Deductions & credits

Here is the procedure to obtain the foreign tax credit for foreign taxes paid on foreign capital gains/losses.

 

It is assumed that the reporting of all income including foreign capital gains/losses for U.S. tax purposes has been completed and the next step is to obtain foreign tax credit for foreign taxes paid using form 1116.

 

Some preliminary work has to be completed. Download the “2020 Instructions for Form 1116” and “Pub 514”.

Open the f1116 instructions and go to page 9. Under the heading “Adjustments to foreign capital gains and losses,” you will be using either worksheet A or B or the worksheet in Pub 514. The instructions will guide you to determine which worksheet to use. Whichever worksheet is used, after completion, you will have the amount to insert into f1116 line 1a if there is a gain or line 5 if there is a loss.

 

Next go to the foreign tax credit interview. Herein is a screen by screen presentation of a simplified scenario whereby the only income for foreign tax credit is foreign capital gains or losses.

 

1. Foreign Tax Credit
         Yes
2. Before We Begin
        Yes
3. Foreign Taxes
        Continue
4. Tell Us About Your Foreign Taxes
         Continue
5. Foreign Taxes
       Continue
6. Do You Want a Deduction or Credit?
       Credit
7. Reporting Foreign Taxes Paid
      Continue
8. No Other Income or Expenses
       No
9. Completing Forms 1116
         Continue
10. Foreign Tax Credit Worksheet
         Continue
11. Choose the Income Type
         Make the selection then Continue
12. Country Summary
          Add a country.
13. Country Name
        Select from the list
14. Other Gross Income-Country
        If there is a gain from the worksheet:
         In the description, enter “Capital Gain”
         Enter the amount from the worksheet.
15. Definitely Related Expenses
        Enter any applicable amount.
16. Foreign Losses
       If you had a net foreign loss from the worksheet,
        enter it here.
17. Foreign Taxes Paid
       Enter the amount
18. Country Summary
       Done
19. Any Foreign Source Qualified Dividends or Long Term Capital Gains?
       Here, Long Term Cap. Gains refers only to capital gain distributions
       from a 1099-DIv.
Continue thru the remaining screens until finished.