Foreign Tax Credit and Form 1116

[Ex-Expat1]

I am a US citizen residing in the USA.  I worked overseas in the UK for an extended period through 2015.  I have foreign tax credit carryovers, a UK bank account that earns interest, and own stock in a Canadian company that pays dividends.  This is my first year preparing taxes on TurboTax; in the past I have used an accountant. 

Running into issues with Form 1116, Foreign Tax Credit.

- My returns from prior years include three completed Forms 1116: one each for General Category Income, Passive Category Income, and Certain Income Re-Sourced by Treaty.  I'd like to do the same in TurboTax.  In TurboTax I am able to enter information separately for the three categories of income, but the software will only generate a single Form 1116, for the category of income I enter first.  Is there a way to generate a separate Form 1116 for each of the three categories of income I have entered?  It does generate separate foreign tax credit carryover information for the three categories of income, presented along with the worksheets.  

- My foreign source income from 2021 was limited to dividends from Canada, and bank account interest from the UK.  As this is passive income, In TurboTax I entered the passive category income information first, so the software would generate a Form 1116 for Passive category income.

- On the Form 1116 Part I generated by TurboTax, there are column headers for Canada and the UK, but all the information beneath it is blank.  It does not pick up the dividend income from Canada, or the bank account interest from the UK.  I specified the Canadian source dividends when entering the 1099-DIV.  I entered the UK bank account interest as a 1099-INT (though I do not receive a 1099-INT for it), as there does not appear to be another way to enter this information, and TurboTax does not have an option to identify it as coming from the UK.  In the Deductions and Losses section, 2d Gross foreign source income, 2e gross income from all sources, and related calculations, are also blank. How can I get these sections to identify my foreign source passive income and taxes paid, and report it correctly?

- Form 1116 Part II, Foreign Taxes Paid or Accrued, lists "1099 taxes" under "Date paid or accrued" for Country A and Country B.  When entering the 1099-DIV, I specified taxes paid to Canada, but these do not appear here.  I did not pay taxes to the UK.  How can I get this section to identify my foreign tax paid, and report it correctly?

Thank you for your help!

[rogge1722]

Some clarification is needed with regard to the category of income.

For TY2022, you have Interest income from the U.K. and dividend income from Canada. Both are Passive Income category.

Where does the General Category income originate for TY2022?  Nothing in the description indicates foreign earned income for TY2022.

How is the Resourced  by Treaty Category utilized?  That indicates you have U.S. sourced income resourced to a foreign country to avoid double taxation due to the fact that you have to submit a return to both the U.S. and a foreign country.

[Ex-Expat1]

Happy to clarify.

I used to work in the UK.

For TY2022, there is no General category income.  I have General category income foreign tax credit carryovers for tax years 2012-2017.

For TY2022, there is no Re-sourced by Treaty category income.  I have Re-Sourced by Treaty category income foreign tax credit carryovers for tax years 2013-2015.

[rogge1722]

What type of income was resourced by treaty?

[Ex-Expat1]

During the time I was based in the UK, I did some business travel in the US.  The income re-sourced by treaty is an allocation of my earnings, to the time I spent in the US on business.

It comprises salary income, interest income, and capital gains.

[rogge1722]

In order to utilize  a form 1116 for TY2022 for a specific category of income, it is required to have foreign income and foreign tax paid in that category of income during TY2022.

From what you have indicated, that leaves out a form 1116 for General Category  income.

In order to use the Resourced by Treaty category, that would indicate some foreign government has a legal claim  on U.S. sourced income during TY2022 and potentially being double taxed if not resourced.

Thus the only category of income available for TY2022 that I can see is for Passive category and that is the only one to which I can respond.

Bring up to the screen the 1099-INT.  I’m assuming  you filled in a blank form.  Make sure there is an amount in box 1, interest income.

Bring up to the screen the 1099-DIV.  Make sure there is an amount in box 1a ordinary dividends, box 1b qualified dividends, and box 7, foreign tax paid.

If the foreign taxes paid on the 1099-DIV are no more than $300/ $600 married filing jointly,,  TT will automatically  insert the credit on the 1040 line 20.

[Ex-Expat1]

Focusing then on Form 1116 for the foreign source passive income in TY2022.

In 1099-INT, I entered the foreign bank account interest amount in Box 1.  This interest was sourced from the United Kingdom.

In 1099-DIV, I entered the amount in Box 1a ordinary dividends, Box 1b qualified dividends, and box 7 foreign tax paid.   The return is for married filing jointly, and the foreign tax paid is less than $600.  On later screens, I have also identified and reported the amount of foreign dividends received, and noted that Canada is the foreign country to which the foreign tax in box 7 was paid.

In the foreign tax credit entry section, I report that I received dividend income from Canada, confirm the 1099-DIV on which this income was reported, and confirm the amount of foreign source dividend income from Canada.

On the country summary, I enter Canada and United Kingdom as the countries from which I have received foreign source passive income.  The Canada sourced dividend income was entered in the 1099-DIV section.  The UK sourced income was entered in the 1099-INT section.

Turbotax generates a Form 1116 for passive income from Canada (column A) and United Kingdom (column B). 

For Canada, Form 1116 picks up all of the related information from the 1099-DIV and enters it in column A.  But for United Kingdom, it does not pick up any of the information from the 1099-INT.  Column B is blank.  This is understandable as there does not appear a way to identify the interest income as being sourced from the United Kingdom.

How do I identify the relevant interest income as being sourced from the United Kingdom?

[rogge1722]

Before you go thru the foreign tax credit interview, you need to determine if it is necessary.  You qualify for the exemption.  Next is to determine if you have used all or a portion of it.  Bring up form 1040. On line 16, is the tax greater than the exemption?  If so, the exemption amount is posted on line 20 and you are finished.

If line 16 is less than the exemption, then the amount on line 20 is only enough to bring the tax to zero.

If you cannot use  the full exemption, any unused portion cannot be carried over.  You then elect  to not use the exemption.  Then you fill out form 1116.  TT has to see foreign tax credit on the 1099- INT and the 1099-DIV.  What you can do is to subtract $1.00 from the 1099-DIV  box 7 and add it to Box 6 of the 1099-INT.  Then revisit the interview and  TT will see it.

After you are done, open the Federal Information Worksheet. Scroll down to part 6, then look for foreign tax credit and checkmark the box to file the form.  This will cause TT to carryover any unused credit to 2023.

[Ex-Expat1]

To clarify, is what you refer to as the "exemption amount" the foreign tax credit, as calculated by Form 1116?

[rogge1722]

The exemption is the foreign tax credit you can claim without filing form 1116.  If TT knows you qualify with the data it has, it will automatically enter the amount in form 1040, line 20.  Form 1116 instructions on page 2 explains in detail the terms and conditions.

[Ex-Expat1]

I see that page 2 of the Form 1116 instructions refer to an election not to file Form 1116 if certain conditions are met.

One of the conditions is that all of the income and any foreign taxes paid on it must have been reported to me on a qualified payee statement.  I did not receive a 1099-INT for the UK bank account interest, so I need to file Form 1116.

I am back to the issue that the Form 1116 generated by TT does not identify the interest from the UK bank account, as being sourced from the UK.  Form 1116 has a column header for the United Kingdom, but there is no information in the column.

Though I did not receive a 1099-INT for the UK bank account interest, I entered it as a 1099-INT in TT because there does not appear to be another way to enter the income.  In the 1099-INT entry, there does not appear to be a way to specify that the income was sourced from the UK.  I changed box 6a foreign tax paid for this 1099-INT to 1.00, but this did not have any effect on Form 1116.  

How can I get form 1116 to pick up the UK bank account interest?  

[rogge1722]

All i can suggest is to delete form 1116 and start from the beginning.

[Ex-Expat1]

I re-started From 1116 and TT identified the UK 1099-INT with the 1.00 of foreign tax withheld.

Thank you for your help. 

[glengriff]

I'm trying to do something similar and also struggling.

I saw this 'special instruction':

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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.

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I only have one category of income, but I tried to follow this instruction, because I have two separate sources of passive income, and only one was showing up on the list. Anyway, only one 1116 form was created when I attempted, but the instructions are confusing, IMO.

I'm wondering if TurboTax is simply broken in this area.

I'll stay tuned to this discussion. Good Luck!

[Ex-Expat1]

Thank you - I had not seen that special instruction, and have made a note of it for my records.

Found a way to solve my my remaining issue and thought to post for the community.

I want to generate Forms 1116 for income categories for which I received no income nor paid tax in 2022, because I will report foreign tax credit carryovers relating to these income categories.  I cannot find IRS guidance on whether it is necessary to file Form 1116 when in this situation, but in previous years, my accountants have done so.

In the foreign tax credit section, TurboTax allows the user to select the income categories and enter the carryover amounts from previous years.  While TurboTax's completed tax form will show the carryovers in worksheets, it does not generate Forms 1116s for these categories, because there is no income or tax paid that is identified relating to these categories. 

My fix was, within each income category, to enter the countries from previous years to which the carryover amounts relate.  In each country, on the screen "Foreign Taxes Paid - (Country Name)" select "No, I have foreign taxes paid on rental, royalty, or other income (including wages).  Then enter Foreign Taxes on Other Income of 0.   This compels TurboTax to generate a blank Form 1116 for the income category.