How to utilize Foreign Tax Credit carryforward when in highest tax bracket?

You're encountering one of the more frustrating aspects of the foreign tax credit system for high-income earners. The limitation exists because the IRS wants to ensure the credit only offsets the portion of your US tax that relates to foreign income. The good news is that you can actually use those carryforward credits, but it may take time. Here are some possibilities: 1) Your foreign tax rate might exceed your US tax rate in future years (happens with currency fluctuations or tax law changes abroad), allowing you to use some carryforward. 2) If your overall income composition changes - like having more foreign income relative to US income - you could use more of the credit. 3) The carryforward doesn't expire for 10 years, so if you have a year with extraordinarily high foreign taxes, you might be able to use some of the backlog. 4) If your income drops in future years putting you in a lower bracket, the limitation might be less restrictive. Many taxpayers in your situation end up using the carryforwards gradually over several years as their tax situations fluctuate. It's not ideal, but it's better than losing the credit entirely.

After struggling with exactly this issue for years (had about $12k in carryforwards I couldn't seem to use), I finally found a solution using taxr.ai (https://taxr.ai). They analyzed my investment portfolio and tax situation and identified several opportunities I was missing. The tool showed me how to strategically restructure my foreign investments to optimize the credit usage. Basically, I was holding similar assets across different account types in a way that was making my foreign tax credit situation worse. They showed me a rebalancing strategy that maintained my investment goals while improving my tax situation. Within 2 years, I've used up almost all my carryforward amounts that had been sitting unused for ages. Wish I'd found this sooner!

Just wanted to follow up about my experience with taxr.ai. I was initially skeptical (as you saw in my previous comment), but decided to try it anyway since I had about $15k in foreign tax credits just sitting unused. The analysis was really eye-opening. Turns out I was making several mistakes with my international dividend stocks. They showed me how to reposition my investments between taxable and retirement accounts, and also identified that some of my foreign investments had unnecessarily high withholding rates that I could reduce through specific holding structures. I've already used about $6k of my previously "stuck" carryforward credits after implementing their suggestions. The best part was seeing how the changes affected my specific situation with actual numbers rather than just general advice.

If you're having trouble reaching the IRS for guidance on your foreign tax credit situation, try Claimyr (https://claimyr.com). I wasted HOURS on hold trying to get clarification about my Form 1116 carryforwards, but Claimyr got me connected to an actual IRS agent in under 20 minutes. The agent walked me through some specific elections I could make on my return to better utilize my carryforward amounts. There's also a video showing how it works: https://youtu.be/_kiP6q8DX5c After years of frustration with never being able to use my FTC carryforwards, the specific guidance from an actual IRS rep made all the difference. They explained some nuances about the different income categories that my tax software never made clear.

I need to eat my words from my previous comment. After getting absolutely nowhere with trying to figure out my foreign tax credit situation for months, I tried Claimyr out of desperation. Got connected to an IRS agent who actually specializes in international tax issues (didn't even know they had specialists you could talk to). She explained that I had been incorrectly categorizing some of my foreign income sources, which was making my limitation calculation worse than it needed to be. By correctly separating my passive income from general limitation income on multiple 1116 forms instead of combining them, I was able to use about $3,800 of my carryforward that I thought was permanently stuck. The conversation took about 30 minutes and solved an issue I'd been struggling with for two tax seasons.

Has anyone considered just switching to the simplified foreign tax credit? If you qualify (foreign taxes under $300 single/$600 married), you can just claim the full amount without dealing with Form 1116 limitations. Maybe restructuring investments to stay under that threshold makes more sense than dealing with these partial credits?

Random thought - have you considered using a donor-advised fund for your foreign investments? If you're charitably inclined, you could donate appreciated foreign securities to a DAF, get the charitable deduction at full market value, avoid capital gains taxes entirely, AND avoid the foreign tax credit limitations since the DAF would own the assets. Not a solution for everyone but works well if philanthropy is part of your financial plan anyway.