Foreign Tax Credit (form 1116) for Trust (form 1041)

[nello]

How does TurboTax adjust foreign qualified and capital gains income for a Trust filing form 1116 for a Foreign Tax Credit?

Does it produce a "Qualified Dividends Tax Worksheet (Estates and Trusts)" as discussed in the 1116 instruction on page 9?

Thank you.

[nello]

My question is, what value goes in line 1a of Form 1116 when it is part of a trust return (using form 1041)

For individual returns (Form 1040) this is well documented in the 2024 Form 1116 instructions page 9 under the heading "Qualified Dividends and Capital Gain Tax Worksheet (Individuals)," which includes clear instructions for determining the "Adjustment exception" which appears under the text, "You qualify for the adjustment exception if you meet both of the following requirements…."

Unfortunately, for trusts (Form 1041), the instructions for the Adjustment Exception are not clear (to me).

Specifically, my questions are:

1. What is the adjustment exception for line 1a on Form 1116 with a Form 1041, and
2. How are the values of foreign qualified dividends reduced for line 1a on Form 1116 with a Form 1041?

Thank you.

[DaveF1006]

It depends.  Let's break this down. The adjustment exception for line 1a on Form 1116 involves the treatment of foreign qualified dividends and capital gains. If you have foreign qualified dividends or long-term capital gains, you may need to adjust these amounts before reporting them on line 1a. If you are under these reporting thresholds, you do not need to make an adjustment.

The adjustment is required if:

1. You have foreign qualifying dividends or long-term capital gains totaling more than $20,000, OR
2. Your total income exceeds certain thresholds based on your filing status. The thresholds are:

• $383,900 if married filing jointly or qualifying surviving spouse,
• $191,950 if married filing separately,
• $191,950 if single, or
• $191,950 if head of household.

To reduce the values of foreign qualified dividends for line 1a on Form 1116, you need to apply a specific percentage based on the tax rate applicable to those dividends. The IRS provides a reduction schedule that are on Line 18 of the worksheet. The adjustment reduction percentages are as follows depending what percentage rates your qualified dividends or capital gains were taxed. This is all in the Instructions for Form 1116 (2024).

This advice is true no matter what type of tax return you file. it is true for 1041 as well as for 1040's.

 

[nello]

@DaveF1006 

Thank you very much for replying to my question. 

However, maybe I wasn’t clear about the recipient of the dividends and capital gains as well as the payor of the foreign taxes.  

My question is about filing a trust return (Form 1041) and the trust claiming a credit for foreign taxes that the trust has paid.  

In the case of a trust return, there is no filing status such as: single, married, etc. Thus, the rules for the Adjustment Exception that you cited seem suited to an individual’s return (Form 1040), not a trust’s return (Form 1041).  

What am I misunderstanding about using rules based on an individual’s filing status to compute the Adjustment Exception for a trust?   

Thank you for clarifying this for me; sorry if I’m being a bit dense.  

[DaveF1006]

Yes, in this instance, the filing status would be irrelevant. In this case, if you have foreign qualifying dividends or long-term capital gains totaling more than $20,000, then the adjustment is required. This is true for individuals as well as for trusts.

@nello