if I sell the stock of a foreign company and have a gain (or a loss), does that gain get included in line 1a of form 1116 as foreign source income?

[ThomasM125]

This would not constitute foreign income unless the proceeds you received also came from the foreign country. So, the identity of the stock belonging to the foreign country would not be the overriding consideration, it would be where you sold the stock.

[sshurtz]

Thanks for the answer to my question last year.  I am now doing my 2021 taxes and have similar issues.  If I sold the foreign company stock on a US stock exchange, and had a gain, then it sounds like the gain would not be foreign source income.  However, if I was paid a dividend on that stock before I sold it, and the foreign country withheld taxes on that dividend, please confirm that the dividend is foreign source income and the taxes withheld can be used for a foreign tax credit.

One further question, if the dividend was a qualified dividend, and my taxable income is less than $80,800 so that qualified dividends are taxed at 0%, can I still use the foreign dividend as foreign source income?  Is there an IRS publication that explains the answer to this question?

[ThomasM125]

The income would be foreign source income and the taxes paid would be foreign taxes.

The regulations state that "If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes."

It is unclear if that applies to income that appears on your tax return but is not taxed due to the level of your income reported on your tax return, as is the case here.

I did not see any reference to distinguishing between taxable and non-taxable foreign income, based on your level of income, in the foreign income entry screens in TurboTax. So, you should enter your foreign taxes in that section and TurboTax will determine whether you are entitled to the credit based on your entries. 

TurboTax guarantees the accuracy of their calculations, so you should complete the Foreign Taxes section under Deductions and Credits and TurboTax will make the necessary interpretation based on your entries.

Here is a link to the IRS article I referenced:

Foreign Tax Credit

@sshurtz

 [Edited 2/16/22 at 1:27 PM EST]