It is because the foreign source qualified dividends are taxed at a reduced rate on the US return. If you have received foreign sourced qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116 Instructions, Foreign Tax Credit (Individual, Estate, or Trust), line 1a.How do I make the adjustment? Form 1116 Instructions - See the detailed instructions for “Foreign Qualified Dividends and Capital Gains (Losses)”. Generally, if the foreign source income was taxed at the 0% rate, then you must exclude the income from your foreign source income (Form 1116 line 1a). Generally, if the foreign sourced income was taxed at the 15% rate, then you must multiply that foreign sourced income by 0.3788 and include only that amount in your foreign source income on Form 1116, line 1a. Generally, if the foreign source income was taxed at the 20% rate, then you must multiply that foreign source income by 0.5051 and include only that amount in your foreign source income on Form 1116, line 1a. See Publication 514, Foreign Tax Credit for Individuals, for more information on the rate differential adjustment.Foreign Tax Credit Compliance Tips

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Anonymous

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Taxable income from foreign sources, Line 1A, Form 1116 does not match value that I entered in 1099-DIV section but the description says "From 1099s". Any ideas?

Forum|Forum|6 years ago
February 22, 2020
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TurboTax Deluxe Online

Best answer by KarenJ2

It is because the foreign source qualified dividends are taxed at a reduced rate on the US return.

If you have received foreign sourced qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116 Instructions, Foreign Tax Credit (Individual, Estate, or Trust), line 1a.

How do I make the adjustment?

Form 1116 Instructions - See the detailed instructions for “Foreign Qualified Dividends and Capital Gains (Losses)”.
Generally, if the foreign source income was taxed at the 0% rate, then you must exclude the income from your foreign source income (Form 1116 line 1a).
Generally, if the foreign sourced income was taxed at the 15% rate, then you must multiply that foreign sourced income by 0.3788 and include only that amount in your foreign source income on Form 1116, line 1a.
Generally, if the foreign source income was taxed at the 20% rate, then you must multiply that foreign source income by 0.5051 and include only that amount in your foreign source income on Form 1116, line 1a.
See Publication 514, Foreign Tax Credit for Individuals, for more information on the rate differential adjustment.

Foreign Tax Credit Compliance Tips

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rogge1722

Employee

In addition to the foreign source income from the 1099-div, other possible sources are from k-1's, form 2555, and adjustments to the qualified dividends based on the dividend amount and/or income levels.

K

KarenJ2Answer

It is because the foreign source qualified dividends are taxed at a reduced rate on the US return.

If you have received foreign sourced qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116 Instructions, Foreign Tax Credit (Individual, Estate, or Trust), line 1a.

How do I make the adjustment?

Form 1116 Instructions - See the detailed instructions for “Foreign Qualified Dividends and Capital Gains (Losses)”.
Generally, if the foreign source income was taxed at the 0% rate, then you must exclude the income from your foreign source income (Form 1116 line 1a).
Generally, if the foreign sourced income was taxed at the 15% rate, then you must multiply that foreign sourced income by 0.3788 and include only that amount in your foreign source income on Form 1116, line 1a.
Generally, if the foreign source income was taxed at the 20% rate, then you must multiply that foreign source income by 0.5051 and include only that amount in your foreign source income on Form 1116, line 1a.
See Publication 514, Foreign Tax Credit for Individuals, for more information on the rate differential adjustment.

Foreign Tax Credit Compliance Tips

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Wolfwoman

What additional items are added back into the gross? I had refunds that were not claimed because I did not itemize the year before (2019}. How about Social Security? I declared 85% of my SS income as taxable. Also should the QBI deduction be added back into the AMT form?

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rchead037

Just learned that foreign source income for funds with less than 50% in foreign investment do NOT qualify for the Form 1116 credit. Therefore, the investment company (in this case, Vanguard, for VT), does not list the foreign source income percentage in their documentation. But TurboTax still insists on having that number for Form 1116.

Since only a few 100$ were involved, rather than trying to figure out how to make TurboTax work around this (there WERE foreign taxes listed on the 1099-DEV, and therefore Turbotax WANTED a foreign source %%), I just switched to Schedule A deduction instead of Form 1116 credit -- the difference was a few dollars, well worth it to avoid struggling with a TurboTax Catch-22 for hours (and waiting for the IRS to issue the final Form 1116).

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Doc31

TurboTax incorrectly uses the value of foreign taxes paid from Form 1099-DIV as the value of foreign source income entered on Form 1116 Line 1a, provides no indication that it may be incorrect and does not provide guidance about where to find or how to enter correct values.

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rchead037

I think the onus here is mostly on the IRS for making the 1116 calculation so bizarrely complicated (looking at some earlier posts in this thread). It would really make sense to create a simpler process for individual taxpayers who have nothing but mutual fund foreign dividends and taxes... and let the millionaires and corporations (or their accountants) deal with the full complexity. But that's the hazard of our weird tax code: it's an enormous kloodge with layer upon layer of fixes intended to prevent sneaky accountants from gaming the rules for rich people. Regular taxpayers are just collateral damage (and TurboTax and its peers can earn nice money dealing with the insane complexity).

That said, for this particular situation, TurboTax doesn't help much, and also demands entries into fields even when none are needed, it seems. I expect that my past years' Form 1116s are all completely wrong, but it's always just a few dollars involved, so if the IRS ever comes after me, well, I'll just ask them what they think I owe, or they do. This year, it seemed that the foreign tax deduction, much simpler to calculate, is so much easier that I don't even care if it costs me $20 in taxes (and that's the amount, truly).