Foreign tax credit form 1116

Is capital gain on sale of a US based ETF that invests in non-US stocks considered foreign sourced income?

jtax
Level 10

Deductions & credits

Interesting question. I doubt it because the ETF is almost certainly a US-company. (Assuming you are a US citizen or US resident.) But I don't know enough to give you a clear answer. Perhaps something lets like a pass-through could be in play here.

 

I.R.C. 865 https://www.law.cornell.edu/uscode/text/26/865 

says

 

(a) sales of personal property (i.e. not real estate) by a US citizen are US source income unless an exception applies as described the rest of section 865.

 

So you have to find an exception that applies if you want it to be foreign source income. 

 

Do you have other foreign tax paid so that you want more income for the I.R.C. 904(a) proration calculation?

 

 

 

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Deductions & credits

No other foreign income except mutual fund dividends from US fund  that passed its foreign taxes paid to shareholders.  Just trying to complete form 1116.  My return was rejected with note that read:

/Return/ReturnData/IRS1116/ForeignTaxCreditSource/USTaxWithheldOnDividendAmt - Data in the return is missing or invalid.  I had already indicated RIC for the mutual fund, actually it was two funds on the same brokerage 1099 that I combined.  And the second part of the note seems to imply that I have no or the wrong amount for tax withheld on the foreign dividends? I'm not sure I understand that since the mutual fund pays the foreign tax and it shows up on my 1099. No country is withholding taxes for any of my dividends except the US and its more than enough to cover my taxes?

Deductions & credits

normally the 1099 div will disclose the foreign income amount. 

jtax
Level 10

Deductions & credits

The broker will indeed typically give you the foreign income amount. It does not have an official box on the 1099-Div but is usually somewhere in the supplemental information (which is not sent to the IRS). It is not always easy to find. You can also try looking at the ETF website for the tax info for that particular fund.

 

The investment that paid the foreign tax should disclose somewhere it's foreign income. Other investments might not disclose or might not have any foreign income. 

 

If the ETF did not do the selling but you sold the ETF then the capital gain won't be foreign income. If the ETF paid dividends or capital gains distributions and was taxed on those you'll see both the tax listed on the 1099 and somewhere the amount of foreign income.

 

If you can't find something that says it is foreign income, I think you have to conclude that it is not.

 

If your only foreign tax is from passive investments shown on 1099s or K-1s and it is less than $300 ($600 joint) you don't need a 1116 and it won't matter what you put down for foreign income because the section 904 proportionality won't apply. See https://www.irs.gov/pub/irs-pdf/i1116.pdf page 1.

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I'm reading elsewhere on the net that this rejection error may  be due to an entry on the 1116 wks regarding the date dividends paid.  If you change the date from various to 12/31/20 it fixes the issue?  

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