% of the computed credit. Thus everyone in that situation that year owed additional tax on the disallowed 10%. Everyone. American Citizens Abroad campaigned against the regulation, and as a result, it was dropped the following year.

Fast forward to TCJA and the repatriation tax.

After a long time abroad, one learns Congress can drop a tax bomb on US expats at any time. Therefore, as a CYA exercise, one takes a proactive defensive position wherever possible. Hence, why I continue to file 6251 and 1116AMT if my income is above the AMT threshold.

Thank you for your reply, theOAP.

I find this situation with TT most curious.

The TurboTax situation is indeed curious.  Grabiner’s additional take on the situation is “Your tax software has to ask because it may not know whether you will be affected by the AMT at the time it asks, and it needs to do the computations both ways.”  Without getting too much into the TT weeds, I did contact a CPA at TT via their TurboTax Live feature, and his suggestion was to (1) see if I can e-file without answering the Simplified election question, and (2) if the answer is No, then delete the 6251 Form (since TT has already established that I don’t need it).  Not conceptually satisfying, but I’m ok going with a workaround.

I would see no reason to make a choice regarding 'Simplified' prior to a situation where a 6251 was required. On a personal basis, unless for some reason I needed the net foreign source taxable income to align, or for some other reason (see post above),  between 1040 1116 and 1116AMT, I would never select the 'Simplified' election. Perhaps the professionals would know. For someone with long term foreign source income, the carryover/carry back facility is far too valuable (more on this later).
........
Are we both missing something here?  I have no knowledge of any reason to elect the 'Simplified' method for the average punter. As I said above, perhaps the professionals do know why.

For my projected scenario - mainly UK wage income, some US wage income, and almost all income is General Category - I looked at both methods.  It turns out that Line 19 of both AMT Form 1116 and regular Form 1116 result in the same ratio (based on my individual scenario).  I would of course do this analysis at the actual time based on my situation then, but it’s interesting that there was no difference in the two methods for my (admittedly simple) scenario.  Which brings us back to the conclusion that the non-simplified method is likely to be better for us since it preserves the additional flexibility of FTC carryforwards for AMT. 

It would be interesting to hear if anyone else has encountered a situation where the simplified election has worked out better for them.

Bogleheads are most concerned with US based mutual funds (Vanguard) and for many, the foreign investments that are taxed abroad within the Vanguard wrapper. US expats with no prior Vanguard account before residing abroad, no US bank account, and no US address will not have mutual funds (PFICs), so are coming from a different circumstance; mainly, a return composed of predominantly foreign sourced income.

You are correct about the nature of the Bogleheads forum.  In fact I’d originally posted in that forum and was directed here by a poster TedSwippet who is very knowledgeable about UK-US financial issues.

Sorry to hear about your 2003 episode.  It appears that being an expat is not for the fainthearted.

..........almost all income is General Category - I looked at both methods.  It turns out that Line 19 of both AMT Form 1116 and regular Form 1116 result in the same ratio (based on my individual scenario).

If most income is predominately foreign sourced, and, most of the income is only in one basket, then the result for line 19 may well be '1'. For line 19, '1' is the default result whenever line 18 (the denominator in the fraction) is larger smaller than line 17 (the numerator in the fraction). If your result for line 19 is less than 1 (0.xxxx), and line 19 of both forms is the same result, then welcome to the intricacies of form 1116!

Good luck with your return. I wish more would make the effort you are making to understand the consequences of foreign sourced income, rather than simply blindly accepting whatever the tax software throws at them.

Reason for Edit: I can't tell my overs from my unders