Foreign Qualified Dividends (FQDs) and MAXIMIZING your Foreign Tax Credit (FTC)

[Gezter]

I have significant FQDs that had tax withheld at 25%. My goal is to maximize the FTC and thereby LOWER my total tax due.

I wish to choose to have theses FQDs taxed at marginal rates SO THAT I do not have to adjust the FQD amount on line 1 of the 1116 form. Am I crazy? No - because when the FQD amount on 1116 is adjusted my FTC is "x" BUT when NOT adjusted my FTC is "2x". AND - The larger FTC EXCEEDS the increase in tax calculated by choosing to forego the preferential rate treatment of the FQDs.

How does one do this?

In theory it is simple. The FQD amount is entered on line 4g of form 4952. This requires that tax due be calculated using the Schedule D Tax Worksheet where the 4g amount should appear on Line 3. BECAUSE the FQDs are treated as regular income on this worksheet the FQD amount on line 1 of 1116 SHOULD NOT BE ADJUSTED. (see IRS instructions for 4952 line 4g)

I have 2 problems

1   Turbotax does not appear to generate the Sched D Tax w/s when 4952 line 4g is non-zero.

2   Turbotax will not allow me to enter the unadjusted FQD amount on line 1 of the 1116.

Please HELP!

Thanks

[Mike9241]

4g is when you elect to have qualified dividends and long-term capital gains treated as ordinary income. therefore the dividends are no longer qualifying. so you can do both with the same dividends nonqualifying for 1116 but qualifying for 4952.

[Gezter]

And your solution to the 2 problems I define is..............

[rogge1722]

With regard to form 4952, the interest expense in part 1 must be greater than the investment income in part 2 in order to populate line 4g. The details are worked out in the "Special Election Smart Worksheet." The amount TT inserts in 4g will appear in the Schedule D Tax Worksheet line 3.

With regard to form 1116. TT will adjust the qualified dividends starting at 20k. In Forms Mode, bring up the f1116 worksheet. Line g,1, k "Adjustment required for QD/LTCG" contains the amount adjusted. Put the pointer over the cell and right click. On the box that appears, click on Override. Then delete the entry. Line 1m will then display the same amount as 1f and will convey this to f1116 line 1a.

[Gezter]

@rogge1722 

Thanks for the instructions on getting the unadjusted amount into 1116. That solves my problem #2.

Do you have an answer to #1?

Much appreciate your help

Cheers

[Gezter]

@rogge1722 

I posted 2 replies to your post yesterday and I only see one - re 1116. So here goes again...

Re 4952 and my problem #1. 4952 line 4g can be used regardless of having investment expenses or none. The problem is TT only generates the 4952 when the expenses are > than investment income. The reason is there is no requirement to file 4952 if expenses are < investment income. Unfortunately TT is ignoring the case when I want to use 4952 JUST to enter an amount on line 4g. 

See these instructions for 4952...page 3... beginning "Line 4g In general, qualified dividends and ..."

I can get TT to generate the 4952 by forcing an amount $1 more than the investment income. I can enter an amount on line 4g. The problem is I do not see a Schedule D Tax worksheet in the forms, nor do I see the special election worksheet that you mention. And TT is still using the tax calculated on the CGQD worksheet instead of that from the Sched D Tax worksheet. Appreciate your help - thanks again.

[Gezter]

@rogge1722 

BTW I discovered this strategy for maximizing FTC in an article written by protax consulting. I included a link to the article which maybe caused TT to nix it. Google "Maximizing the Foreign Tax Credit on Qualified Dividends" and you should find the article. Scroll down to the part which reads....CAN FURTHER STEPS BE TAKEN TO REDUCE THE TAXPAYER’S OVERALL TAX BURDEN? THE ANSWER IS “POSSIBLY.”

In my case the reduction will be significant if I can get TT to work. Otherwise I will have to file a paper return.

[rogge1722]

If you have the cd version with Forms Mode, I have found a work around.

[Gezter]

@rogge1722 

Hi Rogge!

I do have the CD version of TT deluxe. I am up to date on updates. I can see the forms and add forms. Would love to see your workaround.

Thanks in advance!

Cheers

[rogge1722]

Here is the work around.

In Forms Mode, open up form 4952. In line 4g, type in the required amount. TT will follow thru with the calculations to line 6.

Next open up the Schedule D tax worksheet. Put the pointer over line 3 and right click. On the box that appears, click on Override. Enter the amount from the 4952/4g. TT will follow thru with the calculations to line 47.

Next open up the form 1116 Comp. Wks. Delete the entry in line 1k as previously mentioned.

TT will accept these Overrides without causing any errors so the return can be e-filed.

BTW on page 4 of the IRS instructions for form 4952, in the Note paragraph, it mentions this 4952/1116 strategy. Apparently the IRS has no problem with it being utilized.

[Gezter]

I already did everything in your workaround except the part with the Sched D w/s line 3. Did you miss what I wrote in my previous reply...

" I can enter an amount on line 4g. The problem is I do not see a Schedule D Tax worksheet in the forms, nor do I see the special election worksheet that you mention. "

I do see that w/s for the AMT. 

Is there a way to force TT to use a Sched D w/s?

[rogge1722]

TT is using the default Qualified Dividends and Cap Gain Wks. To replace it with the Schedule D form and worksheet, perform the following:

Bring up the 1099-DIV. worksheet and insert $1.00. into box 2b, the section 1250 gain. After this you should see in the left pane both the Schedule D form and the Worksheet in lieu of QDCG Wks.  TT will use this to calculate the tax.

[rogge1722]

TT is using the default Qualified Dividends and Cap Gain Wks. To replace it with the Schedule D form and worksheet, perform the following:

Bring up the 1099-DIV. worksheet and nsert $1.00. into box 2b, the section 1250 gain. After this you should see in the left pane both the Schedule D form and the worksheet in lieu of QDCG Wks.

[Gezter]

Put $1 on 2b as you suggested. Even tried putting @$10,000 there. Still do not see Sched D w/s - just the QDCG w/s.......

[rogge1722]

Bring up the Schedule D. You should see $1.00 on line 19. Line 20 should have the lower box checkmarked which states to complete the Schedule D Tax Wks.  If so TT should have brought it up.  If not it might be the fact that the deluxe edition has limitations that the premier edition  which I'm using  does not have.