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Does foreign source income calculation include LT Cap Gains?

Context: I choose to take foreign tax as a credit and have more than $600 (MFJ) so must use Form 1116. Let's take T. Rowe Price Intl Discovery Fund (RIC) which has 72.06% foreign source income. For this example, let's say

 

Box 1a (total ordinary dividends) $6000
Box 1b (qualified dividends) $5000
Box 2a (total capital gains) $2000
Box 7 (foreign tax paid) $800

 

In the past, in calculating foreign source income, I've followed these instructions that come from TRP:

 

To calculate your foreign source income and foreign source qualified income, multiply the amount in Box 1a of your Form 1099-DIV by the “Foreign source income %” and “Foreign source qualified income %” columns, respectively.

 

That says to me .7206 * 6000 = 4323.60 is my foreign source income for this fund. However, if I use the step-by-step method, the interview for calculating foreign-tax income says "You reported $8000 total income from <the fund>. How much of this income was from foreign countries?" The implicated here is that I should instead calculate .7206 * $8000, that is, to include income from capital gains in the calculation. I don't think that is correct.

 

Am I correct here that the wording in the interview isn't optimal, and that indeed you only multiply Box 1a by foreign source percentage? The help actually does specifically say Box 1a. Perhaps the wording could have been

 

You reported $6000 in ordinary dividends from <the fund>. How much of these dividends was from foreign countries?

 

While I'm at it, this gets even more jumbled for custodians that list all holdings as totals on 1099-DIV (example, Vanguard). In this case, you need to multiply only that part of Box 1a by the foreign source multiplier, not the full amount since the full amount contains income from other funds on which foreign tax wasn't paid.

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3 Replies

Does foreign source income calculation include LT Cap Gains?

On the screen that states you reported $8000 total income, TT is adding up the following: box 1a+ 2a +3. Box 2a includes 2b+2c+2d. TT assumes that total includes both foreign and domestic. TT wants to know how much of that total is foreign sourced. From TRC's supplemental info as you state it, the source of foreign income is contained only in box 1a and they quoted 72.6% of box 1a is foreign sourced. That is "ordinary dividends" and that includes both unqualified and qualified dividends. That is the amount that TT wants in that screen. If there was any foreign income in any other box, TRC would explicitly disclose it TRC will also quote the percentage of foreign qualified dividends which might be needed later in the interview, but in most cases it would have to be at least $20,000 to matter.

 

Does foreign source income calculation include LT Cap Gains?

OK, very well. So what you are saying is that foreign income could occur in other boxes, so the question about how much of the total of it all is foreign is appropriate. But in the case of this fund, they are telling me that Box 1a is the only one that has foreign income.

 

I think that's clear. Thanks.

AmyC
Expert Alumni

Does foreign source income calculation include LT Cap Gains?

Yes, it is common to only list box 1a and give you a percentage to use. Now, you are aware of the many places it can be hidden and limitations thanks to @rogge1722 

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