The .4054 factor is the usual adjustment for the 15% rate group in a typical year. This number can change, though, since it’s tied to the highest U.S. ordinary tax rate for each tax year.
For the 2025 tax year, the tax brackets were shifted significantly due to the One Big Beautiful Bill Act (OBBBA) or standard inflation indexing. If the top ordinary tax rate used in the IRS's 2025 calculation is roughly 37.1% (or if a different "maximum rate" is being pulled by the software based on your specific tax data), the math changes. In this case 15%/37.1%=.4042. Normally, if you used the standard 37% this year, the factor is .4054. It increased to 37.1% because it was indexed for inflation, which changed the multiplier.
To answer your second question, the IRS isn't looking at your specific 12% bracket for this adjustment. They are looking at the "Preferential Benefit" you received because your income was classified as Qualified Dividends.
The IRS lets you pay a lower 15% tax rate on these dividends. If that money were regular income, it could be taxed at rates up to 37%.
Since you’re getting a tax break by paying 15% instead of the higher ordinary rate, the IRS also limits the amount of foreign tax credit you can claim. If you were able to count all of that income on Form 1116 but only paid 15% tax, you could end up with extra credits that'd reduce the tax you owe on your regular salary.
Not all is lost. You don't necessarily lose the difference. The "unused" portion of your 15% payment,the part that exceeded the 12% U.S. limit, is considered excess foreign tax. You can typically:
- Carry it back to the previous tax year to get a refund if you had a "tax deficit" there.
- Carry it forward for up to 10 years to use in a future year when your foreign taxes might be lower than the U.S. limit.
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