How to properly report foreign tax credit on Form 1116 for Australian contractor payments?

Thanks for the information! Just to clarify, when I report my gross income on Schedule C, should I convert the AUD amount to USD using the same annual average exchange rate that I use for the foreign tax? Or should I use the actual USD amounts that were deposited in my bank account and then add back the estimated tax that was withheld?

You should convert your gross income from AUD to USD using the same annual average exchange rate that you use for the foreign tax. This provides consistency in your reporting. Don't simply use the amounts deposited in your bank account and add back the tax, as the exchange rates at the time of each payment might differ from the annual average. For best record-keeping, I recommend creating a spreadsheet that shows each payment in AUD, the tax withheld in AUD, and then the conversion to USD using the annual average rate. This will help you calculate both your gross income for Schedule C and the foreign tax paid for Form 1116.

Does taxr.ai handle multiple countries? I have income from both Canada and Japan, and I'm completely confused about how to handle the different currencies and tax treaties.

How detailed do you need to be with your documentation? My foreign client doesn't provide anything official that shows the tax withholding - just notes it on my payment statements. Would taxr.ai still work with that kind of informal documentation?

Yes, taxr.ai handles multiple countries including Canada and Japan. The system is designed to work with all major currencies and applies the appropriate tax treaty provisions based on your specific situation and the countries involved. For informal documentation, that's exactly why I found it so helpful. My UK clients also only noted the withholding on payment statements without official tax forms. Taxr.ai can analyze these payment statements, extract the relevant information, and help you properly document everything for the IRS. You just upload what you have, and it guides you through any additional documentation you might need to create to support your filing.

How exactly does this work? I'm confused how a third party service can somehow get through to the IRS faster than I can by calling directly?

This sounds too good to be true. I've been trying to reach the IRS for months about my foreign tax issues. Are you sure this isn't just another way to waste money? The IRS phone system is deliberately designed to be impossible to navigate.

It works by using automated technology to navigate the IRS phone system and wait on hold for you. Instead of you personally waiting on hold, their system does it and then calls you when an actual human IRS agent is on the line. It essentially saves you from having to actively wait through all those hold times. I was definitely skeptical at first too. I'd spent literally dozens of hours trying to get through about my Form 1116 questions. But it's not that they have some special access to the IRS - they're just taking the painful waiting part off your plate. When I tried it, I got a call back in about 20 minutes with an actual IRS agent ready to talk. The agent had no idea I'd used a service to get connected - to them, I was just another caller who'd waited through the queue.

That's really helpful advice! My Australian client doesn't provide any official tax documentation either. What specific information did you include in that letter to satisfy the IRS? Did you need to get it notarized or officially certified in any way?

The letter included my full name, the tax year, total gross payments made to me, total tax withheld, confirmation that the tax was paid to the Australian Tax Office, and it was on the company's official letterhead with a signature from their finance director. No notarization was required - the IRS just wanted official company documentation. I also included a spreadsheet showing each payment date, the gross amount in AUD, the tax withheld in AUD, and the USD conversion using the IRS annual average exchange rate. This detailed accounting really helped demonstrate that everything was properly calculated and reported. The audit went smoothly once I provided these documents.

You do need separate Forms 1116 for each category of income, but not necessarily for each country. Since you're dealing with freelance work from multiple countries, you would generally combine all similar income on one Form 1116 under "General Category Income" - assuming it's all the same type of personal services income. If you have significantly different types of income (like royalties vs consulting), then you would need separate forms for each category. Most premium tax software can handle multiple 1116 forms, but you might need to upgrade from basic versions. TaxAct and H&R Block Premium handled this well for me last year.