How do I determine total investment assets on Form 1116 so I can allocate investment income expense to foreign income?

[mar2015]

Complete Check stops me at: Form 1116: foreign tax credit comp wks: adj basis of tot inv ast must be entered.  This is to create the ratio to allocate $70 of investment interest expense to foreign income. How do I determine adjusted basis of total investment assets?

[pk · Accepted solution]

Assuming that what you are talking about is soemthing like a  mutual fund which has invested in foreign funds and therefore has foreign income on which foreign taxes were paid on your behalf. You are trying to get credit for that foreign taxes  paid.  Right ?

In such a case , your broker  and /or the back-up sheet to your  Broker's Consolidated Report will detail  the foreign  % of holding  for the  specific fund. ---- thus it will say  Fund XYZ --- various countries 13%.  You then multiply this percentage  by your total honding in that fund to come up with the value of your  foreign holdings  -- which generated the  foreign income.

[meagan]

But the question is....  "Adjusted Basis of investment assets generating foreign income"   Its not asking for a country or what % of the country it is.  It's asking for Adjusted basis - whatever that really means.   No info on TT.

[eschuldt]

same question.  form 1116 "error" is preventing me from filing

[jwhal978]

same issue here. No clarity from TT about which assets/investments this relates to.

[peckham1]

Same issue.  I have no context for what is being asked and since it is a TT calculation form, I don't know what i need to enter here.  TurboTax does a horrible job on clarifying their calculation worksheets

[tuxedorose]

has anyone figured out how to get past this error in TT?

[pk]

@tuxedorose , sorry for the delay in my answer --- generally these adjustments  are required  for things like foreign capital gains/losses ; for foreign qualified dividends  etc. where US has a preferential tax treatment i.e. not taxed at ordinary income tax rate.   For most people  whom pay foreign taxes at source on income from Mutual funds  or similar investments , this adjustment to the foreign  gross income is NOT applicable -- so just enter  ZERO for adjustment  ( TurboTax  should require an entry rather than leaving it blank ).

For more details on  how to adjust etc. see   page 7   of instruction for form 1116.   Note that this  same form is used  for a wide  area of foreign tax  -- from very simple case like foreign dividend income ( through Mutual Funds or direct ownership of foreign stocks  etc.) to very complex foreign investments   and incomes, thus making it overly complex  for many taxpayers.

pk

[eschuldt]

That would have been super helpful during tax season last year. Now not so much. I'm assuming I just put in a random number because Turbo tax had no help figuring out the right number and kept flagging it as an error if I didn't enter anything.

It's becoming less obvious to me what exactly I'm paying to use the software for. This doesn't seem like a question that is so esoteric that there isn't any turbo tax help.

[pk]

@eschuldt , I do not know whether I should apologize or not -- understand  your frustration. Al I can suggest is that if you raise a question on the community board and do not get an answer in a reasonable time, you can always  take the liberty of sending Private Mail ( PM ) to one of us volunteers -- if we don't know the answer, we will bring it to the attention of another whom we think deals with that area. I deal mostly with foreign and international taxation issues such as form 1116.  so have no excuse how I missed this.  Often starting a new thread  may help rather than tacking onto another thread.  That is all I can say-- I empathize with your predicament but really don't know how to help at this stage 

[tuxedorose]

@pk thanks for your detailed response. yes, this form 1116 and its worksheet are used for a many kinds of foreign income but the vast majority of us mere mortals 🙂 just have a bit of a bit of foreign taxes paid because of some of our mutual funds.

for that reason, TT should recognize that fact and ask if this is the case rather than ask us to enter line items on the worksheet that are hard to understand.

that being said... when you suggest to just "enter 0 for adjustment", im not sure I understand?  was that an option when it showed me the error message?....    I think the error message I got told me I had to enter amt for 1116 worksheet PART I, 4b ->1b "adjusted basis of investment assest generating foreign income 

and 1c "adjusted basis of total investment assets

both of these are "User Entered" and I dont think you can enter 0 without an error message

can you please take a look ?  Thanks!

[Anonymous]

i do not know if this is your situation, but if the FTC amount for what is termed passive income (really portfolio) is $300 or less ($600 or less if married filing joint) the form can be omitted under the Simplified Method.  what you lose by using the SM is that ability to use any FTC carryforward from 2018 is lost and you get no carryover of unused FTC to 2020.    the 1116 is required for passive/portfolio income if you are taking the FTC for any other category of FTC such as general, 901(l), 951A, etc.  

[pk]

Agreeing with @Anonymous , you should note that while your foreign taxes paid is recognized  $ for $, the allowable amount for the year is  based on the ratio of  your foreign income to world income, the rest of the amount of foreign tax is eligible for carry back and carry forward.  So sometimes  , even if the foreign taxes paid  is above the safe  harbor amount ( $300 for single and $600 for married filing joint ),  you may be better served  by claiming ONLY the safe harbor amount.  This of course is dependent on your specific circumstances and facts, including your longer term plans  of foreign income and  foreign taxes.

@tuxedorose , I tried duplicating your situation  i.e.  using an adjustment of zero for  gross foreign income/asset ( on which foreign taxes were levied) as also just leaving it blank -- I could not get an error.  However I am using  desktop version of  Home & Business  with the latest updates.  I did indeed find the questions etc. quite opaque and possibly  troublesome for the uninitiated.  Normally I  operate mostly in forms mode  and often shuttling between the step-by-step and forms mode.  Do not have access  and not familiar with the on-line version ( it is supposed to be same  or very similar from user perspective , in step-by-step  mode).  If zero has not worked , I would suggest  clearing the entries  ( gross foreign income/ asset ) and adjustment and re-enter both -- perhaps  this will reset the entry worksheet.   Another thing I noticed is that  to get to the form 1116, other than jump to from search, one has to select "update"  foreign taxes paid under "deductions and credits " tab -- a bit contorted way of getting there.

[tuxedorose]

thanks @pk .   Im glad you explained what the purpose of the calculations on form 1116 but its still not clear.

i see them taking the ratio of foreign income to total income  but then they do a convoluted calculatino based on a % of your ITEMIZED DEDUCTIONS and then subtract that from your foreign income .

then they finally do a ratio of this number to your taxable income 

then multiply this by your tax owed to get the amount of foreign tax credit for this year.

Im trying to understand the logic and intent of all this?!?

is it safe to say

1. the larger the % of your foreign income to your total income allows for a bigger foreign tax credit this year

2. the larger the %  itemized deductions compared to total income, will reduce the foreign tax credit this year

am I missing anything?

[tuxedorose]

thanks. I guess it pays to look at it 2 ways ...

1. taking the $300  with simplified method(for single taxpayer) vs doing all those crazy calculations which might result in less than $300 of tax credit this year

2. doing the standard method (crazy calculations) and possibly taking a lower tax credit this year but getting the benefit of carry fwd on the unused foreign taxes

is that right?