What this line means
The portion of your foreign tax credit carryover that is reduced because you excluded canceled debt from income. Foreign tax credits are reduced at 33.33 cents for every dollar of remaining excluded debt — the same rate as general business credits and minimum tax credits. This is the seventh and final attribute in the Section 108(b)(2) reduction order.
Does this apply to you?
- You excluded canceled debt from income and still have remaining excluded debt after reducing all prior attributes on lines 4 through 9
- You have a foreign tax credit carryover from Form 1116 that you could not use in the current or prior years
- You paid foreign income taxes and the credit exceeded your limitation in one or more years
- You did not elect to reduce depreciable property basis first on line 10b
Easy to overlook
Few individual filers reach this line in practice The foreign tax credit is the last attribute in the reduction order. By the time excluded debt flows through NOLs, business credits, minimum tax credits, capital losses, property basis, and passive losses, most filers have exhausted their excluded amount. If you reach line 10a, you likely had a very large debt cancellation or very few other tax attributes. 1 IRS Form 982 Instructions — Line 10a
The 33.33 cents rate preserves more of your credit than you might expect Because foreign tax credits are reduced at one-third the rate, a $9,000 remaining excluded debt amount only eliminates $3,000 of foreign tax credit carryover. If your excluded debt amount is small by the time it reaches this line, the impact on your foreign tax credits may be minimal. Run the calculation rather than assuming the credit is wiped out. 2 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
Watch out for this
Forgetting that foreign tax credit carryovers expire after 10 years. If your carryover is close to expiring anyway, losing it to a Form 982 reduction has less practical impact than losing an NOL with no expiration. Consider this when deciding whether to elect the Section 108(b)(5) depreciable property basis reduction on line 10b instead of following the standard ordering rules.
Footnotes
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IRS Form 982 Instructions, Line 10a. https://www.irs.gov/instructions/i982 ↩
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Chapter 1. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩