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Can I allocate foreign dividends between both RICs and other sources in TT for purposes of the foreign tax credit? How do I do this as TT only allows one allocation?

 
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5 Replies
MaryK4
Expert Alumni

Can I allocate foreign dividends between both RICs and other sources in TT for purposes of the foreign tax credit? How do I do this as TT only allows one allocation?

A separate Form 1116 is required for each Category of income, so if the other sources are passive income, they must be included on the passive income 1116.  If you have more than one category of income, you can add it in TurboTax.


See Filing IRS Form 1116 to Claim the Foreign Tax Credit

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Can I allocate foreign dividends between both RICs and other sources in TT for purposes of the foreign tax credit? How do I do this as TT only allows one allocation?

Thanks.  I am finding that TT is very difficult to navigate in terms of adding and navigating separate 1116 forms, particularly when you have three different investment accounts with foreign source passive income from both RICs and individual investments.  The TT system is opaque here.  

Can I allocate foreign dividends between both RICs and other sources in TT for purposes of the foreign tax credit? How do I do this as TT only allows one allocation?

this doesn't answer the question.  Let me be clearer:  On one 1099, I have foreign taxes paid from both RICs and from individuals stocks.  If these were separate 1099s, then they could be entered separately in TT.  But since they are on the same 1099, I have  found no way for TT to allow for both entries to be made for that one 1099.  Unless you know a way to do it.  Thanks.

Can I allocate foreign dividends between both RICs and other sources in TT for purposes of the foreign tax credit? How do I do this as TT only allows one allocation?

Foreign tax credits are governed by some of the most complex sections of the tax code. There are some less common situations involving multiple foreign income sources that might require special handling. These less common situations may require special procedures to generate a return that can be e-filed. This guidance is intended to help explain what those special procedures are and when you need to use them.

How TurboTax Works Currently

First, a little background on how TurboTax handles foreign income. We try to make it as easy as possible by identifying foreign income that is reported on Forms 1099-INT, 1099-DIV, and K-1. Whenever we identify foreign income, we offer to link this income to a Form 1116 when you start the Foreign Tax Credit interview. (Form 1116 is what is used to calculate the amount of your foreign tax credit). When different categories of income are present, or there are more than 3 different sources in the same category, multiple Forms 1116 must be generated. We generate those forms in a specific order.

If there is any "General category" income reported on a K-1, we'll offer to generate a Form 1116 by linking that income first. Next you can generate copies of Form 1116 by linking to "Passive category" income that is reported on Form(s) K-1, Form(s) 1099-INT, Form(s) 1099-DIV, in that order. Finally you can generate additional copies of Form 1116 for other income by editing/creating more copies and entering income and taxes paid by category and country.

When multiple copies of Form 1116 are required, this method will generate multiple copies of Form 1116 in the correct order required by the IRS for the vast majority of taxpayers. You simply report income from forms in the order they're presented in the interview. However, in a small number of cases, this will result in forms that are not in the order required by the IRS, and special instructions must be followed instead of the standard procedure.

When Special Procedures Must Be Followed

The IRS requires the copy of Form 1116 reporting the largest Foreign Tax Credit to be listed first in the return, and on this copy is a summary of the foreign tax credits claimed on additional copies. Since TurboTax generates the forms in the order in which they're linked, this sometimes results in the first copy NOT being the copy with the largest foreign tax credit. This can result in a return that can't be e-filed. This will usually happen if the foreign income on which you paid the most foreign tax is not the first copy of Form 1116 that you create in TurboTax.

How To Create Copies Of Form 1116 In The Right Order

In order to make sure TurboTax generates multiple copies of Form 1116 in the correct order, you should first identify which source of foreign income incurred the most taxes. This item will generally result in the largest credit and should be listed first. Once you know which income item to list first, make sure the first copy of Form 1116 includes this item. In the interview, you do this by NOT "reporting" income from any K-1's or 1099's the first time you visit the Foreign Tax Credit interview, except for the income item that generates the largest credit. ("Reporting" income in the Foreign Tax Credit interview creates a copy of a Form 1116 and links the income to the Form 1116). The first time through the interview, only report income from the item with the largest tax paid. After completing the interview the first time for the largest item, then you can revisit the interview and report any other items you have. (Note: "completing the interview" involves answering Yes to question about being done with "all Foreign Tax Credit Computation Worksheets.") This will generate the additional copies of Form 1116 that you need, and they should be in the correct order.

Here are two sample situations to illustrate the process:

Situation one-Taxpayer has a 1099-DIV with $1,000 in foreign-source dividends and $200 in foreign tax paid. In addition the W-2 reports $50,000 of wages, and $20,000 of this amount was earned in a foreign country with $4,000 of foreign tax paid on the $20,000. TurboTax will first offer to report the income from the 1099-DIV. But in this case, the largest foreign tax credit will be on the wages (which are general category income), so if the 1099-DIV is reported first then the copies will be out of order and the return can't be e-filed. The taxpayer should NOT report the income from the 1099-DIV the first time through the interview. Instead, the taxpayer will report General category income from the foreign wages and the tax paid on that income. After completing the interview with only General category income reported, the interview should be revisited. The second time through the interview the 1099-DIV income can be reported. This will create a return that can be e-filed.

Situation two-Taxpayer is a partner in a partnership reporting general category foreign income on a K-1 of $10,000 and foreign taxes on that income of $2,000. The taxpayer also received $50,000 of foreign source dividend income on a 1099-DIV with $5,000 of taxes paid. When the Foreign Tax Credit interview is first visited, the taxpayer will first be asked to report the income from the K-1. Since the K-1 income is not the largest foreign tax item, the income should NOT be reported (at first). Next TurboTax will prompt you to report the dividend income, which is the largest foreign tax item, so it should be reported. After answering all the questions and completing the interview, the taxpayer can revisit the interview and report the K-1 income. This will create a return that can be e-filed.

Due to complexities in how the foreign tax credit is computed it is possible in some situations that the income with the most taxes may not be the income that generates the largest foreign tax credit. If following these instructions still results in an error during Federal Review related to Form 1116, Line 22, then that is what occurred. You'll need to revisit the Foreign Tax Credit interview and delete the first copy of the form. Complete the interview, and then start again and re-add the information from the copy you deleted. This will re-order the forms. Visit Federal Review again to see if the correct copy is now first (i.e. the error has gone away). Repeat this process until the form with the largest credit has moved to the beginning.

 

Can I allocate foreign dividends between both RICs and other sources in TT for purposes of the foreign tax credit? How do I do this as TT only allows one allocation?

I totally agree with you and your frustration!  TurboTax is not very helpful in regards to Form 1116 and I haven't been able to find any online examples of a completed Form 1116 at any public accounting firm or website for the situation of a USA resident citizen taxpayer who has taxable income in the form of dividends [passive income] from a foreign country source whether mutual funds or ETFs or corporate stock shares which dividends are qualified per USA tax law and for which a credit is available to the taxpayer IF the taxpayer submits a properly completed Form 1116.

 

As a precautionary measure and based on my own experience, and a delay in receiving the credit due me, I now always file my federal return in printed paper form, and include with my return a copy of each page from my brokerage account that provides the details of the dates on which dividends were paid and the foreign taxes paid.  That enables the IRS to enter any additional data they deem necessary and to make any corrections they deem necessary.  By inclusion of a cover letter with my federal return, I authorize the IRS to make any corrections they deem necessary to that Form 1116.  Otherwise, I've found my credit and thus my entire refund due me to be held up by the IRS, typically for several months.

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