Form 1116 Carryover only?

[tbamaze]

Client is an expat living in the UK with foreign income of $27k and foreign taxes withheld of $3k.  Also has $11k of 1099 NEC income made from the US.

Form 1116 is only calculating a carryforward credit for all foreign taxes paid of $3k no credit for 2023. What could be the cause of this?  Could it be because there was just 1099 income in the US?  Client owes $800 for federal (I assume because did pay taxes on 1099 NEC income).

Would like to be able to fully explain to client why foreign credit did nothing for them this year.

[sjrcpa]

Is the UK foreign income on the return?

Or, did you use the foreign earned income exclusion to exclude it?

[tbamaze]

Only entered the foreign income on form 1116.  So 1040 shows nothing related to foreign earned income or foreign taxes paid.

Did not consider entering as foreign earned income exclusion (form 2555) because thought form 1116 credit would be more beneficial.  Is the recommendation to enter on both forms (1116 and 2555)? 

First time doing one of these...... 

[sjrcpa]

The income is taxable on the 1040 first. Then maybe you get the credit.

You cannot take foreign earned income exclusion and foreign tax credit on the same income.

The software is correctly calculating no FTC based on your input. But your input is wrong.

[tbamaze]

Thank you for the tip. When entering wages earned in UK I am using a payslip for YTD wages and taxes paid because they do not issue a W-2. UK also has their version of Social Security.  Would I enter that as Social Security taxes withheld or is that not allowed because it is for the UK.

[sjrcpa]

I would not enter it as Social security tax withheld.

[tbamaze]

I am also doing a comparison with Foreign Income Exclusion (2555).   Do wages also need to be entered as income on the 1040 and also under form 2555 or just under form 2555.?

[sjrcpa]

I don't use ProConnect.

But wages should appear as income. Then the foreign earned income exclusion appears as a subtraction. 2 separate lines on the return.