Foreign Tax Credit Error with no adjustment exception and requirement to adjust qualified dividends

[Roverdog]

For the foreign tax credit, if one attempts to obtain the credit from (for example) an international stock index fund, I have noticed that there is an error under the following circumstances:

1) One does not qualify for the adjustment exception (i.e., in this case slightly more than $20,000 in foreign qualified dividends; and 2) if supplemental information provided by the fund indicates that the amount of foreign qualified dividends *needs to be adjusted* (i.e., it is different from the qualified dividends reported on box 1b of the 1099-DIV).

In other words, the fund company supplemental information relevant to foreign tax reporting indicates that the amount of foreign qualified dividends should be decreased slightly. However, TurboTax responds with an error saying that "the value of foreign qualified dividends must be at least $XXX," where XXX is the amount in 1099-DIV box 1b. This is incorrect, since I want to have a smaller value for the amount of qualified dividends. (This is the number that will be multiplied by 0.4054 or 0.5405 to adjust the final value of F1116 line 1). Therefore, if the foreign qualified dividend number cannot be adjusted, then that ultimately will decrease the amount of foreign tax credit allowed, and more tax will be (incorrectly) owed.

If anyone has any workarounds, please post them. I have tried making a few dummy 1099 forms, but that does not work either (since it can correct the 1116 problem, but then the regular tax computation is incorrect). Thanks!

[rogge1722]

First, address the error with regard to the statement "the value of the fgn dividends must be etc."

Open a new spreadsheet.

Column A is used for both qualified and unqualified dividends, aka. “Ordinary dividends”.
Column B is used for qualified dividends only.

In cell A1, insert the worldwide ordinary dividends. This is the amount in the 1099-div, box 1a.
In cell A2, insert the foreign ordinary dividends. This amount is derived from the broker’s supplemental info.
In cell A3, subtract A2 from A1. The result is the U.S sourced ordinary dividends.

In cell B1, insert the worldwide qualified dividends. This is the amount in the 1099-div box 1b.
In cell B2, insert the foreign qualified dividends. This amount is derived from the broker’s supplemental info.
In cell B3, subtract B2 from B1. The result is the U.S. sourced qualified dividends.

Each cell in column A must be equal to or greater than the corresponding cell in column B. If that is not the case then there is an error. Recheck all entries.

Next  address the adjustment issue.

When you go thru the interview, the screen with the header "Foreign-Source Income" is asking for the amount from cell A2, Later a screen with the header "Any foreign source qualified dividends or long term capital gains?"  Enter the amount form cell B2.

If the amount is 20k or more, TT will make the adjustment for you with the built in algorithm The amount retained is forwarded to f1116 line 1a.

[Roverdog]

Thanks for the reply. However....

The issue is that spreadsheet box A1=A2, as the supplementary information states that the foreign source income is 100% of total ordinary dividends (1099 box 1a).  So foreign income equals worldwide income, and spreadsheet box A3 is zero.

And foreign qualified dividend income (via the supplementary information) is *less* than worldwide qualified dividend income (as noted in 1099 box 1b).  So spreadsheet box B3 is positive. 

So that generates the error. 

This is for three Vanguard index funds. There is no other income generated by those funds. The only entries on form 1099-DIV are in columns 1a, 1b, and 7 (foreign tax paid). 

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Supplementary information states: "To calculate the foreign source income, multiply the percentage shown by the amount in box 1a." That percentage is 100%, so it is the 1099 box 1a amount. It next states, "To calculate the qualified foreign dividend income, multiply the percentage shown by the amount in box 1a."  (Those numbers are in the 70-95% range). And that latter calculation yields a number that is *less* than the box 1b amount. Again, the generates the error.

This is driving me crazy. Any answers/solutions would be appreciated! 🙂

Thanks

[rogge1722]

If the amount you calculated is less by a small amount, I would be inclined to use the amount in box 1b. Thus A1=A2 and B1=B2 and finish up. Otherwise the percentage is wrong or some other error. Then you would have to contact Vanguard and explain all this to a service rep and have them send you a corrected 1099-DIV or the correct percentage. That could result in a long delay.

[Roverdog]

Since the same issue is occurring with multiple international funds in this fund family, I suspect there might be a holding period, or similar issue, that makes the 1099 1b amount different from the supplementary material amount. 

Probably the long-term solution would be to update TurboTax so that one could further adjust/modify/customize the F1116 box 1 final amount, and have the program ignore the calculated amount. Perhaps in future years, I suppose.

In the meantime, I am inclined to agree with your suggested solution. Technically, it's inaccurate, but the amount is small, and the odds of the IRS noticing or caring is small (because the tax liability is overestimated).

In any event, thanks for your replies, I appreciate  it!  🙂