Foreign tax credit question for a trust k-1

[mlpinvestor]

Hi all.  I posted this in the farm and business forum, but no comments so far.  I thought maybe this would be a more appropriate place for it.

I have a trust k-1 showing foreign taxes paid (as divided withholding).  I'd like to claim the foreign tax credit for these, but there are several redundant-sounding boxes in the Turbotax interview and I'm unsure for which ones I'm expected to enter this amount.  I understand, in general, how the foreign tax credit works, i.e. it's based on the amount of foreign income divided by total income, but the Turbotax questions are vague.

I entered the amount of foreign tax in Box 14B, but then it seems to ask for it again.  The confusion starts with the page that says "Enter the foreign tax information as shown on box 14" from the trust.  There are three boxes for "other deductions:" total, foreign, and US source.  I want to claim the credit, so I assume this would be left blank, but since you can also take a deduction for foreign taxes in lieu of the credit, should I enter the foreign tax amounts here, or not?  Turbotax doesn't specify what these "deductions" may relate to, but since they're under foreign taxes, I assume that's what they'd be for.

Then there's a page for "foreign taxes accrued."  I assume this relates to the cash vs. accrual accounting alternatives.  To keep things simple, I want the cash method, but it doesn't let you specifically choose that anywhere.  So should I enter the amount here, also, or leave it blank?

Basically, I need to know if entering foreign taxes in box 14b is enough to get me the credit without double-claiming, or if these other boxes are necessary.

A related question would be, what actually defines "foreign income?"  For instance, some jurisdictions (ex. UK) don't tax dividends paid to US investors at all.  So if a stock you hold is UK-domiciled, does that alone let you count its dividends as "foreign income" for purposes of the numerator of the fraction described here: https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-how-to-figure-the-credit

Doing so would effectively pad the amount of credit you're eligible for with respect to taxes paid on all other foreign holdings for which there is withholding tax.  This seems fishy, since no foreign tax is involved for the UK-domiciled companies, but far be it from me to turn down a smaller tax bill.

[pk]

@mlpinvestor , let me digest this , check the TurboTax screens and come back to you -- give me about 30 minutes.

In the meantime  which country are we talking about ( foreign source income and the taxes paid to  ?

 I am assuming that you are a US person ( Citizen/GreenCard/ Resident for Tax purposes )  .  Also that your tax home is US

pk

[pk]

@mlpinvestor  assuming that you have access to Windows H&B or similar  but one where you can work in the forms mode --- I used step-by-step  in entering  K-1 box details  ( box by box. ).  Then moved to forms mode  and as needed switching to   K-1 worksheet to verify that I have entered everything correctly.  Then to make sure  all is well, selected the K-1 worksheet from forms tree ( in forms mode ) and as necessary confirmed that right clicking on an entry box  i could see the  HELP  & source details/ explanations.  You should try this  as there is a large amount of information there  to supplant the  step-by-step entries ( without explanation ).

Then I included a large amount of foreign taxes paid / accrued and thus form 1116 was  included  in the forms tree.  Here I clicked  an arbitrary box to open the  form 1116 worksheet.  Now I could  enter the Foreign source income ( dividends  line in your case ) and arbitrary chose  a country ( Germany  , one which US has a Tax Treaty with ). This then allowed everything to flow correctly on to form 1040 and Schedule-1 and 3 .

Note that when I entered a  foreign taxes  paid less than the  Safe Harbor amount for the filing status ( Single in my case ), TurboTax behaved correctly and generated no  form 1116 or worksheet but gave me the credit as expected.

Comment on your question about  Paid  or accrued  ( foreign Taxes )  does not directly have much to do with your own accounting process -- For US purposes, all taxpayers are cash basis.  However, when you have foreign countries involved a large part of the world is  NOT calendar   year  tax process --- e.g. UK / commonwealth countries  generally  use  1st April of the calendar year to 31st March of Next year as Tax year.  In such a case the  filing and settlement of  taxes   needs to be allocated for US purposes  and furthermore  the taxes are not settled / finalized ( even if withheld at source )  till post US filing date  and  therefore you claim "accrued" by allocating  based on average for the last settled year.  You then mostly have to come back and file an amended  return to recognize any changes to the allocated tax figure.

Does this make sense ?

Is there more I can do for you ?

[mlpinvestor]

@pk 

Yes, that was very helpful, thank you.  Especially about right clicking on Forms.  I'd never tried that.  And apologies for the late reply.  Yes, I am a US citizen in the US, and the trust is also US-based.  All of this is about dividends from foreign stocks.

I eventually figured out that the parts I was missing are in a completely different section of Turbotax.  Under Deductions & Credits, there’s a foreign tax section totally separate from the one where you enter the actual foreign tax amounts under Wages & Income.  That had the information and selections I was missing.