Foreign Tax Credit on a Trust Return (1041)

[Lion EA]

I only prepare three trusts, and at least one of them has no foreign income. Tonight's trust has, in round numbers...

$2,500 income, all dividends and interest

$1,000 foreign dividends

$50 foreign tax paid

I was expecting $50 to be deducted from the tax liability, but it ends up being a ratio of 1000/2500 X 50 = foreign tax credit. The trust doesn't get credit for the full $50 foreign taxes it paid. Is that right? (I know I'm tired and not thinking straight.)

[Abby Normal]

Sounds right. Also, check the K1 to make sure that if any FTC is passed to the beneficiary, it doesn't exceed the total FTC. I've had problems with this in prior years.

[Lion EA]

No K-1. Complex trust; nothing distributed; trust pays taxes. About $26 but trustee is complaining!

Thank you, Mr. Normal. I may have missed the ratio last year, but trust made much, much less then. In 2020, it made over $2,500 so the FTC would've wiped out all US tax if it could've been used in full. Oh well.

Right now, I'd pay $26 to get a return off my desk! Every. Single. Return. has something different this year, has me explaining to clients, has them asking more questions before they'll sign. The trustee's wife complained, "We don't do a thing with it. I'm surprised she's made enough money on it this year to owe taxes since we haven't taken anything out. Want to check and then we can talk about the payment?"

So, I wanted confirmation that the trust does NOT get the full credit for ALL foreign taxes paid but only the ration of foreign income to worldwide income times the foreign taxes paid.

[Abby Normal]

The dirty little secret of 1116 is that even when it's not required to be filed, the calculation must still be done. Many of us, including me, choose to ignore that when we're under the 1116 filing requirement limits.

ATX has a checkbox to facilitate using the 1116 for the calculation but not including it in the return.

[Margaret CPA in OH]

Yes, that ratio can be a pain.  I have several German clients (resident aliens, mostly, some with green cards) that are annoyed every year that they don't get full credit and some have substantial carryovers. I think much will never be used.

[Lion EA]

Yes, I have that checkbox, too. On personal returns, the ratio just tickled at the back of my mind. $30 of foreign credit from thousands of dollars of investments with thousands of dollars w/h from large W-2s meant that whether they received $30 FTC or $19 FTC, it made no dent in their refunds or balances due.

This was a new-to-me complex trust last year and made less than $1,000 then. I'll look up if it had any FTC last year. This year it earned over $2,500, so a balance due rears it ugly head. I have one other complex trust with no foreign income; it owns a commercial building. And, a third that might have a FTC but earns a lot and always owes a lot, and -- hopefully -- I've done it right in the past. It will be next up when I can get this one signed and e-filed.

Thank you Abby and Margaret for confirming for me how FTC is calculated. I was hoping I was wrong, but I'd gone through the form and instructions before I posted and could see what it was doing and why.