Foreign Tax Credit - Income re-sourced by treaty - How do I enter Schedule B Interest and Dividends

[Robbie V]

Hi -

I've been using TurboTax for years.  I'm a US Citizen, Spanish tax resident.

My income is entirely from US sources.  The income consists of an IRA distribution (1099-R), US bank interest (1099-INT) and US investment company dividends (1099-DIV).

In Spain, I report the IRA distribution, US interest and US dividends and pay the associated tax.  

In the US, I also report these items in the appropriate income sections of TT.

For the US, I've also completed the foreign tax credit in previous years in two categories:

• Passive Income (traditionally Form 1116 - Copy 1)
• Income Re-sourced by Treaty (traditionally Form 1116 - Copy 2)

Normally, the "Passive income" copy notes the portion of dividends that are of foreign source and the tax credit is given.  This is determined by answering TT questions about the portion of income that are foreign sourced.

In the "Income Re-sourced by Treaty" section, I manually enter the IRA distribution under Other Gross Income.  As expected, this value is added to the FTC tax worksheet under Gross Income.  

My question is:

During the TT step-by-step procedure for "Income Re-sourced by Treaty" it specifically states that any income already reported on 1099-INT, 1099-DIV, etc. should NOT be reported again.  How are these items included on Form 1116?  In previous years, I see my US interest and dividends on Form 1116, Part 1, Line C (Interest and Dividends from Schedule B).  I don't recall manually entering a value directly in the Form but perhaps I did.   Is there some other place to link Sched B Interest and Dividends to the Form 1116 or is it a manual entry?

Thanks!     

[tagteam]

@pk ?

[pk · Accepted solution]

@Robbie V , it is a bit messy, but I just tried the scenario that reflects your case ---  Interest ( domestic ) , Dividend income  ( including  foreign taxes paid to country 1 ),  and 1099-R for both taxpayer and spouse   ( taxed by both USA and Spain ( country #2 ).

If you don't want to hand enter zll the gory details for the  " resourced by treaty ", the way I could achieve this is  to ---  at the end of  taking care of dividend   income foreign tax  ( form 1116 work sheet #1 ), go to forms mode and add a new form 1116 comp. worksheet -- from the drop downlist of all the forms available,  then while  this second worksheet is selected , click step-by-step.  Form here on you can enter all the needed information -- because the  second worksheet shows up on your list of 1116   forms , select edit and follow the screen prompts.

Hope this helps

Is there more I can do for you /

pk

[Robbie V]

Thanks @pk and @tagteam 

I appreciate the prompt reply (and I apologize for my delayed response).

I'd like to clarify the steps that you offered before trying your solution.  And, I'll make a copy of my existing tax file before attempting these steps:

1) Delete the existing Form 1116, Income Re-sourced by treaty (currently Copy 2)

QUESTION: Do you recommend that I also delete the Form 1116, FTC Passive Income (currently Copy 1) and re-enter it?  Or is it OK to leave it?

2) Switch to Forms mode and use Open Form to add a new Form 1116

3) Mark the Form as Income Re-Sourced by treaty and then switch to Step-by-Step

4) Use the step-by-step questions to include my 1099 income that is taxed by Spain.

If it's really that simple then it's not messy at all!  Again, thanks for the help!

Rob

[pk]

@Robbie V   I did not delete the 1116 worksheet that was working ( Passive income )  i.e. form 1116 worksheet #1.  All I wanted was  ad   a new form 1116  deleting the original" in-active"   form 1116 worksheet.

Good Luck

pk

[Robbie V]

Hello  @pk 

Quick update: Unfortunately, your suggested solution didn't work for me.  I'm using TT Deluxe for Windows.

I successfully deleted the original Form 1116 (Copy 2).

I successfully manually added a new Copy 2 via Forms mode and marked it for Income Re-sourced by Treaty.

Upon returning to Step-by-step and "Editing" Copy 2 I'm still encountering the same issue.  Under "Other Gross Income" I'm specifically instructed to not enter income already reported on Forms 1099-INT and 1099-DIV.  I can complete all of the questions and I'm never presented an option to re-source that income to Spain.  Essentially, the software behaved exactly the same as when I had added the second 1116 using Step-by-step.

I think the biggest reason for this problem has to do with the foreign tax sections of the Schedule B, 1099-DIV (Box 7) and 1099-INT (Box 6) forms.  In those boxes (via Forms mode) a link is shown to a Form 1116 copy.  If the 1099-DIV form is already linked to the "Passive Income - Copy 1" then it can't be double linked to the "Income Re-Sourced by Treaty - Copy 2".  Now, sure, I could manually link the 1099-INT forms to the Copy 2 since they don't have a foreign source component (and they do show up on Form 1116 - Copy 2; I tried it) but that doesn't solve the inclusion problems for the 1099-DIV forms.

So, unless specifically advised AGAINST this option, here is what I did:

1) I completed Form 1116 (Copy 2) using the step-by-step function (again, without being able to enter any Schedule B information)

2) In Forms mode, I opened up the Foreign Tax Credit Computation Worksheet for Copy 2 (1116 Comp Wks)

3) Under Part 1 g - line c "Interest and Dividends from Schedule B", I entered an "Override" Total value which is the total amount from my Schedule B.  I also added supporting details with each 1099 listed (and totaling the same as the override value) under Column A for Spain.  The adjusted gross income updated to represent the income reported and taxed in Spain. 

4) Interestingly, the override broke all the previous 1099-DIV links to the Passive Income - Copy 1.  So, I manually relinked every 1099-DIV (with a foreign tax/foreign source income value) back to Copy 1

I checked for errors (none) and reviewed the numbers.  I believe it looks good.  I'm happy to try some other solution but I really think the problem lies in not being able to link a 1099-DIV to more than one form 1116.

Ideas?  Warnings? Or any other thoughts?

Thanks,

Rob  

[jlf_spain]

Hello @Robbie V @pk @tagteam . Thank you very much for your posts on this matter. They really helped me a lot to better understand how this “Certain income re-sourced by Treaty” category works in Form 1116

I am also a US Citizen, first year of Spanish tax residency, and I still have a couple of doubts that I hope you could help me to clarify.

These are my source of income: Income from the US (interests, dividends and US Social Security retirement), AND Income from Spain (dividends and Spanish Social Security retirement).

I am assuming that:

• One Form 1116 (say COPY 1) should be used for all my Spain source income, checking the box “Passive Category Income” on it, plus
• A separate Form 1116 (say COPY 2), checking the box “Certain income re-sourced by Treaty” for all my US source income. I also assume that a Statement should be attached to this COPY 2, providing a brief explanation of the US income included, and referring to the specific Spain Tax Treaty applicable provision used, which I believe is Art. 24, para. 3, correct?

Are my assumptions correct?

If so, I have another doubt: Is Social Security retirement income considered passive or general income. If passive, the above two Form 1116 would cover everything. If it is considered general income, should I split COPY 1 in two Form 1116 (one for general and one for passive) or just include Social Security income under Part I, line 1a or 1b (Anyhow, US income in COPY 2 couldn´t be split, since there is no possibility to split re-sourced income in further categories)

Thanks!

[jlf_spain]

Hello again @Robbie V @pk @tagteam

One more question. Are we (US Citizen, Spanish tax residency) required to file Form 8833 in connection to using Form 1116 for income re-sourced by treaty???

Thanks!

[JotikaT2]

Your assumptions are correct.

You will need to prepare Form 1116 for your passive income as well as Form 1116 for your nonpassive income.  In this situation, Social Security is considered nonpassive income and therefore would not be reported with interest and dividend income.  You will need to enter each type of income separately to ensure TurboTax generates 2 separate foreign tax credit forms.

For any income that is resourced according to the tax treaty, you will classify that portion of income accordingly when entering the details for the foreign tax credit under the Deductions & Credits screen in TurboTax.  The details would be entered under the Foreign Taxes section.  Proceed through the screens and you will see the following screen asking you to choose the type of income.  For any income that is resource, be sure to select "Income resourced by treaty" to ensure it is reported accurately on Form 1116.

As far as Form 8833, it is not supported within TurboTax.  However, please see this follow excerpt from IRS Publication 519 which outlines when Form 8833 would be required depending upon your specific situation.

  @jlf_spain

[jlf_spain]

Hi @JotikaT2, Thank you very much for your expert confirmation of my assumptions in relation with Form 1116. I really appreciate it very much.

In relation with Form 8833, it looks like that, based on the reference mentioned in your response, where it reads that one of the cases in which Form 8833 must be filed is when:

• “You claim a credit for a specific foreign tax for which foreign tax credit would not be allowed by the Internal revenue Code”,

which I believe it would be the case when claiming the foreign tax credit for "Income resourced by treaty", then it seems that Form 8833 would have to be filed, right?

Since mailing the return together with the Form 8833 from abroad is always complicated and/or costly, would the inclusion of an “Additional Information” statement in the relevant “Foreign Tax Computation Worksheet” (go to Forms, double click on the relevant Part I Taxable Income figure) instead of Form 8833 would suffice?

And one question for @Robbie V: Have you ever filed the Form 8833 when claiming foreign tax credit for “income resourced by treaty”? Do you think that it is required in our case (US Citizen, Spanish tax residency)?

Thanks!!!

[JotikaT2]

You would need to be careful if you decide you do not fall under the requirements to file Form 8833.  The penalties are steep for not filing when you are required to (up to $1,000 per instance when the form is required to be filed).  If you fall under the requirements to file the form, I recommend filing that form as well to avoid these steep penalties.

@jlf_spain 

[WT6]

If their resourced U.S. bank interest is less than $10,000, wouldn't Exception 5 apply, meaning they would not be obliged to file a Form 8833 for the resourced income?

[jlf_spain]

Hi @JotikaT2 ,I continued digging in this Form 8833 thing. And this is what I found.

The IRS website (https://www.irs.gov/individuals/international-taxpayers/claiming-tax-treaty-benefits) – part of it snipped by you in a prior post -, lists just the “more common situations” for which the filing of the form is or is not required. Similarly, the Instructions for completing the Form 8833 (see https://www.irs.gov/pub/irs-pdf/f8833.pdf) again mentions in page 3: “Positions for which reporting is waived include, but are not limited to, the following. See Regulations section 301.6114-1(c) for other waivers from reporting”.

So, I went ahead, searched for the full text of Regulations section 301.6114-1(c) - you can find it in several sites in the internet, like these ones: https://www.govinfo.gov/content/pkg/CFR-2018-title26-vol20/pdf/CFR-2018-**bleep**[product key remove... or https://www.law.cornell.edu/cfr/text/26/301.6114-1 - and this is what I found specifically mentioned in section (c) Reporting requirement waived:

(1) Pursuant to the authority contained in section 6114 (b), reporting is waived under this section with respect to any of the following return positions taken by the taxpayer:

…………………..

(v) That income of an individual is resourced (for purposes of applying the foreign tax credit limitation) under a treaty provision relating to elimination of double taxation;

…………………..

which, I believe is precisely the case we have been discussing here. In summary, and according to this, I believe that I would be exempted of filing Form 8833 with my 1040.

Please, let me know your thoughts.