It depends. While the instructions say to take your adjusted gross income and subtract your standard or itemized deductions, there is a catch. If you have qualified dividends or capital gains (taxed at the lower 0%, 15%, or 20% rates), the IRS requires you to "adjust" those amounts before they go on Line 18.
This is because the Foreign Tax Credit (FTC) limit is based on your tax rate. Since dividends are taxed at a lower rate than your ordinary income, the IRS doesn't let you count the full amount of those dividends.
As a result, if you have entries on Form 1040, Line 3a (Qualified Dividends) or Schedule D, TurboTax is running the Foreign Tax Credit Worksheet to adjust your dividends to reflect the lower US tax rate for computation of the foreign tax credit.
- The Adjustment: You must multiply your qualified dividends/capital gains by a specific fraction (usually 0.4054 or 0.5405 depending on the current tax year's brackets) before adding them to the total.
- The Result: This makes your Line 18 figure smaller than your taxable income on Form 1040, Line 15.
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