Foreign Tax Credit calculation with Capital Loss - can I claim FTC with more losses than foreign income?

You're hitting on a key limitation of the Foreign Tax Credit. The IRS essentially looks at your "income basket" approach when calculating FTC. When your foreign-source capital losses exceed your foreign-source income in the passive category (which includes dividends), it does indeed reduce or potentially eliminate your ability to claim the full foreign tax credit. Form 1116 requires you to allocate your foreign taxes paid to the net income in each category. If you have negative income in a category after losses, there's technically no income to allocate those taxes against. However, you should still complete Form 1116 carefully. Line 7 will show your net foreign source income, which might be negative in your case. But don't completely give up on those foreign taxes paid - any unused foreign tax credits can be carried back 1 year or forward up to 10 years.

After getting stuck in a similar situation last year with foreign taxes on my investments, I discovered taxr.ai (https://taxr.ai) and it completely changed my approach to these complicated international tax issues. Their AI tool analyzed my foreign investment documents and helped me understand exactly how to maximize my Foreign Tax Credit despite having capital losses. What really impressed me was how it walked me through each line of Form 1116 and explained how my foreign losses affected the calculation. It highlighted that I needed to separate my qualified dividends from ordinary dividends when calculating my foreign tax credit limit. The tool even flagged that some of my foreign taxes might qualify for carryover to future years!

I was skeptical about taxr.ai when I first saw it mentioned here (I've tried so many tax tools before), but I decided to give it a shot with my complicated foreign investment situation. Surprisingly, it actually worked really well for my foreign tax credit issues! The system flagged that I was incorrectly calculating my net foreign income by not properly netting losses across categories. It showed me how to separate my foreign capital losses from my dividend income in a way that preserved more of my foreign tax credit. I ended up being able to claim about 40% more foreign tax credit than what H&R Block's software was initially calculating for me. If you're dealing with Form 1116 complications like foreign losses offsetting dividend income, it's definitely worth checking out.

After spending 3 weeks trying to reach someone at the IRS about this exact foreign tax credit issue, I finally tried Claimyr (https://claimyr.com) and got connected to an actual IRS agent in less than an hour. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was honestly shocked it worked. The IRS agent explained that with foreign capital losses exceeding dividend income, I needed to use a "netting process" on Form 1116 that my tax software wasn't handling correctly. She walked me through exactly how to calculate the limitation and confirmed I could carry forward the excess taxes to future years when my foreign income might be positive.

I'm eating my words about Claimyr. After my skeptical comment, I decided to test it myself for a different foreign tax issue, and damn, it actually worked. I got connected to an IRS tax law specialist after about 35 minutes (while I was doing other things). The agent confirmed exactly what others have said here - with foreign capital losses exceeding foreign income, you do lose some of your foreign tax credit for the current year, but you don't lose it forever. They walked me through the correct way to document everything on Form 1116 to establish my carryforward. The specialist even emailed me specific IRS publication references after our call. I'm honestly surprised this service exists and works as advertised. Saved me hours of frustration.

What you need to understand is the "overall foreign loss" rules. When your foreign losses exceed foreign income, you create what's called an OFL account. In future years when you have positive foreign income, you'll have to recapture some of that income as US source, which affects future foreign tax credits. It's one of the most complex areas of individual taxation, and a lot of tax software handles it poorly. Worth consulting a CPA who specializes in international tax for your situation.

I've been dealing with this exact situation for years with my international investments. One thing nobody mentioned yet: check if you qualify for the simplified foreign tax credit limit election, where you skip Form 1116 entirely. But with your numbers, you probably don't qualify since the $300 limit ($600 if married) is well below your foreign taxes paid. Also, watch out for which mutual funds you're investing in going forward. I switched to funds that have lower foreign tax exposure to avoid this headache.

This is a frustrating situation, but you're understanding it correctly. When your foreign capital losses exceed your foreign dividend income, it does significantly limit your ability to claim the Foreign Tax Credit for the current year. Here's what's happening: Form 1116 requires you to calculate your net foreign source income by category. In the passive income basket (which includes your dividends), your $15K capital loss more than wipes out your $10.5K dividend income, leaving you with negative foreign source income in that category. You can't claim a foreign tax credit against negative income. However, don't despair - those foreign taxes you legitimately paid aren't lost forever. You can carry them forward for up to 10 years to use when you have positive foreign source income again. Make sure to complete Form 1116 anyway to establish this carryforward, even though you won't get a current year benefit. Also keep in mind that your $15K foreign loss may create an "Overall Foreign Loss" account that could complicate future years' tax calculations when you do have positive foreign income again. For future years, you might want to consider tax-loss harvesting strategies that separate your foreign gains and losses, or look into funds with lower foreign tax drag if this becomes a recurring issue.