Yes, based on the data provided, the reason there was likely no (or minimal) adjustment in 2024, but a likely requirement for one in 2025, is the significant increase in foreign Qualified Dividends/Long Term Capital Gains relative to your total Adjusted Gross Income (AGI). Here is the breakdown of why this occurred:
1. 2024: No Adjustment (Low Ratio of Passive Foreign Income)
- Total Foreign Income (2024): $20,379.15
- AGI (2024): $254,576
- Analysis: Your foreign income was a relatively small percentage (approx. 8%) of your total AGI. The "adjustment" to the Foreign Tax Credit (Form 1116) usually triggers when foreign-sourced qualified dividends or capital gains (which are taxed at lower U.S. rates) are high enough to cause a mismatch, meaning the foreign tax credit is higher than the U.S. tax actually owed on that income.
- In 2024, because the foreign passive income ($20k) was low compared to the total income ($254k), it likely did not trigger the "rate differential adjustment" needed to reduce the foreign source income on Form 1116, line 1a.
2. 2025 Adjustment Likely Required (High Ratio of Passive Foreign Income)
- Total Foreign Income (2025): $40,635.45 (nearly double 2024)
- AGI (2025): $327,589
- Analysis: Not only did your total foreign income double, but the amount of foreign qualified dividends and capital gains (taxed at 0%, 15%, or 20%) also increased significantly compared to 2024. I notice especially the sharp rise in the long-term capital gains distribution.
- The 2025 Shift: Starting in 2024/2025, tax software (and IRS rules) became more stringent regarding Form 1116, line 18, to prevent over-crediting. The 2025 rules call for a required multi-step adjustment that treats all income as if it’s taxed at regular rates. This can sharply lower your foreign tax credit, especially if you have a lot of foreign qualified dividends or capital gains.
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