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?

[rogge1722]

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.

[KarenJ2 · Accepted solution]

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

[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?

[ReneeM7122]

Social Security does not get added back into your gross income; nor does QBI. 

Here is a TurboTax article about the difference between AGI and Modified AGI (MAGI) on your taxes.

@Wolfwoman

[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).

[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.

[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).

[rchead037]

Wow, in short it's ridiculously complicated, especially for individual taxpayers with mutual funds. Naturally, mutual fund reporting does not tell us at what rate the foreign tax was calculated, nor on what amount of foreign income, so basically, doing Form 1116 correctly when accounting only for RIC income is impossible. I put the onus for that mostly on the IRS, to be sure (and to the generations of accounts who have invented ever-new ways to game the tax code, leading to new tax regs, leading to more gaming....etc. etc.)

[Doc31]

You can hand jam a Form 1116 but you have to go back to your 1099-DIV details and ferret out which mutual fund had how much foreign source income then go chase down the percentage of the totals in each category are foreign source (and if it is less than 50% apparently it won't show up in the documentation), then multiply each component from each mutual fund by the fraction that is foreign source and add it all up and enter it on LIne 1A of the Form 1116. Then make sure that the foreign tax paid (or accrued) gets entered in Part II in either foreign currency or US dollars. in the corresponding row.

You may need to fill out a Schedule B for the Form 1116 as well which tracks your 10 year historic use of the tax credit and it a pain in the ass to fill out (especially the first time) and the IRS instructions are totally incomprehensible so you are pretty much on your own.  TurboTax does not support the Schedule B so you will have to make a paper copy and mail in your return rather than using electronic filing (even though you paid for it when you bought TT).  So aside from poor SW quality control and a clear willingness to let the customers find the bugs in beta software released as final production versions (that is why we continue to get "updates" - along with the need to track IRS late release of finalized forms).  But don't get me started.

[gabriel_ckb]

I have exactly this problem as rchead037:  I have VT on several 1099-DIVs but it is not listed in Vanguard's documentation what the foreign source income percentage is for VT because it did not pass through anything on the foreign tax credit.  Today, I even called up VT's office and when I explained the situation and asked if they could tell me the foreign source income % for VT even if there was no credit, the answer I got was that what is in the Vanguard document is what they are required to report and they couldn't provide the information.

As you can see, VT is listed nowhere here:

https://www.vanguard.com/pdf/FTC_2023.pdf

As a result I have sold my VT and will try to move away from it.  I guess I read somewhere else that people just buy a 100% foreign sourced international index fund to avoid the fact that VT doesn't pass through tax credits.  Also in this case I'd do it just to avoid the fact that it's impossible to report the foreign sourced income for it.

That doesn't really help me for this year's taxes though.  Not sure what to do for that.  I'd be tempted to take the foreign deduction but I use the standard deduction so that's not an option. 

At this point, I'm thinking about simply foregoing the foreign tax credit altogether.  It seems like neither Vanguard or Turbotax are likely to be help sort this out, and the IRS documentation for that form is a mess.  The time I'll spend sorting it out will be worth more than the few hundred dollars of foreign tax credit I'd be giving up.

In any case, lesson learned--from now on I'll only get international index funds that are clearly documented in terms of their foreign sourced income by whoever offers them...

[RobertB4444]

You are entitled to a foreign tax credit regardless of whether you take the standard deduction or not.  And you have put in a good faith effort to discover what your foreign source income is and now it is understandable that you estimate it.  Assume the foreign tax is at 4 or 5% and then figure the income from that.  As long as the foreign source income is not greater than the income on the 1099 that is fine for purposes of calculating your foreign tax credit.

@gabriel_ckb 

[gabriel_ckb]

It doesn't seem the right thing to just make up some percentage numbers and personally decide I've made a "good faith effort".  If I get audited wouldn't that be a big problem?

[DaveF1006]

If there is an audit that is generated, be sure to document all your efforts in determining what the percentage numbers are and keep this documentation handy in case if the IRS questions your good faith estimate.

Details are important which includes all your best efforts in obtaining the percentage numbers. Especially explain how you attempted to contact Vanguard for more specific information and how you were denied and keep a copy of this entire thread regarding the tax advice you received. 

As far as Turbo Tax, we cannot help without knowing specific information that only you or your broker would know. What i can suggest you do is if you are using Turbo Tax Online, I suggest you might consider the Full Service option.  You may pay a little more for this but since Turbo Tax will take responsibility for an accurate report of your return, especially the accuracy of all calculations that  are reported in the return. in this case, you can shift the responsibility to us in case if you are audited.

If you decide not to use Full Service, then keep a detailed account in how you based your good faith estimate on the foreign percentages. This information though is often missing and i am sure IRS is aware of the problem. Besides, i have never heard that this is an issue in the past and i have prepared numerous returns not having this information. 

@gabriel_ckb