This sounds like a dividend adjustment. The IRS requires you to adjust your foreign income on Line 1a if that income was taxed at the lower preferential rates (0%, 15%, or 20%) rather than your ordinary income tax rate. The Foreign Tax Credit is meant to prevent double taxation, but the IRS doesn't want to give you a "full value" credit for income that was already taxed at a lower rate in the U.S.
For example, if you had $1,000 in foreign qualified dividends, TurboTax applies a multiplier (often around 0.4054 or 0.5405 depending on your tax bracket) to "shrink" that income. This ensures the credit is proportional to the actual U.S. tax you paid on those dividends.
TurboTax only skips the adjustment if you meet both of these tests for 2023. If you were even $1 over, the software correctly applied the adjustment:
- Your total foreign qualified dividends plus foreign long-term capital gains must be less than $20,000.
- The Income Test: Your 2023 Taxable Income (Form 1040, Line 15) must be below:
- Married Filing Jointly: $364,200
- Single / Head of Household: $182,100
- Married Filing Separately: $182,100
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