Business & farm

This is not easy stuff. Good questions.

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@pakman04 wrote:

Does TT use the "Gross Income Sourced at Beneficiary Level" and/or "Gross Income Sourced at Beneficiary Level: U.S. Source Income" if married filing jointly and we both have foreign source income (passive category)?

The first thing is that, as you deduced, the 1116s are not per spouse but per return. You may have more than one 1116 if you have different categories of foreign income and/or different countries.

From the Form 1116 that's generated (only 1 form is generated, I assume since both are sourced from the same foreign income category), I can see it's using our (roughly) combined adjusted gross income amount for line 3e on Form 1116. I'm mostly interested in how TT will incorporate the 2 values noted above for a single K-1 into the combined Form 1116 when married filing jointly?

For example, I can see where the "Gross Income Sourced at Beneficiary Level: Foreign Source Income" number is being combined with foreign source income that's reported on our 1099-DIV/B statements and entered into Line 1a on Form 1116, but I would like to know more specifically how the other 2 values are being incorporated into the return; are one or both part of the combined value that gets entered into Line 3e on Form 1116?

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1116, line 3e is your wordwide gross income. It is quite a complicated calculation. I think that what's going on is there is no single line on a 1040 that captures total gross income. All the elements are added up while subtracting the above the line deductions when calculating adjusted-gross income (AGI). So it needs to be a separate calc. (See below). (Or if using desktop TT right click on line 3e and choose "data source.")

It will include the Total K-1 Trust income sourced at the beneficiary level. (That itself is the sum of US and Foreign income sourced to a bene.)

The reason this is done is because line 3f is the ratio of foreign income to worldwide gross income. This is used in line 3g to calculate the proportion certain deductions that are proportional to the foreign income. the 3g deduction gets added certain other deductions in line 4, 5 and you get a sum of deductions relevant to the foreign income. That is subtracted from the foreign income and entered on line 7, carried down to line 15.

The important thing is that line 15 (foreign income minus certain deductions) divided by your taxable (not gross) US income is computed and entered on line 19. That is the ratio of your foreign income to you US taxable income.

Say you had $300 of foreign tax on $1k of foreign income and $100k of US taxable income at that point. The ratio of foreign income to US taxable is 1% and entered on 1116 line 19.

That % is then applied to your US tax (line 20, 1116). Say you owed $20k US tax. $20k times 1% = $200.  Your foreign tax credit against US Tax is $200 even though you paid $300 in foreign tax. You get to carry forward the unused $100 in case you can use it in the future (but my experience says that rarely happens if this is just minor investments).

Things might be simpler if you can use the simplified foreign tax credit, but you can only do that for investment income and only if the tax is < $300 ($600 MFJ). And my head hurts to much from all this to look into it further.

FYI 1116 line 3e calc from the TT "data source" help:

Form 1116 (COPY 1) : Line 3ea
Calculated Gross income from all sources:

This is total income before deductions and is the sum of:

Form 1040, line 1 plus
Form 1040, line 2b plus
Form 1040, line 3b plus
Schedule 1 (Form 1040), line 1 plus
Schedule 1 (Form 1040), line 2a plus
Schedule C, line 7 (all copies) plus
All gains reported on Schedule D minus Schedule D, line 11, Subtotal Line A(Form 4797, Gain from Part I) plus
All gains reported on Form 4797 plus
Form 1040, line 4b plus
Schedule E, line 3 total plus line 4 total plus
Schedule K-1 Worksheet - Partnerships Box 16, Code B (if it has a value); otherwise income reported on line 1, 2, OR 3 plus any amount on line 4 plus
Schedule K-1 - Partnership Additional Information page 1, Box 11 section,Code A, line 1 (if positive) and line 3 and line 4 and Code I, line 5
Schedule K-1 Worksheet - S Corporations Box 14, Code B (if it has a value); otherwise income reported on line 1, 2 or 3 plus
Schedule K-1 - S Corporation Additional Information page 1, Box 10 section, Code A, line 1 (if positive) and line 3 and line 4 and Code H, line 5
Schedule K-1 Worksheet - Estates and Trusts, Box 14 Code B : Foreign Tax Information section, line 7 (if it has a value); otherwise income reported in Part III lines 5, 6, 7 and 8 plus
Schedule F, line 11 (all copies) plus
Form 4835, line 7 ( all copies) plus
Schedule 1 (Form 1040), line 7 plus
Form 1040, line 5b plus
All positive income amounts on the Other Income Statement.