What is the correct way to complete this line
I think Turbotax has got it wrong
FOREIGN TAX CREDIT COMPUTATION WORKSHEET LINE L
Instructions for form 1116 are not clear as to how to allocate foreign dividends to either the 15% or 20% category. The way TurboTax does this is by calculating the foreign dividends as a percentage of the total dividends and then apply this number to each category (15% or 20% ) as determined by the Qualified dividends / Capital gains work sheet
For example:
Foreign dividends = $200,000
US dividends = $150,000.
Total dividends = $350,000
% foreign = 200,000/350,000 = 57.14%
Let us say that the capital gains worksheet comes up with the following numbers, which are multiplied by a factor which is determined by the IRS instructions
Taxed at 15% $228,549 x 0.4054 = $92,653.7646
Taxed at 20% $121,451 x 0.5405 = $65,644.2655
Total $350,000 $158,298.03
Total dividend adjustment is $158,298.03 and therefore Foreign adjusted dividends are $158,298.03 x 57.14% = $90,4056.58
However most do not use this approach. The IRS does not explicitly indicate how to allocate the foreign dividends, and certainly there is no information in either the instructions or regulations to indicate that this should be done on a percentage basis - as is done by TurboTax. Most individuals first allocate the foreign dividends to the 20% category, and those that are left over to the 15% category
Because the instructions do not provide an explicit ordering rule, the “first allocating” approach is essentially a convention. This approach is used because it is a consistent and reasonable method to reflect the statutory design of the credit computation. Most community discussions (for example, in tax forums and guidance from preparers) confirm—that placing the higher-rate (20%) amounts first is an acceptable method, as long as the allocation is done consistently and is supported by the overall regulatory framework governing the foreign tax credit.
The "first allocating" to the 20% category (i.e., applying the largest reduction factor first) ensures compliance with the intent of the IRS rules, which is to limit the foreign tax credit to the U.S. tax liability on the foreign income at its preferential rate. This effectively means that income taxed at a higher preferential rate (like 20%) is prioritized in the calculation to ensure the foreign tax credit accurately reflects the U.S. tax on that specific income. (Publication 514 and Internal Revenue Code section I(h))
Using the above approach, making all the dividends that are taxed at 20% as foreign, the calculations using the prior figures are as follows
Taxed at 15% $ 78,549 x 0.4054 = $31,843.7646
Taxed at 20% $121,451 x 0.5405 = $65,644.2655
Total $200,000 $97,488
Foreign adjusted dividends are then $97,488
