It is because the foreign source qualified dividends are taxed at a reduced rate on the US return.
If you have received foreign sourced qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116 Instructions, Foreign Tax Credit (Individual, Estate, or Trust), line 1a.
How do I make the adjustment?
- Form 1116 Instructions - See the detailed instructions for “Foreign Qualified Dividends and Capital Gains (Losses)”.
- Generally, if the foreign source income was taxed at the 0% rate, then you must exclude the income from your foreign source income (Form 1116 line 1a).
- Generally, if the foreign sourced income was taxed at the 15% rate, then you must multiply that foreign sourced income by 0.3788 and include only that amount in your foreign source income on Form 1116, line 1a.
- Generally, if the foreign source income was taxed at the 20% rate, then you must multiply that foreign source income by 0.5051 and include only that amount in your foreign source income on Form 1116, line 1a.
- See Publication 514, Foreign Tax Credit for Individuals, for more information on the rate differential adjustment.
Foreign Tax Credit Compliance Tips
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