Context: I choose to take foreign tax as a credit and have more than $600 (MFJ) so must use Form 1116. Let's take T. Rowe Price Intl Discovery Fund (RIC) which has 72.06% foreign source income. For this example, let's say
Box 1a (total ordinary dividends) $6000
Box 1b (qualified dividends) $5000
Box 2a (total capital gains) $2000
Box 7 (foreign tax paid) $800
In the past, in calculating foreign source income, I've followed these instructions that come from TRP:
To calculate your foreign source income and foreign source qualified income, multiply the amount in Box 1a of your Form 1099-DIV by the “Foreign source income %” and “Foreign source qualified income %” columns, respectively.
That says to me .7206 * 6000 = 4323.60 is my foreign source income for this fund. However, if I use the step-by-step method, the interview for calculating foreign-tax income says "You reported $8000 total income from <the fund>. How much of this income was from foreign countries?" The implicated here is that I should instead calculate .7206 * $8000, that is, to include income from capital gains in the calculation. I don't think that is correct.
Am I correct here that the wording in the interview isn't optimal, and that indeed you only multiply Box 1a by foreign source percentage? The help actually does specifically say Box 1a. Perhaps the wording could have been
You reported $6000 in ordinary dividends from <the fund>. How much of these dividends was from foreign countries?
While I'm at it, this gets even more jumbled for custodians that list all holdings as totals on 1099-DIV (example, Vanguard). In this case, you need to multiply only that part of Box 1a by the foreign source multiplier, not the full amount since the full amount contains income from other funds on which foreign tax wasn't paid.
