Form 1116 Line 3a - Real Estate Tax - LIMITED?

Forum|Forum|5 years ago
January 21, 2021
2 replies
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In processing a 2019 tax return, we had a client that had real estate taxes of 7k and state income taxes of 19k, for a total of 26k taxes paid, and was limited to 10k on Schedule A. That's fine, but in the Foreign Tax Credit Form 1116, line 3a, Lacerte did not put in 7k from Schedule A. Instead, it calculated 27% (7k RE tax / 26k all tax) and then multiplied by the 10k total tax on Schedule A, so only $2.7k was deducted from foreign income.

Instructions for Form 1116 do not reference any limitation required for this line. NOTE: When I reviewed 2017 Form 1116 instructions it DOES require a reduction to line 3a because of the income limitation on Schedule A that was in effect prior to the TJCA.

Is Lacerte calculating this correctly?

Lacerte Tax

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Best answer by itonewbie

This is easy to explain and that's the reason why I asked about your client's residency.

Since your client is a tax resident in a state and is presumably subject to state tax on worldwide income, state income tax deduction is ratably allocable to gross income from all sources. Lacerte wouldn't know that but you should see that it does trigger an informational diagnostic to prompt you to consider the sourcing position (if you had checked).

The way to solve this is to take the following steps:

Go to Screen 35.1;
Under Sections in the bottom left panel, click on Deductions and Losses;
On the line for Other deductions not directly allocable [A], hit Ctrl+E to pull up the dialog box; and
Enter NJ Income Tax Deduction (or something to that effect) under Description, enter 7,308 under Amount, and select NJ under State.

This $7,308 will show up on Line 3b and increase Line 3c to $10,000.

itonewbie

Level 15

Scratch that. Misread question. Will respond again.

---------------------------------------------------------------------------------Still an AllStar

itonewbie

Level 15

Can you give a break down of the Sch A numbers, what was allowed, and whether there are deductions that are definitively related to US income or certain basket on Line 2?

Also, is your client a tax resident of a state where worldwide income is subject to state tax?

---------------------------------------------------------------------------------Still an AllStar

J

JimS_1Author

Level 4

The taxpayer had 16k of medical expenses, but was not able to claim any due the 7.5% floor. The state and local taxes were just 19k of state income taxes (New Jersey) and the $7k Real Estate taxes - both of which were limited to 10k. The taxpayer had 62k of Charitable cash gifts (not limited). Total itemized was 72k, which was taken fully. On line 2 of Form 1116, there are no amounts listed. Foreign income is 4k from RIC and 2k from a K-1 (trust). Taxpayer is resident of NJ, which I'm pretty sure requires taxes paid on the foreign income.

Appreciate your help!! The reason this came up is this is a new client and previous tax preparer (Big 4) included full 10k in line 3a, but when we input prior year data in 2019 so we can rollforward to 2020, Lacerete did not include the full 10k. It seems like Lacerete is making an assumption that just like pre-TJCA required a reduction for limited deductions, that the software should also reduce the RE taxes for the SALT limitation post-TJCA. But 2019 Form 1116 instructions do not say this has to be limited.

itonewbieAnswer

Level 15

This is easy to explain and that's the reason why I asked about your client's residency.

Since your client is a tax resident in a state and is presumably subject to state tax on worldwide income, state income tax deduction is ratably allocable to gross income from all sources. Lacerte wouldn't know that but you should see that it does trigger an informational diagnostic to prompt you to consider the sourcing position (if you had checked).

The way to solve this is to take the following steps:

Go to Screen 35.1;
Under Sections in the bottom left panel, click on Deductions and Losses;
On the line for Other deductions not directly allocable [A], hit Ctrl+E to pull up the dialog box; and
Enter NJ Income Tax Deduction (or something to that effect) under Description, enter 7,308 under Amount, and select NJ under State.

This $7,308 will show up on Line 3b and increase Line 3c to $10,000.

---------------------------------------------------------------------------------Still an AllStar

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