Deductions & credits

TurboTax makes foreign qualified dividends and foreign long-term capital gains (FQD) match your total foreign income (TFI) because it follows IRS rules for Form 1116. The software isn’t broken—it’s applying a requirement based on how the IRS handles foreign qualified dividends and capital gains, Even if the rules don’t always match what mutual funds report.

This rule exists because the foreign tax credit cannot exceed the U.S. tax actually imposed on that income. When the U.S. taxes that income at a lower rate, the IRS requires you to scale down or adjust the foreign‑source amount before using it in the credit calculation. When you report the income in Form 1116, the foreign tax credit is based on the assumption that this income was taxed at the ordinary income tax rate when in reality, it was taxed at the preferred capital gains rate. If this happens, the income must be adjusted downward to reflect the change.

TurboTax uses the IRS’s reduced-rate adjustment for foreign qualified dividends and foreign LTCG, which affects how much of that income shows up on Form 1116, line 1a. The IRS says foreign-source income that gets lower U.S. tax rates has to be adjusted down before it can be included in the foreign tax credit calculation.

TurboTax uses the IRS’s adjustment factors for foreign-source income taxed at preferential rates:

1. If taxed at 0%, the income is excluded entirely.
2. If taxed at 15%, the IRS requires multiplying the foreign-source amount by 0.4054 before entering it on Form 1116 line 1a.
3. Because of this, TurboTax treats all foreign qualified dividends and foreign LTCG as “adjusted foreign-source income”, not as the raw amounts your mutual fund reports. That means:

• TurboTax’s TFI is the adjusted foreign-source income.
• TurboTax’s FQD is also the adjusted foreign-source income.
• Therefore, TurboTax forces FQD = TFI because both represent the same IRS‑adjusted amount.

 The reason why your numbers don't match is:

1. Your fund reports Foreign qualified dividends = 80% of Box 1a
2. Total foreign income = 95% of Box 1a
3. These are correct for raw foreign-source reporting, but Form 1116 does not use raw numbers for income taxed at reduced rates. The IRS requires an adjustment before the income can be used for the foreign tax credit.

You are required to make this adjustment if you meet both of these conditions.

1. Your total foreign source qualified dividends plus your foreign source long-term capital gains (including distributions) are $20,000 or more.
2. Your AGI is:

• Married Filing Jointly: $383,900
• Single / Head of Household: $191,950
• Married Filing Separately: $191,950