tl;dr

• This is an accidental Part 2 to my common tax mistakes post from last year.
• I screwed up my taxes in 2021 and 2023 by not taking a Foreign Tax Credit based on Box 7 “Foreign Taxes Paid” on my 1099-DIV. In 2021, I simply missed the sections in TurboTax to get any credit or deduction. In 2023, I accidentally took a deduction instead of a credit. In all, this cost me $893.
• Luckily, creating an amended tax return to fix this mistake is easy, and with a few clicks in TurboTax I created amended returns and filed them to recover my $893. Note that there is a 3-year deadline for most amendments, but the Foreign Tax Credit can be amended for up to 10 years.
• My key lessons from this saga are:
  • Don’t hop around between tabs in TurboTax; follow the guided flow from beginning to end: If I’d progressed through TurboTax step-by-step, I would have seen the clear landing page to enter the Foreign Tax Credit and avoided my 2021 and 2023 mistakes. 
  • Even when SmartCheck only gives you one option, double check the underlying form too, and make sure you understand it: When SmartCheck gave me a single check box and said I’d get a deduction, I just went with it. If I’d read more carefully and dug into what Form 1116 was, I could have at least avoided my 2023 mistake.
  • Always buy TurboTax desktop, not online: You’ll be forced to buy the desktop version anyway if you want to amend your taxes.

Intro

I recently re-read an old post of mine about the cost of owning my apartment. In it, I was describing how the mortgage interest deduction enabled me to itemize my return, which unlocked other deductions I wouldn’t have otherwise been able to take advantage of: 

I had $818 in foreign tax deductions in 2023 that would have been lost if I hadn’t itemized my returns

The statement, and the math behind it was correct, but something was off. I had just finished my 2024 taxes, and knew for a fact that I just took a foreign tax credit (difference explained below) for the same kind of foreign taxes. 

That little observation turned into a review of the last 7 years of my tax filings¹, which caught two related but different mistakes. Fixing those mistakes let me file amended returns to recover $893 in overpaid taxes (and gave me an excuse to turn my previous tax mistakes post into a series). 

Preface: Foreign Taxes, Credits, and Deductions

My investment portfolio includes international stocks, via the VEA and VWO exchange traded funds (ETFs). VEA and VWO are Regulated Investment Companies (RICs)², just like many ETFs. This is important, because the IRS lets RICs pass through deductions and tax credits for foreign taxes:

A RIC may make an irrevocable election under section 853(a) to allow its shareholders to apply their share of the foreign taxes paid by the RIC either as a credit or a deduction.

This means that I can take a credit or deduction on my tax return for the foreign taxes paid by VEA and VWO.

Credits and deductions are sometimes mixed up or accidentally used interchangeably. Credits reduce your taxes owed by that amount. For example, a $1,000 tax credit would reduce a $10,000 tax bill to $9,000. Deductions reduce the income used to calculate the taxes you owe. For example, if you had a $100,000 taxable income, a $1,000 deduction would reduce your taxable income to $99,000. The federal tax bracket in that range is 22%, so a $1,000 deduction would reduce your federal taxes owed by $1,000 * 22% = $220. As you can see, tax credits usually save you more money than deductions.

The federal government offers a ton of tax credits, but the one you need to know about for this article is the Foreign Tax Credit. While there are plenty or rules that govern what does / doesn’t count for the credit, the main thing that you need to know is that if a RIC is passing its ability to take a credit along to you, they are required to send you documentation of that. That documentation should usually take the form of a 1099-DIV with something in Box 7. For example, this is what my 1099-DIV from Citi looked like in 2021:

That documentation is a good hint that you should look into³ taking a Foreign Tax Credit.

My Mistake: Not Taking the Foreign Tax Credit

What I Did

Every year since I moved to the US, I’ve received 1099-DIVs detailing the foreign taxes my ETFs paid. And every year I’ve dutifully punched it into TurboTax. The problem is that just entering your 1099-DIV doesn’t automatically apply the tax credit.

Instead, once you move on from “Wages & Income” (where you punch in the 1099-DIV), you get to the “Deductions & Credits” page. IF you scroll down to the bottom of that page and click “Done with Deductions” it’ll give you a chance to claim your tax credit:

If you’re like me, however, and you hop around by clicking on the tabs at the top of the page, you’ll miss that screen entirely. There is, luckily, one final chance to not miss out on the tax credit though. When you hit the “Smart Check” feature, you’ll be presented with this screen:

The problem is that in 2023 when I saw this screen, I thought the only option was to check that “Foreign tax Sch A box” and receive a deduction. And hey, why wouldn’t I want a deduction? Those reduce my taxes! I did not, however, think about the fact that checking this box meant I was giving up my tax credit for a tax deduction!

Worse, in 2021 I never ended up checking that box at all. So I didn’t end up taking a credit or deduction; my foreign taxes just didn’t show up on my return at all that year! How did that happen? I can’t say for sure, but I suspect that I accidentally skipped over the “Smart Check” feature entirely (as TurboTax will let you do) and filed my taxes without completing those action items. I probably did that because I had been filling out my takes over the course of February and March as the forms came in, and by the time I was ready to file my taxes I just jumped right to the end by clicking on the “File” tab.

What it Cost Me

Luckily, I only made the above foreign tax credit mistakes in 2021 and 2023, with slightly different cost calculations:

• 2021: I had $379 in 1099-DIV Box 7 Foreign Taxes, and I entirely failed to take any credit or deduction. So the cost was the entire value of the credit: $379
• 2023: I had $818 in 1099-DIV Box 7 Foreign Taxes that I took as a deduction. That deduction reduced my taxes by $304. If I’d taken the credit, I would have gotten the full $818 back. So the cost was the difference: $514

That brings the total cost for both year’s mistakes to $893.

Fixing It: Amending Tax Returns isn’t That Scary, but There is a Deadline!

Deadlines

If you make a mistake on your taxes, you can file an amended tax return to get your refund (or pay what you additionally owe). The problem is that there is a deadline:

Generally, to claim a refund, you must file an amended return within 3 years after the date you filed your original return or 2 years after the date you paid the tax, whichever is later. If you filed early, count from the April tax deadline.

The 2021 tax year had a tax deadline of April 18 2022, which means I could file an amended return up until April 18 2025 (which just so happens to be slightly after I wrote this post). But it turns out I’d be OK even if I missed that 3 year deadline, because foreign taxes in particular enjoy a later deadline:

You can choose to claim a credit or to change from claiming a deduction to claiming a credit at any time during the period within 10 years from the regular due date for filing the return

Amending

Once I figured out I was allowed to amend my taxes, turns out amending was easy with TurboTax. I just had to open my TurboTax 2021 and 2023 desktop Tax programs, and click the button on the landing page:

From there I followed the instructions to produce a Form 1040-X. That form breaks down step by step the before and after of what your original and new 1040 look like, making it really easy for you and the IRS to tell what changed:

TurboTax supports e-Filing the 1040-X for 2024 (and presumably future years), but unfortunately 2023 and prior returns have to be printed and mailed in. So I printed out the ~30 page stack of paper and mailed in two thick envelopes to the IRS⁴. Note that I haven’t actually gotten my refund yet, and I don’t expect to for a while⁵. Normally I wouldn’t write a post like this until I’ve gotten the refund, to prove out the process end-to-end, but I figured that getting this post out before this year’s tax deadline was worth the lapse in editorial process.

TurboTax Desktop vs Online

The astute reader might have wondered why I italicized “desktop” in the previous section. Turns out that you can only access TurboTax online for the current tax year⁶. If you filed a prior year’s tax return via TurboTax Online and want to amend it, you’re going to have to buy yourself a desktop copy of TurboTax, and coax TurboTax into giving you a copy of your .tax file. The secret to doing this is:

1. Open up this year’s version of TurboTax online
2. Click through the landing pages to start doing your current year’s taxes, until you reach a landing page that looks like this:

3. From there, open “Your tax returns & documents” > select the prior year you actually wanted > click “Download .tax file”

Once you’ve got your .tax file, and the right version of TurboTax desktop, you can go ahead and amend your taxes.

Lessons

Like any good engineer, I like to do a post mortem when things go wrong, and figure out what will help me (and hopefully you!) prevent similar incidents in the future. My key learnings from this misadventure are:

1. Don’t hop around; follow the TurboTax guided flow from beginning to end: If I’d progressed through TurboTax step-by-step, I would have seen the clear landing page to enter the Foreign Tax Credit and avoided my 2021 and 2023 mistakes. Don’t be like me; spend the time clicking through the dozen obscure questions about whether you repaired your whaling boat, so that you can see the one relevant one about Foreign Taxes (or whatever other situation might apply to you).
2. Even when SmartCheck only gives you one option, double check the underlying form too, and make sure you understand it: When SmartCheck gave me a page with only one option, and it was to check a box to get a deduction, I just went with it. If I’d read more carefully and dug into what this Form 1116 thing was, I could have at least avoided my 2023 mistake.
3. Always buy TurboTax desktop, not online: Having a local copy of your tax file and software means you’ll always be able to boot up old copies of TurboTax, whatever the need may be. It could save you from having to buy the desktop version if you need to amend. It could also save you from TurboTax Online one day removing the ability for you to download your .tax files.

One final lesson some might take from this is: “This is too complicated and easy to screw up, just get an accountant.” While I think that’s a fair conclusion for some to reach, that’s not my conclusion for a few reasons:

1. Doing your own taxes helps ensure you understand them better. This is good in the abstract, but it also concretely helps you make tax efficient decisions, like, say, locating dividend paying assets in your Roth accounts to reduce taxes.
2. Accountants also mess up. I’ve heard many horror stories about accountants not understanding things as basic as the backdoor Roth IRA. If your accountant screws up how they enter that, they will likely cost you much more than I lost in this little foreign tax mistake. In my personal experience, I’ve never had an accountant get my taxes right, and in one case they forgot an entire state’s return.
3. The costs can still outweigh the savings. Accountants typically cost hundreds (sometimes into the low thousands) of dollars to file, once you start bringing them multiple states, a bunch of 1099’s, a 1098, and other tax situations beyond just a W-2. If we conservatively say I would have paid $300 / year to file my taxes from 2017 (first year I filed as a full time worker) through 2024, that’s $2,400. Even if they had saved me the $893 mistake (which I think I’ll be able to recover), and my $60 / year in TurboTax fees, I’d still be behind. Now maybe the time savings could make up the rest of the difference (especially if I value my time using my $200 / hour rule), but the point is this mistake is small enough that the cost is outweighed by what an accountant would charge.

1. Honestly, this sounds a lot more painful than it was. It only took a few minutes per return, and it turns out it was worth it! ↩︎
2. While many online sources will tell you that almost all ETFs are RICs, it’s very hard to find out if a specific ETF is an RIC. I think that if you’re getting a 1099-DIV with foreign taxes in Box 7, that implies your ETF is an RIC. But if you want to know for sure (eg. before getting your 1099-DIV), you’ll have to do some digging. For these funds in particular, I had to go to Vanguard’s documents page for the fund, download the “Statement of Additional Information (SAI)”, and on Page 133 I found the statement: “Each Fund expects to qualify each year for treatment as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC).” ↩︎
3. Yeah, I’m using some weasel wording here. Beyond the typical “I’m not an accountant and I’m not your accountant”, there seems to be some really interesting nuance around determining whether the whole number in Box 7 is actually eligible for the tax credit or not. For wee folk like you and I, I strongly suspect the IRS isn’t policing the foreign tax credit beyond checking that your credits claimed match your 1099-DIV Box 7, but I also don’t want to authoritatively tell you can just claim the whole thing as a credit, because I’m not 100% sure you can, technically. ↩︎
4. Fun fact, the envelopes came in as ~4oz each, which is just over the USPS’s 3.5oz limit for regular first class letters, requiring me to cram on a few of my oversized D&D forever stamps on the envelope. Hopefully the person opening letters at the IRS is a fellow nerd and appreciates the art. ↩︎
5. The IRS says “Allow 8 to 12 weeks for your amended return to be processed; however, in some cases, processing can take up to 16 weeks.” And that statement is assuming the IRS is functioning properly, which may not be the case after recent staffing cuts. ↩︎
6. Something that I think is a load of BS, and has already burned me as I work in parallel on a blog post covering my experience tax loss harvesting. ↩︎