Foreign Source Qualified Dividends

[TaxPlethora]

I am writing to request assistance with the TurboTax screen entitled “Any foreign source qualified dividends or long term capital gains?"

By way of background, I own an international stock mutual fund in a regular taxable account, and the 1099-DIV reports amounts only in the following boxes:

• Box 1a (total ordinary dividends).
• Box 1b (qualified dividends), where the amount is equal to Box 1a.
• Box 2a (total capital gain distributions), exceeding $20,000.
• Box 7 (foreign taxes paid), exceeding $600.
• (This one mutual fund is the only investment owned that generates foreign income and taxes.)

The supplemental tax reporting information provided by the mutual fund company describes a “standard method” to calculate…

• Foreign source income:  multiply the amount in Box 1a of Form 1099-DIV by the Foreign Source Income Percentage (which is 95%).
• Foreign source qualified dividends:  multiply the amount in Box 1a of Form 1099-DIV by the Foreign Source Qualified Dividend Percentage (which is 80%).

TurboTax, however, reports an error when the calculated foreign source qualified dividends (Box 1a x 80%) is entered, stating that the “foreign qualified dividends and l.t. capital gains” should be at least equal to “total foreign income for this category.”  Given the instructions received from the mutual fund company, this is not possible since “Box 1a x 80%” cannot be greater than or equal to “Box 1a x 95%.”

Thank you in advance for any insights or recommendations on how to enter the correct amount for “foreign qualified dividends and l.t. capital gains.”

[pk]

@TaxPlethora , 

(a) first , the Box 1a heading on the form 1099-DIV has a problem  ( IMHO) -- it says  "Total Ordinary  Dividends ".  It should say  "Total Dividends " .   I say this because Box 1b amount is a subset of Box 1a i.e. of the total dividend income reported in Box 1a,  the amount reported in Box 1b is qualified dividend.

(b) I am not sure I understand  your issue ( and/or why Turbo is complaining ).  What I would expect  ( for example :(

               Box 1a ---- 1000,  of which  1000* .95 = 950 is foreign source  ( Total ) dividend income

               Box  1b ---- 1000  ( all dividend is qualified )  of which  1000 *  .80 = 800 is foreign qualified   dividend.

To  me this implies     World  dividend income  is  $1000 ----- Foreign Source  dividend income (RIC ) is  $950

                                       World  Qualified Dividend  is $1000 ----- Foreign Source Qualified  income is $800

                                                                                             ---------------Foreign Taxes paid ( RIC) ------ amount in Box 7

Am I missing something here ?   If I am,  tell me more , please.

[TaxPlethora]

@pk, thank you for your note – and, I agree with your analysis.

To explain the issue using your numerical example, TurboTax displays a screen entitled “Any foreign source qualified dividends or long term capital gains?" during the Foreign Tax Credit interview.  On that screen, TurboTax prompts the user to enter “foreign qualified dividends and l.t. capital gains.”  When $800 is entered, TurboTax displays the error “this field should be at least $950” (where $950 = “total foreign income for this category” = Box 1a x 95%).  However, based on the supplemental tax reporting information provided by the mutual fund company, the correct answer to the question is indeed $800 (= Box 1a x 80%) – which, of course, is less than the $950 minimum required by TurboTax.

Any insight on why TurboTax might be reporting this error?  And, more importantly, how do I circumvent this issue and enter the correct amount for “foreign qualified dividends and l.t. capital gains”?

Thank you for your assistance.

[TaxPlethora]

This problem persists:  namely, on the screen entitled “Any foreign source qualified dividends or long term capital gains?", TurboTax Deluxe (desktop, macOS) will not accept a value for “foreign qualified dividends and l.t. capital gains” (FQD) that does not equal “total foreign income for this category” (TFI).  However, based on the supplemental tax reporting information provided by the mutual fund company, the two values are indeed different:  FQD = Form 1099-DIV Box 1a x 80%, and TFI = Box 1a x 95%.

Repeating the data entry process does not yield a different outcome:

1. Delete the Form 1099-DIV.
2. Restart TurboTax.
3. Enter the Form 1099-DIV.
4. Complete the Foreign Tax Credit interview (Federal Taxes | Deductions and Credits | Estimates and Other Taxes Paid | Foreign Taxes).

Why does TurboTax require that FQD = TFI?  Is there a means to circumvent this restriction?  (Thank you for your assistance.)

P.S.:  @DaveF1006, I noticed on other threads related to the Foreign Tax Credit you have been able to provide assistance.  Can you please do so here?

[DaveF1006]

TurboTax makes foreign qualified dividends and foreign long-term capital gains (FQD) match your total foreign income (TFI) because it follows IRS rules for Form 1116. The software isn’t broken—it’s applying a requirement based on how the IRS handles foreign qualified dividends and capital gains, Even if the rules don’t always match what mutual funds report.

This rule exists because the foreign tax credit cannot exceed the U.S. tax actually imposed on that income. When the U.S. taxes that income at a lower rate, the IRS requires you to scale down or adjust the foreign‑source amount before using it in the credit calculation. When you report the income in Form 1116, the foreign tax credit is based on the assumption that this income was taxed at the ordinary income tax rate when in reality, it was taxed at the preferred capital gains rate. If this happens, the income must be adjusted downward to reflect the change.

TurboTax uses the IRS’s reduced-rate adjustment for foreign qualified dividends and foreign LTCG, which affects how much of that income shows up on Form 1116, line 1a. The IRS says foreign-source income that gets lower U.S. tax rates has to be adjusted down before it can be included in the foreign tax credit calculation.

TurboTax uses the IRS’s adjustment factors for foreign-source income taxed at preferential rates:

1. If taxed at 0%, the income is excluded entirely.
2. If taxed at 15%, the IRS requires multiplying the foreign-source amount by 0.4054 before entering it on Form 1116 line 1a.
3. Because of this, TurboTax treats all foreign qualified dividends and foreign LTCG as “adjusted foreign-source income”, not as the raw amounts your mutual fund reports. That means:

• TurboTax’s TFI is the adjusted foreign-source income.
• TurboTax’s FQD is also the adjusted foreign-source income.
• Therefore, TurboTax forces FQD = TFI because both represent the same IRS‑adjusted amount.

 The reason why your numbers don't match is:

1. Your fund reports Foreign qualified dividends = 80% of Box 1a
2. Total foreign income = 95% of Box 1a
3. These are correct for raw foreign-source reporting, but Form 1116 does not use raw numbers for income taxed at reduced rates. The IRS requires an adjustment before the income can be used for the foreign tax credit.

You are required to make this adjustment if you meet both of these conditions.

1. Your total foreign source qualified dividends plus your foreign source long-term capital gains (including distributions) are $20,000 or more.
2. Your AGI is:

• Married Filing Jointly: $383,900
• Single / Head of Household: $191,950
• Married Filing Separately: $191,950

[TaxPlethora]

@DaveF1006, thank you for taking the time to provide a thorough and helpful explanation.  Based on my understanding and testing, it seems that there are two scenarios to consider in order to understand the behavior of TurboTax on the screen entitled “Any foreign source qualified dividends or long term capital gains?"…

Scenario 1:  Form 1099-DIV, Box 1a = Box 1b

• TFI must equal the value of FQD entered on the screen entitled “Any foreign source qualified dividends or long term capital gains?" because, by definition, all dividends are qualified.
• This TurboTax behavior remains the same, whether FQD are adjusted or not.
• For reference, the adjustment is described in the IRS publication “Form 1116 Instructions” in the section “Qualified Dividends and Capital Gain Tax Worksheet (Individuals),” and the adjustment amount appears on the Foreign Tax Credit Computation Worksheet, Line 1k (“Adjustment required for QD/LTCG”).

Scenario 2:  Form 1099-DIV, Box 1a > Box 1b

• TFI can be greater than the value of FQD entered on the screen entitled “Any foreign source qualified dividends or long term capital gains?", in contrast to Scenario 1.
• This TurboTax behavior remains the same, whether the FQD are adjusted or not. 
• For reference, a helpful article illustrating this scenario is:  How to Enter Foreign Tax Credit Form 1116 in TurboTax.

Dave, can you kindly confirm (or correct) my understanding – for the benefit of all who may find this thread at a later date?

P.S.:  Abbreviations used herein…

• TFI:  “Total foreign income for this category” as displayed on the screen entitled “Any foreign source qualified dividends or long term capital gains?" when completing the Foreign Tax Credit interview.  It is also known as “Foreign dividends received” as entered on the screen “Tell us about your foreign dividends” when inputting the Form 1099-DIV information.  The amount is equal to Form 1099-DIV Box 1a multiplied by a “foreign source income percentage” specified in the supplemental tax reporting information provided by the mutual fund company.
• FQD:  “Foreign qualified dividends and 1.t. capital gains.”
• Form 1099-DIV, Box 1a:  Total ordinary dividends.
• Form 1099-DIV, Box 1b:  Qualified dividends.

[DaveF1006]

Here is a breakdown of your scenarios.

1. Scenario 1: Box 1a = Box 1b (All Dividends are Qualified)

Your Understanding: Correct. In this case, since every dollar of foreign income is "qualified," TFI must equal FQD. If you try to enter an FQD amount higher than TFI, the software (and the IRS) will flag it because you can't have more qualified income than you have total income.

Even if the IRS requires an adjustment on Line 1k of the Foreign Tax Credit Computation Worksheet (to account for the lower tax rate on qualified dividends), the input screen in TurboTax is asking for the unadjusted amount. TurboTax performs the math behind the scenes to scale that down.

2. Scenario 2: Box 1a > Box 1b (Mixed Income)

Your Understanding: Correct. Here, your foreign source income consists of a "pool" of ordinary dividends (TFI), only a portion of which is qualified (FQD). Therefore, TFI > FQD.

Example: If your mutual fund has $1,000 in foreign ordinary dividends (Box 1a) but only $800 of that is qualified (Box 1b), your TFI is $1,000 and your FQD is $800. TurboTax needs both numbers because the $200 difference is taxed at ordinary rates, while the $800 is subject to the adjustment mentioned in the Form 1116 instructions.

3. Crucial Clarification on the "Adjustment

The "Adjustment" you referenced (from the Qualified Dividends and Capital Gain Tax Worksheet) is where most users get tripped up.

When you enter your FQD into TurboTax, you are entering the gross amount from your 1099-DIV. However, because qualified dividends are taxed at a lower rate (e.g., 15%) than standard income (e.g., 22%–37%), the IRS doesn't let you claim the "full" weight of that income when calculating the foreign tax credit limit.

1. If you look at your actual Form 1116, Line 1a, you will notice the number there might be lower than the TFI you entered. This is the result of that adjustment: 
2. Input: You enter the 100% gross value. 
3. TurboTax Math: It multiplies the FQD portion by a fraction (typically $0.4054$ or $0.3784$ depending on the tax bracket) to "neutralize" the tax rate benefit.
4. Result: This adjusted number is what actually determines your credit limit.

4. Summary for Future Readers

• TFI (Total Foreign Income): The total amount of foreign money you received (Box 1a equivalent).
• FQD (Foreign Qualified Dividends): The "special" portion of that money taxed at lower rates (Box 1b equivalent).
• The Golden Rule: FQD can never be greater than TFI. If they are equal, all your foreign income was qualified. If FQD is lower, you have some ordinary foreign income in the mix.

@TaxPlethora