Deductions & credits

Here is a breakdown of your scenarios.

1. Scenario 1: Box 1a = Box 1b (All Dividends are Qualified)

Your Understanding: Correct. In this case, since every dollar of foreign income is "qualified," TFI must equal FQD. If you try to enter an FQD amount higher than TFI, the software (and the IRS) will flag it because you can't have more qualified income than you have total income.

Even if the IRS requires an adjustment on Line 1k of the Foreign Tax Credit Computation Worksheet (to account for the lower tax rate on qualified dividends), the input screen in TurboTax is asking for the unadjusted amount. TurboTax performs the math behind the scenes to scale that down.

2. Scenario 2: Box 1a > Box 1b (Mixed Income)

Your Understanding: Correct. Here, your foreign source income consists of a "pool" of ordinary dividends (TFI), only a portion of which is qualified (FQD). Therefore, TFI > FQD.

Example: If your mutual fund has $1,000 in foreign ordinary dividends (Box 1a) but only $800 of that is qualified (Box 1b), your TFI is $1,000 and your FQD is $800. TurboTax needs both numbers because the $200 difference is taxed at ordinary rates, while the $800 is subject to the adjustment mentioned in the Form 1116 instructions.

3. Crucial Clarification on the "Adjustment

The "Adjustment" you referenced (from the Qualified Dividends and Capital Gain Tax Worksheet) is where most users get tripped up.

When you enter your FQD into TurboTax, you are entering the gross amount from your 1099-DIV. However, because qualified dividends are taxed at a lower rate (e.g., 15%) than standard income (e.g., 22%–37%), the IRS doesn't let you claim the "full" weight of that income when calculating the foreign tax credit limit.

1. If you look at your actual Form 1116, Line 1a, you will notice the number there might be lower than the TFI you entered. This is the result of that adjustment: 
2. Input: You enter the 100% gross value. 
3. TurboTax Math: It multiplies the FQD portion by a fraction (typically $0.4054$ or $0.3784$ depending on the tax bracket) to "neutralize" the tax rate benefit.
4. Result: This adjusted number is what actually determines your credit limit.

4. Summary for Future Readers

• TFI (Total Foreign Income): The total amount of foreign money you received (Box 1a equivalent).
• FQD (Foreign Qualified Dividends): The "special" portion of that money taxed at lower rates (Box 1b equivalent).
• The Golden Rule: FQD can never be greater than TFI. If they are equal, all your foreign income was qualified. If FQD is lower, you have some ordinary foreign income in the mix.

@TaxPlethora