What is Foreign Tax Credit Carryover?

Hey,

My accountant has done my taxes for the last few years.

I'm not 100% sure about what the Foreign Tax Credit Carryover means.

I've accumulated some from previous years. Does this mean, if I owe US tax on Foreign earnings, that I can use this accumulated amount against it?

Thanks

I think you just file form 1116 with your 1040 (or 1040NR) and claim a credit against the US taxes you are paying for the year, subject to some limits.

Foreign taxes are taxes you have paid to foreign governments and even though I have not yet moved back to the UK I have had foreign tax credits to claim due to the international Vanguard funds I own in the USA.

Other more knowledgeable folks will be along to give a more detailed answer (I hope) as I'd like to know the answer to this question as well.

https://www.irs.gov/publications/p514/ar02.html#en_US_2015_publink1000224664

Form 1116

You must file a Form 1116 with your U.S. income tax return, Form 1040 or Form 1040NR. You must file a separate Form 1116 for each of the following categories of income for which you claim a foreign tax credit.

Passive category income.

General category income.

Section 901(j) income.

Income re-sourced by treaty.

Lump-sum distributions.

A Form 1116 consists of four parts.

Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above). Enter the gross amounts of your foreign or possession source income in the separate limit category for which you are completing the form. Do not include income you excluded on Form 2555 or Form 2555-EZ. From these, subtract the deductions that are definitely related to the separate limit income, and a ratable share of the deductions not definitely related to that income. If, in a separate limit category, you received income from more than one foreign country or U.S. possession, complete a separate column for each. You do not need to report income passed through from a regulated investment company (RIC) on a country-by-country basis. Aggregate all income passed through from a RIC in a single column in Part I. Enter “RIC” on line g of Part I.

Part II—Foreign Taxes Paid or Accrued. This part shows the foreign taxes you paid or accrued on the income in the separate limit category in foreign currency and U.S. dollars. If you paid (or accrued) foreign tax to more than one foreign country or U.S. possession, complete a separate line for each. If you receive income passed through from a RIC, aggregate all foreign taxes paid or accrued on that income on a single line in Part II.

Part III—Figuring the Credit. You use this part to figure the foreign tax credit that is allowable.

Part IV—Summary of Credits From Separate Parts III. You use this part on one Form 1116 (the one with the largest amount entered on line 22) to summarize the foreign tax credits figured on separate Forms 1116.

FTC carryover is the excess of FTC that you haven't been able to use on your tax returns - usually because the amount that you are able to claim on your return will be restricted to the amount of tax that you would have paid in the US on the same income - as the UK tax rate is higher than the US (on a basic level at least), you'll often have an excess.   This excess can be carried over for up to 10 years to use against future foreign income.

Of course, if you are in the UK for future years, you'll probably not be able to use it - as you'll continue to pay more UK tax and therefore continue to gather more FTC carryover. It could come in useful when you're back in the US if you have foreign income going forwards (for example, if the FTC carryover is shown on your 'General Limitation' 1116 form, then you may be able to use some of it to offset your US liability on income relating to any non-US workdays).