When calculating foreign-source income for mutual funds, you generally apply the Foreign Source Income Percentage to the relevant income categories. However, not all types of income may be included in the calculation. Here’s how it typically works.
- Qualified Dividends (QD) and Non-Qualified Dividends (NQD): These are usually included when applying the Foreign Source Income Percentage.
- Long-Term (LT) and Short-Term (ST) Capital Gains: The IRS generally does not consider capital gains as foreign source income for purposes of the foreign tax credit. So, you may omit LT and ST capital gains when applying the percentage.
Steps to Calculate:
- Add up the total dividends (QD + NQD) for each fund.
- Multiply by the Foreign Source Income Percentage for each fund.
- Exclude capital gains from the calculation unless specific IRS guidance states otherwise.
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