Thank you PK and Dave for your answers. Let me elaborate more for further clarity.
My question is more a technical one about how Turbotax calculates box 3d of form 1116 rather than a fundamental one. This box participates in the calculation of the portion of the deductions that must be subtracted from the foreign source income declared in box 1a of form 1116. This portion should be the ratio between the “Gross Foreign Source Income” (box 3d) and the “Gross Income from all sources” (box 3e), where “gross” in the case of capital gains means “excluding losses” based on form 1116 instructions. My problem is that Turbotax does not seem to subtract the losses from the numerator (box 3d) but it does it correctly for the denominator (box 3e), so I wonder where I can let the tool know that the losses must be subtracted from the numerator (gross foreign source income).
Let’s assume the following scenario for better clarity:
- US citizen living in Spain, married filing jointly.
- Job related income: $400,000 (entirely sourced to Spain).
- Standard deduction ($29,200)
- Passive income just coming from two foreign stock sale events (both short-term in Spain) with a combined net capital gain of $25,000:
Sale 1: Proceeds=$80,000, Cost=$50,000 (net gain of $30,000)
Sale 2: Proceeds=$15,000, Cost=$20,000 (net loss of $5,000)
- Passive income is also sourced to Spain
Line 9 in form 1040 (total income) would therefore be $425,000, which is the $400,000 from job related income plus the $25,000 of net short-term capital gains.
There would be two forms 1116, one for General and one for Passive. My question is about the Passive form:
- Form 1116 (passive) box 1a would be $25,000 as the entire passive income will be considered as foreign sourced. It is a short-term capital gain, so no adjustment factor is needed.
- Form 1116 box 3e (gross income from all sources) is $430,000, which differs from line 9 in form 1040 because it excludes the $5,000 loss from “Sale 2”. Turbotax does this right. It reads from Schedule D that there was a loss in one of the sale events and does not take it into account for box 3e calculation.
- Now here is where the problem is. Form 1116 box 3d (gross foreign source income) should be $30,000, which is the foreign short-term capital gains excluding the $5,000 losses from “Sale 2”. However Turbotax calculates $25,000 for this box leading to the wrong number in line 3g. The correct amount in 3g should be $29,200x$30,000/$430,000=$2,037, but it incorrectly calculates $29,200x$25,000/$430,000=$1,697 (the error is that is uses $25,000 in the numerator instead of $30,000) because of the incorrect number in box 3d.
The problem is that I don’t know where to tell Turbotax that the loss in one of the stock sales is foreign sourced. I have not found a way to manually edit box 3d of form 1116 to correct for this.
Thanks
