I am trying to take a foreign tax credit for capital gains taxes paid for the sale of a home abroad, and it is forcing me to "dividends".

[fairguy]

I already enter the sale of the home as income. But the foreign tax credit wizard is not allowing me to enter the capital gains taxes paid so that they can offset capital gains.

[rogge1722]

Here is the procedure to obtain the foreign tax credit for foreign taxes paid on foreign capital gains.

It is assumed that the reporting of all income including foreign capital gains/losses for U.S. tax purposes has been completed and the next step is to obtain foreign tax credit for foreign taxes paid using form 1116.

Some preliminary work has to be completed. Download the “2019 Instructions for Form 1116” and “Pub 514”.
Open the f1116 instructions and go to page 9. Under the heading “Adjustments to foreign capital gains and losses,” you will be using either worksheet A or B or the worksheet in Pub 514. The instructions will guide you to determine which worksheet to use. Whichever worksheet is used, after completion, you will have the amount to insert into f1116 line 1a if there is a gain or line 5 if there is a loss.

Next go to the foreign tax credit interview. Herein is a screen by screen presentation of a simplified scenario whereby the only income for foreign tax credit is the foreign capital gains. If you have foreign taxes paid from other sources, the screen presentation will be slightly different.

1. Foreign Tax Credit
          Yes
2. Before We Begin
        Yes
3. Foreign Taxes
       Continue
4. Tell Us About Your Foreign Taxes
          Continue
5. Foreign Taxes
      Continue
6. Do You Want a Deduction or Credit?
        Credit
7. Reporting Foreign Taxes Paid
       Continue
8. No Other Income or Expenses
          No
9. Completing Forms 1116
          Continue
10. Foreign Tax Credit Worksheet
         Continue
11. Choose the Income Type
           Make the selection then Continue
12. Country Summary
            Add a country.
13. Country Name
           Select from the list
14. Other Gross Income-Country
             If there is a gain from the worksheet:
               In the description, enter “Cap. Gains.”
              Enter the amount from the worksheet.
15. Definitely Related Expenses
            Enter any applicable amount.
16. Foreign Losses
             If you had a net foreign loss from the worksheet,
             enter it here.
17. Foreign Taxes Paid
         Enter the amount
18. Country Summary
         Done
19. Any Foreign Source Qualified Dividends or Long Term Capital Gains?
         Here, Long Term Cap. Gains refers only to capital gain distributions
         from a 1099-DIv.
Continue thru the remaining screens until finished.

[pjhoz]

I have a related question.

I sold an investment property located in a foreign country and paid Capital Gains Tax in that foreign country. The property has carried forward Passive Activity Losses which TurboTax (TT) has tracked in the 14 years since I purchased the property. I have always indicated in TT that the property was located in a foreign country, including this current year.

When calculating the Foreign Tax Credit on Form 1116 Part III, TurboTax interprets the carried forward losses as US losses, not foreign. The total income from sources outside the US on Line 15, is overstated by the carried forward loss.  As a result, the "ratio" number at line 19 is 1.0000 which can't be correct as I have US sourced income.

Therefore TT fully utilizes the Foreign tax Credit in this current year, which is to my advantage, but not correct. 

Does anyone know how to correct this error in TT?

Thank you

[DaveF1006]

It depends. If line 15 on your 1116 is overstated, you can make an adjustment on line 16 by entering the amount of the overstatement by placing a minus sign in front of it. You can do this if you are using the Turbo Tax  software. Then line 17 should reflect the correct amount of the carryforward loss.

By doing this, the ratio should be different because of the different amount in box 17 assuming if the amount in Box 18 remains the same.

[pjhoz]

Thank you for responding Dave.

It feels like the carried forward losses should be factored into the Part  I Taxable Income calculation, perhaps Deductions and Losses on line 3b?

Adjusting at this point would reduce the Gross Foreign source income which would reduce the unallowed portion of foreign income at Line 3g. 

What do you think?

Thank you again

Peter

[DaveF1006]

Actually, this is the only place you can report it. It is not eligible for any other type of deduction or credit. I see your reluctance to report it the way I suggested to because further losses would reduce the foreign tax paid but it is used strictly to reduce income at the sacrifice of reducing the foreign credit carryforward. 

[pjhoz]

Thank you Dave for following up. Not the best outcome for me but who said the tax code is fair and reasonable!

[DaveF1006]

Yes, this is true unfortunately. I prepared returns in the past where carryovers and foreign tax credits were never used and stayed buried forever.

[pjhoz]

Hi Dave,

When we interacted in March your recommendation was to enter my foreign carried forward losses in Line 16 on Form 1116. When I do that, the ratio on line 19 is adjusted and looks correct.

However, by doing so, has triggered approx $1,000 of AMT. My tax advisor suggested that I enter the same amount of carried forward loss in line 16 of the Form 1116 AMT, however the AMT is unchanged.

I notice that all of fields (1 through 7) in Part I of the 1116 AMT are blank, as is Line 15 in Part III (Taxable income form sources outside the US). There are many entries in these fields in the Standard (Non AMT) Form 1116.

Do you have any thoughts on what's going on? Or any fixes I can make?

Regards, Peter

[DaveF1006]

The standard 1116 and AMT versions may be completely different. Without looking at the forms, it is impossible to speculate if the entries are correct. I would suggest filing an extension and pay the tax if you have a tax due to avoid paying interest penalties. 

Meanwhile, please select this link to contact live help to have them perform a diagnostic on the forms to see if the forms calculated your AMT correctly if you are uncertain.