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David

Can the foreign tax credit reduce the excess advance premium tax credit repayment?

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TP's MFJ 1040 line 41 is negative $18 and taxable income on line 44 is 0. They are subject to the excess advance premium tax credit repayment on line 46 for $1,092, which is the only tax liability they have. They have a $249 FTC carry forward and a current year FTC of $267 for a total FTC of $516 on line 48.

Form 1116 instructions and pub. 514 state that the FTC cannot be more than your total US tax liability (Form 1040, lines 44 and 46. So it appears that even though the foreign taxes paid weren't subject to regular taxes, the FTC can still be used to reduce the  excess advance premium tax credit repayment on line 46.

Form 1116 line 17 foreign source income shows $2,376, line 18 taxable income shows 0 and line 19 shows 1. The "1" on line 19 appears to be correct since the instructions say that if line 17 is greater than line 18, enter 1.

In my research on this I read that the IRS has disallowed the FTC when the only tax liability was the excess advance premium tax credit repayment. It makes sense since the foreign taxes weren't subject to regular tax. However, the IRS publication and instructions seem to support taking the FTC even if the only tax liability is the excess advance premium tax credit repayment. 

Has anyone had this situation and found that the IRS disallowed the FTC for your client? I want to make sure my clients won't have any issue if they take the credit.

Thanks.

 

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From what I understand is foreign tax credit is non-refundable credit that is, it knocks down tax if any, whereas excess premium tax credit is refundable credit meaning taxpayers would get refund even if there is no taxes to offset. Because of this reason premium tax credit gets showed up under payments in 1040.

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On 8/4/2017 at 1:33 PM, David said:

Form 1116 instructions and pub. 514 state that the FTC cannot be more than your total US tax liability (Form 1040, lines 44 and 46 (see my quote in bold below for missing words from pub 514 that go here to properly calc the FTC allowed). So it appears that even though the foreign taxes paid weren't subject to regular taxes, the FTC can still be used to reduce the  excess advance premium tax credit repayment on line 46.

This is not correct because you are missing part of the formula for calculating the limitation on the credit that is allowed in the current year.  The actual wording from pub 514 regarding calculation of the FTC allowed in the current year reads as follows (bold shows the part you are missing):

Quote

Limit on the Credit

Your foreign tax credit cannot be more than your total U.S. tax liability (Form 1040, lines 44 and 46) multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.

 

You already said that the return showed no taxable income, so there should be no FTC allowed for the current year to offset any of the APTC.

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