Form 1116, question about line 1a and 3d

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Hello turbotax community.

Here is my question: I have to fill form 1116 because I have foreign passive income from bank interests and a rental. I have only paid foreign taxes for the rental but not for the bank interests. I see in the instructions that in line 1a I should include all foreign income (from that country) regardless whether I have paid taxes or not: "Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line i, even if isn’t taxable by that foreign country".

1) Is that really the case? Even I have not paid taxes for the bank interests, should I still include that gain along with the income from the rental?

2) I am able to include the income from the rental but how do I handle the bank interests? The information seems to be contradictory as it says: "Do not enter any income already reported on Form 1099-INT" ?????

3) I have reported that foreign bank interests along with the bank interests from the US on Schedule B. Is that the right place? Again, form 1116 says I should not include any income already reported but at the same time is not picking up that foreign income for form 1116.

4) Is there a difference between the amounts in line 1a and line 3d?

Thank you in advance for your help with this matter.

TurboTax Premier Online

rogge1722

Level 10

Since there is no foreign tax paid on the interest, reporting it on Schedule B is OK. Reporting foreign income even if not taxed helps to increase the foreign tax credit limit which helps to reduce or possibly eliminate carryovers.

The part about not reporting interest on form 1099-INT can be ignored because TT assumes that foreign tax paid in box 6 has an entry and TT would see it and process it in the front end of the foreign tax credit interview. In your case, there is no front end so you can include it with your rental income on the screen asking for the description such as "untaxed interest & rental income" if they are from the same country.

With regard to line 3d, here is TT's explanation:

From the corresponding copy of the Foreign Tax Credit Computation Worksheet, line 1f of the corresponding column. Additionally, if this is a General category of income (Box d is marked above), and there is an entry in the related column in the Income Excluded on Form 2555 Smart Worksheet on the Foreign Tax Credit Computation Worksheet, then from the corresponding copy of the Foreign Tax Credit Computation Worksheet, line 1f of the corresponding column, PLUS Form 2555, line 45, of the indicated copy(ies) of Form 2555.