How to deal with FTC carryover

I work in the UK, and so I only have UK income to report on my US taxes. This involves filling form 1116. Because the UK tax on my income is greater than US tax, I always have excess credit to carryover to the next year.

I'm not totally clear on how carryover is supposed to work. I read that there is a statute of limitations for how many years back you can take excess credits and apply it to the current year.

So my question is whether I am allowed to report the carryover from last year on the current year's form 1116, even if that carryover will not be used due to the excess credit within the current year itself. Presumably this unused carryover would then be added into the current year's excess credit and applied as carryover to the next year? But then that means you could essentially build a stockpile of unused credits that grows every year and avoids the expiration date imposed by the statute of limitations.

Am I misunderstanding something or is this the way carryover should be handled?

So my question is whether I am allowed to report the carryover from last year on the current year's form 1116, even if that carryover will not be used due to the excess credit within the current year itself.

No, you are not allowed to do that.

The excess credits are good for 10 years. They remain separate yearly amounts throughout that 10 years.

If you need to use the excess credits, there is a dedicated line (line 10 on page 2 of 1116) where they may be included. If you need to use more than one year of past excess credits, you may do so, and combine them with other years of excess credits to make up the shortfall of the current year. Note that a detailed calculation explaining how you arrived at the total of excess credits used is required. There is a prescribed format (somewhere) for the detailed explanation. It will include such as the total amount of foreign tax paid applicable to the basket you are using them for, for that past year (and you may only use past credits from that type of basket), the limitation, the amount of excess credits for that year, how many excess credits are being used to apply to the current year you're considering (you don't have to use all), and what the remainder will be. (There may be more, I don't have past records to hand).

You then have to interpret whether the instructions require filing a 1040X for the year from which you have used the excess credits.

Hi theOAP, thanks very much for your detailed answer and for setting me straight.

Note that a detailed calculation explaining how you arrived at the total of excess credits used is required. There is a prescribed format (somewhere) for the detailed explanation.

Regarding this, could you point me at an example of the preferred format? I've had a look through the IRS website, and I found a couple example tables here:

https://www.irs.gov/publications/p514/ar02.html#en_US_2014_publink1000224640

However they seem somewhat simplified in comparison to the detailed table you are describing.

https://www.irs.gov/publications/p514/ar02.html#en_US_2014_publink1000224640

However they seem somewhat simplified in comparison to the detailed table you are describing.

That's it, and that will probably do it (example 2). It's been 9 years since I did this and the chart was much more complicated then, but gave the same results. Personally, I would add 2 additional columns - the first, amount carried forward to 2015 (if that's the year you need the credits for), and the second, the resulting balance for the year where the excess came from. But that's just me being pedantic.

Obviously, the first year you take excess credits from is the earliest year in which you have excess credits (in the example, 2010) and work forward from there. That way, you retain later years along with their 10 year limit to use in the future.

It is a bit simplistic because you'd have to know if the tax claimed was before or after the FTC scaledown for the foreign earned income exclusion - keep separate tables for each basket - and separate tables again for FTC AMT carryovers which could be different than for regular tax carryovers...