FORM 1116 - Do Not Trust the Computation

[kcarterco]

There is an error with the TurboTax Premier desktop edition incorrectly calculating the Foreign tax credit on Form 1116.  Form 1116, line 3e does not accurately compute gross income from all sources.  In my case, the TurboTax computation represents less than 25% of my total gross income from Form 1040.  The Form was accurate until I had a Form 1099-MISC entry added for a nominal amount relative to total gross income.  After that entry the program reduced my credit and became wildly disconnected from the actual number.

Who knows how many thousands of returns have been filed inaccurately computing the foreign tax credit computation.  Most users who don't have detailed knowledge of foreign tax credit computations are relying on a program that is completely inaccurate.  I have no errors or diagnostics and know this is a software issue that has been uncorrected for more than a week.

I know what the number should be.  I can override the program to make the computation accurate.  However, when I use the actual number that is correct through an override you prevent me from Efiling my taxes.

When I loaded TurboTax today there were no program updates but nothing fixed the issue that I have communicated multiple times. 

This is the most frustrating process ever. 

[NCperson]

@kcarterco - this is the documented data source for Line 3E:

If your 1099-MISC mapped to Schedule C, then it is part of the Gross Income Calculation.  Otherwise, please provide more detail on what lines / boxes you used on form 1099-MISC and where it is mapping across Form 1040 and / or Schedule 1.  

Why do you believe form 1099-MISC should be excluded from the calculation?  

Form 1116 (Form 1116) : Line 3e
Calculated Gross income from all sources:

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

Form 1040, lines 1, 2b, 3b, 4b, 5b and 6b 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
Schedule E, line 3 total plus line 4 total plus
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 K-3 - Partnerships Line B - Gross income from all sources
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-3 - S Corporations Line B - Gross income from all sources
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 F, line 11 (all copies) plus
Form 4835, line 7 ( all copies) plus
Schedule 1 (Form 1040), line 7 plus
All positive income amounts on the Other Income Statement.

[Mike9241]

TurboTax does compute 3e correctly. Certain items may not go into its computation 

from the 1116 instructions

Lines 3d and 3e
For lines 3d and 3e, gross income means the total of your
gross receipts (reduced by cost of goods sold), total capital
and ordinary gains (before subtracting any losses), and all
other income (before subtracting any deductions).
Line 3d. Enter your gross foreign source income from the
category you checked above Part I of this Form 1116. Include
any foreign earned income you have excluded on Form 2555
but don’t include any other exempt income.
If you had income from more than one country, you must
enter income from only one country in each column.
If you had to adjust your
foreign qualified dividends or
capital gains (discussed earlier), include those amounts
without regard to any adjustments.
Line 3e. Enter on line 3e in each column your gross income
from all sources and all categories, both U.S. and foreign.
“Gross income from all sources” is a constant amount (that is,
you will enter the same amount on line 3e for each column of
all Forms 1116 that you file). Include any foreign earned
income you have excluded on Form 2555 but don’t include
any other exempt income.
If you are a nonresident alien, include on both lines 3d and
3e your income that isn’t effectively connected with a trade or
business in the United States.
If you had to adjust your foreign qualified dividends or
capital gains (discussed earlier), include those amounts
without regard to any adjustments

[kcarterco]

My 1099-MISC is not mapped to Schedule C because it is not a Schedule C reportable item.  It is reported on Schedule 1, Line 3z as "Other Income."  Specifically, the brokerage reported interest income that was earned on loaned securities.  I am not in the business of loaning money, but the brokerage loans stock positions I own to short-sellers and I earn interest from the brokerage on the loans of those securities.    

I am not sure why you believe I was stating the item should be excluded as I never stated it should be excluded.  It is an item of gross income, and I understand that fully. 

The problem with TurboTax programming remains the same - When an item of gross income reported on Schedule 1, line 3z is reported (by the way .003 of total gross income), TurboTax changes my gross income on Form 1116, Line 3e by decreasing my income 79%, and thereby improperly reducing my foreign tax credit.

This remains a TurboTax software issue.  There are no diagnostics, and no errors.  TurboTax is happy for me to electronically file my return incorrectly because they don't care that I would be overpaying my taxes.

[kcarterco]

Please excuse my blunt reply, but don't tell me TurboTax is accurately computing the credit.  You don't have my return numbers and composition, and you don't have my experience.

You don't ask a single question and presume that I don't know what goes into the computation. I have had foreign tax credits in prior years, and I know the computation components very well.  THE PROGRAM IS WRONG WITH MY RETURN DETAILS.

See my reply to the prior poster.  

[NCperson]

@kcarterco I assume you mean it is reported on line 8Z (not 3z) of schedule 1).

I also use Form 1116 in my tax return, so I added a form 1099-MISC to see how it impacted Form 1116.  It doesn't impact form 1116 in the manner you describe.   Line 3e of form 1116 increases by the exact amount of the dummy 1099-MISC I added.  

have you tried deleting your 1099-MISC form and re-entering? I am using desktop deluxe version. 

[kcarterco]

Sorry yes line 8z.  

I have deleted the 1099 on multiple occasions and re-entered.  It remains incorrect programming.  

I wish someone at TurboTax would review the code. 

Let me put the number blowup in context for my return (which has many items).  These are not my actual numbers but they are proportionately accurate.

Form 1040, line 9  $43,890 before the Form 1099-MISC

Form 1116, line 3e  $49,597 before the Form 1099-MISC is added.  BTW, I have a reconciliation (I am a retired CPA who ran 2 different Fortune 500 tax departments) that this figure is correct (of course it is incomplete because I have not added the 1099-MISC yet).

Schedule 1, line 8z  $156 dollars (from the 1099-MISC)

Form 1040, line 9 $44,046 after the 1099-MISC is added

Form 1116, line 3e $10,659 after the 1099-MISC is added

Maybe now you can see why this is spectacularly incorrect as the only item that changes (though I have multiple entries that make up my gross income) is $156 but it decreases total gross income for purposes of the foreign tax credit almost 80%

It is a source code problem when the 1099-MISC gets added with my other items of gross income.

The dolts at TurboTax have been completely useless.

[kcarterco]

Also, I am using the Premier Desktop version.  Lucky me I paid more for a program that doesn't work.

[NCperson · Accepted solution]

@kcarterco did you try right clicking on the "Gross Income from all Soiurces WorkSheet" to trace how both Line A and Line B are determined  by the software? That would prove the programming bug (or determine whether the source of the issue is elsewhere).  That worksheet is just below Line 3D on Form 1116......

looks like you may be able to adjust your findings on Line B without paper filing. 

[kcarterco]

Thank you.

There remains a programming bug because it is not picking up all the items from my return for the data source details.

Having said that, your suggestion of making an adjustment of 80% to the TurboTax computed amount on Line B can be done without an error or diagnostic.  

Thank you for your suggestion.  

I still feel badly the error persists because people without foreign tax credit experience will rely on an erroneous TurboTax computation, but I am indebted to you for the workaround in my case.  

[OBBARD]

I have a similar problem that the calculation is completely wrong.  The instructions on Form 1116 say to exclude exempt income.  I enter exempt income as a negative amount on Schedule 1 (Form 1040) line 8z.  Under the US-UK Treaty Article 17(1)(a) and Article 17(3) pension and social security is only taxed in the country of residence (i.e. exempt from US tax).  

It looks like the program is ignoring those  negative adjustments.

[DaveF1006]

Yes, this is case where TurboTax does not take an account the exempted foreign income reported as negative income in your return.  You do need to adjust that manually in your return. Here is how to adjust.

1.  Go to Deductions & Credits > Estimates and Other Taxes Paid > Foreign Tax Credit. 
2. When you reach the screen asking for your Foreign Income, do not simply rely on the "imported" numbers.
3. Manually enter the income amount for that country. Instead of entering the "Gross" amount, enter the taxable amount (Gross minus the Treaty-Exempt amount).
4. If TurboTax asks for "Gross Income" and then later asks for "Exemptions," ensure the math on the summary screen shows the Numerator (Line 1a) matches your taxable foreign income.

[lauralikestohike]

As far as I could tell, Turbo Tax didn't enter my foreign tax credit at all, even though it was on the statement from my investment company.  I didn't see any way to verify this.  Turbo Tax calculations are too opaque and I don't know how I could've entered a correction anyway.  Frustrating!

[lauralikestohike]

I'm unable to edit my message.  I used the online version of TT.  This was my first time and I hated every minute of it because I couldn't tell what it was doing.

[SusanY1]

TurboTax cannot automatically calculate the credit based solely on the tax reported on your investment company 1099.  

To generate the credit, visit the section for Foreign Taxes under Deductions & Credits, Estimates and Other Taxes Paid.  

You will need to determine the amount of the income reported on your 1099 that is associated with the foreign tax paid as well as the country or countries where the tax was paid.  This is often located near the end of the statement in the dividend (or interest) details.  Some firms give you a nice, easy total and others provide percentages that you will need to apply to the dividends.  

@lauralikestohike