TurboTax is incorrectly computing Form 1116, line 3e. I had a diagnostic to check a box on Form 1099-MISC line 3 and when I checked the box the gross income changed 80%.

[kcarterco]

TurboTax does not allow an override on Form 1116 Line 3e and this prevents me from efiling my return.

[pk]

@kcarterco ,  on the actual form 1116, line 3e is   Gross Income from all sources and it should be generally the same as  1040-line 11 (a)  and (b).  Thus there is really no reason for edit of this entry.   If you look at the editable version of form 1116  --- 1116 Comp Wks. , there is no 3(e).

This "Gross Income From All Sources " / world income is only used to compute the ratio of  each foreign source income to world income  to distribute / allocate  the deductions/ interest expenses etc.  This is then  used to compute allocated taxable income  for each  category -- world income  ( generally same as  1040 line 15)  and  ditto for each  foreign income by source.

Does this make sense ?  Or am I totally misunderstanding your issue ?

[kcarterco]

Your reply - "Gross Income from all sources and it should be generally the same as  1040-line 11 (a)  and (b).  Thus there is really no reason for edit of this entry."  

I would generally agree with your statement.  However, gross income is not the same lines 11 because line 11 includes net capital losses which are netted against gross capital gains.  

The simple problem remains that TurboTax is incorrectly computing gross income for foreign tax credit purposes. 

TurboTax initially computes "gross income" including all items (i.e., by excluding capital losses when determining gross income) as it should be completed.  For my example I will use $100,000 of gross income.  Thus, Form 1116 line 3e shows $100,000. 

The problem arises when I check box 3 on the 1099-MISC worksheet for "Other Income."  After this box is checked to put the 1099-MISC line 3 amount on Schedule 1, line 8z (which in my case was around $1,500) gross income goes haywire.  After checking that box, my gross income on Form 1116 line 3e should increase to $101,500 (the original $100,000 in my example plus the Schedule 1, line 8z amount of $1,500).

The problem is TurboTax changes the Form 1116 line 3e to approximately $21,000, a REDUCTION in gross income of nearly 80% from an item that should have changed gross income less than 2%.

The TurboTax computations are flat out wrong because the gross income is inaccurate.  That inaccuracy reduces my foreign taxes credit by more than 30%. 

TurboxTax has a bug in the computation of the Form 1116.  I have tried to figure out how to contact TurboTAx including waiting almost 90 minutes on the phone and at the end of that time, the music stopped and nobody ever picked up the phone.

I can't Efile my return because I have an override for the gross income to properly compute the gross income after adding the 1099-MISC amount on Schedule 1.

DO NOT FILE WITH TURBOTAX. - they will screw up your foreign tax credit.

This is a simple point but something that is massively inaccurate with the programming.

[pk]

@kcarterco , you make a very interesting point -- the issue of  losses ( NOL ,  business losses etc. ) affecting world income and therefore  attribution / contribution  to FTC computation.  I had not  thought  of that angle  and therefore will  work through the statutes  and Turbo background details of form 1116 Comp Wks. 

I will take your data and see how Turbo behaves  ( including the  figures  you quoted -- duplicate your situation and then hunt for why ). 

Part of my struggle with the whole situation   ( including  form 1116 , Foreign Pension,  Non-Taxable  foreign pension etc. ) is , currently not being a practitioner, I do not have access to the  " business rules"  that IRS publishes  ( currently limited only to software developers , file creators  etc. -- )  which  would answer  how IRS expects  situations like this to be handled.   Personally , I think IRS should make these available   ( even though this would increase the risk of  bad actors  using  each and all  "loop holes"  to advantage).

Thank you for bringing this  issue  ( at least to my attention ) up -- let me work on this.  Once  I  have more info, I will definitely  hand-over the issue to  my contacts  within TurboTax / Intuit.  I will also come back this thread.

pk

[pk]

@kcarterco  just to replicate the issue you mentioned  regarding form 1116 line 3e ( world income ),:

I created a new return ( on Windows desktop Home & Business ), particulars being:

(a) Filing  MFJ, husband working, wife home-maker

(b) W2 income of  $100,000

(b) Foreign interest income of US$20,000, Foreign Taxes paid  US$4000, Country --Germany

(c)  Income entries normal procedure,  small amount of refund

(d) Chose  Foreign  Tax Credit --- form 1116 shows world income  as  US$120,000

(e)  FTC computed  correctly.

(f) Now ( just for kicks to simulate your case ) went back to incomes and entered  1099-MISC for US$1500 in  Prize/Award  income.  Form 1040 line 11 got adjusted.

(g) Went to forms mode again and  checked form 1116  and the world income now is indeed  US$121,500 --- 

So my conclusion is for what ever reason, I cannot confirm the existence of the issue  you are reporting.  My version of  TurboTax is  updated as of yesterday ( Saturday the 14th. of March ).

All I can say therefore  is that   if, and  only if, your version is fully up to date  and still shows this behavior, then  something else is going on.

Another point you made in your post about capital loss  impact on the  world income and therefore  line 3e on form 1116.   After thinking about it, I would like to point out that form 1116 is for the purpose of identifying the  amount of tax imposed by the US on the doubly taxed income.  This is done  ( and is one reasonably fair way )  by first taking the  raw world income and  that from the foreign sources to create a ratio  for applying the deductions and adjustment  in a ratiometric fashion ( thus creating  taxable amount from each source).  This is then used to allocate the  total  tax on world income to the foreign incomes.

This is because per most tax treaties, US has to recognize / credit the  total foreign taxes paid on the doubly taxed foreign income and US does this but allows credit ( for the year ) only to the extent it taxes that income.  This is further affected by  FTC being a Non-Refundable Credit.

Is there more I can do for you ?

[kcarterco]

I appreciate what you have tried to do. 

However, this remains a TurboTax software problem with how TurboTax is computing their information.  I have no overrides in my return, I loaded my program today and there were no updates, and I have no errors.  

The problem remains the same I explained.  It is a software error.  I don’t have Prizes and Awards.  As I noted in my prior note, my income is on the line 11z on the 1099-MISC worksheet.  I am a retired CPA who ran the tax organizations for 2 Fortune 500 companies.  I know how the credit should calculate and TurboTax has a software error they need to correct.

Warning for Any TurboTax filer with foreign tax credits and income from Form 1099-MISC line 11z.  TURBOTAX IS INCORRECT AND. YOU WILL OVERPAY YOUR TAX LIABILITY BECAUSE THE PROGRAM HAS A BUG THAT NEEDS TO BE FIXED!!!!!!!!!!!

[pk]

@kcarterco , I am surprised at your response.  There was never ( and I do not see in my responses  to you ) any intention of question your knowledge/experience / education/ training/ employment etc. on knowledge of tax code.  I am very sorry and apologize if my response  elicited that thought.

All I wanted to get across --- you presented a problem and therefore based on details of your post I honestly tried to replicate the issue identified by you.  I have not been successful in this effort.  TurboTax behaved exactly as expected ( using my admittedly meagre knowledge of  Tax code related to Foreign Tax Credit).  It was never about you.  It was about an issue  that needed to be replicated.

Note that my failure does not mean that it ( TurboTax  mis-behavior ) does not exist --- I just could not replicate based on my copy of the product, your  post details  and my  Operating system on my machine.

I will therefore forward this thread to the  powers be and see somebody else can replicate the issue and/or resolution.

pk

[DaveF1006]

First of all, delete your Form 1116 and all worksheets that are generated.  Let's start with a clean slate. To delete:

1. Switch to Forms Mode: In the upper right corner of your screen, click the Forms icon. 
2. Locate the Form: In the list of forms on the left-hand side, find Form 1116.
3. Note: If you see multiple copies (e.g., Copy 1, Copy 2), you may need to delete each one individually. 
4. Delete the Form:
5. Click on the form name, then click the Delete Form button at the bottom of the screen. 
6. Mac: Select the form name, then go to the Forms menu at the very top of your computer screen and select Remove Form 1116.
7. Check for Worksheets: Look for any Foreign Tax Credit Worksheets (Comp Wks or AMT Wks) in that same left-hand list and delete them as well.

Check all of your income entries to make sure they are correct. When you get to the 1099 INT entry, make sure you report the foreign tax paid in Box 6 and answer a follow-up question asking what amount of the interest is foreign interest. It will probably be the full amount.

Now, let's reclaim your foreign tax credit.

1. Go to Deductions & Credits > Estimates and Other Taxes Paid. 
2. Click Start/Update next to Foreign Taxes.
3. Choose "Take a Credit" (this is usually better than a deduction). 
4. Follow the screens. When it asks for the Category of Income, select Passive Income (this covers interest and dividends).
5. On the Country Summary screen, select your country.
6. When prompted to "Report Income," you should see your 1099-INT listed. Check the box next to it to "link" that income to the Form 1116 calculation.
7. Complete the remainder of the section.
8. Don't do anything other than what I described.

Now I created a return like my colleague PK, and here is what I found, and this should be correct. Line 3e is $121,500. This amount includes W2 wages, interest, and miscellaneous income. This doesn't include your capital gains or losses.  In fact,  the Instructions for Form 1116, gross income for lines 3e must include:

"...total capital and ordinary gains (before subtracting any losses), and all other income (before subtracting any deductions)."

In looking over the rest of the Form 1116, everything seems to be handled correctly without any error. I think where you are going astray is that you are making adjustments in the form itself. If you are, just stick to the easy step or the step by step version. Entering, adjusting, or overidding on the forms themselves can be a nightmare even for seasoned pros such as ourselves.

[kcarterco]

PK,

In my frustration with TurboTax, I did not clarify the intent of my message was twofold.  First, recognizing that time is a precious commodity I was trying to advise everyone that I would not want them to waste their time trying to work an issue that to me is clearly a programming error because of my background.  Second, I wanted to advise anyone with foreign tax credits in their return should be skeptical before filing their return because incorrect credits will cause them to overpay their taxes.

I appreciate that you took time to try and resolve my issue, and to the extent my response came across as ungrateful, I am embarrassed about that and apologize to you.

I imported all my 1099 information directly into TurboTax from my brokerage.  I verified everything was imported accurately, including all the gross income items for the foreign tax credit. 

When I ran the federal return review I had a single diagnostic.  That diagnostic required me to check a single box for the 1099-MISC line 3 amount that was imported from my brokerage.  After I checked the appropriate box ("Other Income") to address the diagnostic (i.e., increasing my income), the TurboTax computed "gross income" declined by 80% and based on my return that involves a large dollar decrease in gross income and reduced my foreign tax credit by in excess of 40%.

I am deeply frustrated that after waiting 90 minutes on the phone to contact TurboTax I was cut off with no response.  I am unaware of how to directly communicate to TurboTax that is impossible to have an approximately $1,500 increase in income by checking a diagnostic box decrease gross income by more than 80%.

As a result, trying to replicate that inconsistent and erroneous computation seemed like a waste of time that only someone who can look at the code for the program could resolve.  Accordingly, I apologize to you.  

My frustration and anger with TurboTax and their poor QC remains.

[kcarterco]

I deleted my brokerage information which deleted all of the underlying information that fed to the foreign tax credit computation.  

I reimported my brokerage information.  I completed the details prompted going through each of the TurboTax forms.  No overrides exist.  No diagnostic errors exist. 

The problem that existed previously remains, and TurboTax has a computational error.

The foreign tax credit computation (Form 1116, line 3e) reflects "gross income from all sources" that is 21% of what the actual number should be (and additionally it is only 24% of page 1, line 9).  The actual number should include the sum of page 1 gross income items and also should include addbacks for capital losses that were netted against capital gains when computing page 1 gross income.

I don't know where or how the hell the source code of line 3e is being picked up, but as you can see my facts are not being computed accurately by TurboTax.

Trying to replicate this is a waste of time, because clearly there is a program error with TurboTax, and they clearly are not monitoring the community notes.

Do not trust TurboTax and their computation of foreign tax credits.

[DaveF1006]

I understand your frustration. To determine if there is an actual issue here, we would like for you to send us a diagnostic file to see if there is a flaw in the software itself. I reviewed this earlier, and I felt there was no issue but perhaps there is something that was overlooked that is specific to you. 

The diagnostic file that I am asking you to send has no personal information, but consists entirely of data.  All personal information is "scrubbed" from your return. To send:

• Go to the black stripe in the heading of your software, select online.
• Select send tax file to agent.
• Send us back the token number that appears on the screen.

As a part of the TurboTax Community, we take great pride in the service we provide. We do monitor these posts, and we do take things seriously.

@kcarterco 

[kcarterco]

Token 4626745227694515-53606556 for the agent file.

When I loaded TurboTax earlier today there were updates made, but the Form 1116 continues to be wildly wrong.  Accordingly, my frustration grows daily as I will end up mailing the return if this does not get corrected in the next ten days - I will be traveling and unable to access my desktop version.

Beyond frustrating.

[kcarterco]

When I try to add the token in the body, it gets blocked out so I don't know how I am supposed to provide it.

Another reason for my frustration to grow.

[pk]

@kcarterco , while my colleague @DaveF1006  has been working with you to replicate the issue that you are seeing, and

(a) I still do not have a good understanding of what your exact scenario is ( i.e. one that creates  your issue) 

(b) went back over all your posts in this thread and tried a slightly modified version, i.e.  MFJ, wage income, foreign interest, foreign tax, Schedule-1 income ( award / prize ), -- did not try and incorporate  Schedule-1 "other / line z income ) and now added  ( based on one of your posts ) , form 8949 / Schedule-D income (  ordinary gain, multiple  capital asset sale with   gain and  loss , including LTCG and LTCL that affected the  ordinary gain to a final loss, and after each iteration going back and looking at  line 3e of form 1116.   Each time  Turbo's computation matched  my by hand figures.

Thus  I am at a  loss  on what else to try to make this thing show what you are seeing.  Being a volunteer , I cannot see  ( nor do I want  to ) your exact screen renditions.  My colleague @DaveF1006  can and therefore has that advantage.

Only thing I can think of  is if there is someway you can  give me every entry  ( the $ figures ) -- (not computed ones) for  form 1040,  Schedule-1 , form 8949 / Schedule-D and form 1116 , perhaps I can try again to  see where your and mine differ and  just may be able to replicate  the issue.   My struggle is  whether this is a number  influenced    ( singly or as a combination ) issue , confluence of  entry / income types issue  or simply  something totally different.  I am asking for help, really because it bugs me that I cannot replicate an issue.

TT customer service should be able to help on why your tokenization is not behaving --- I have never had to use it and so have zilch on that 

pk

[kcarterco]

PK,

Thank you for your commitment to trying to help recreate/resolve this issue.  Like you, I am bugged this has gone unresolved despite hours on your part and mine. 

I have deleted forms and data, restarted TurboTax, downloaded TurboTax updates, downloaded from my brokerage, entered items manually without download, and the issue persists.  If TurboTax had a mechanism to actually speak with someone who could look at the code that would probably be a start in the right direction.  

Sadly, TurboTax makes it impossible (I was left hanging after one hour and 25 minutes on hold) to reach anyone that I can speak to about this issue.  I have all but given up on this product after using it for 25+ years.  

It is beyond frustrating for me because if I could override 2 numbers (the Form 1116 Gross Income From All Sources Smart Worksheet "Calculated gross income from all sources" Line A, which is the same number that then appears on Column A, line 3e of the Form 1116) I could Efile my federal and state returns.  In the end, the automated computations from my actual data (for which there are no diagnostic errors) for gross income, is off 79%.  That is stunning for a product that millions of people are using, and my daily posts on this channel and feedback notes to TurboTax result in nothing changing in the calculations for my return. 

I believe my data sources (e.g., W-2, 1099-DIV, 1099-B, 1099-MISC, 1099-SA, 1099-SSA) are likely the same as thousands (maybe tens of thousands) of other returns that are potentially getting filed erroneously by TurboTax. 

Because the "calculated gross income from all sources" is so wildly wrong, it is hopeless to see this accurately presented on all those returns, many of which have likely already been filed.

And to jump back to a prior post, TurboTax actually had the gross income from all sources accurate until that 1099-MISC items was added wherein the entire computation blew apart at the seams.