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Deductions & credits
Hi,
I came across this question because I'm dealing with a similar issue as the original poster. I live in Germany, and while the specific details may vary, I believe the tax treaties are comparable.
I tried using Form 1116 with the "Income Re-sourced by Treaty" option. However, according to the Form 1116 instructions, my foreign income is adjusted by multiplying it by 0.4504. As a result, the amount of foreign tax credit I can claim is reduced, and I end up with a U.S. tax bill that exceeds 15% of my dividend income — even though the treaty should cap the U.S. tax on dividends at 15%.
I’ve been trying to understand the reasoning behind this 0.4504 factor. It seems intended to account for the difference between the 15% treaty rate on dividends and the top marginal rate of 37% on ordinary income. But this adjustment seems flawed if you’re not actually in the 37% tax bracket.
Thanks!