Form 1116 line b and Self employment deductions?

[WriteOffWarrior]

Turbotax is limiting my credit for foreign tax paid, and I think it is in error and I should be able to correct it but a bit fearful of directly editing the form 1116.

Background:  Turbotax home and business 2025 desktop;  foreign (passive) income and foreign tax paid via vanguard mutual fund only.  100% SE income is solely US based income.

Turbotax is lumping the entirety of my SE deductions from schedule 1 onto 1116 line b:  self employment taxes, SE health insurance, SE 401k.  I believe this is incorrect, because those deductions are based 100% on US income.  Turbotax interview never asks me about which should be included (or I'm missing it somehow).  I guess I should be able to edit in forms mode 1116 and delete the entire amount on 3b, and add an explanation that this is all US based income?

My questions:

1.  Is my understanding correct and the best/only way to handle it in turbotax?

2.  Why the heck wouldn't turbotax handle this correctly by asking about these deductions income source, if it wasn't clear?

appreciate any replies!

[pk]

@WriteOffWarrior , your understanding is generally correct in that  form 1116 needs  to  have directly or otherwise  collect the total foreign source income --- generally by country  ( often the case for  passive  foreign incomes ). It should then be able to  compute the applicable  ratio of  foreign source income to world income and  use this to allocate  US taxes for each foreign source income.

If you are comfortable working in the forms mode ( and  for me the easiest way )  , just use the  "1116 Comp Wks".  This worksheet allows you to enter / edit   amounts which then flow to the  actual  " form 1116  ( Copy 1)". 

Use only the entry items  and not the computed ones.  You should be quite safe.  However, just to be extra careful. I would suggest saving your return first  ( save as with a different name ) , then open the original and work with that.  If things go wrong , delete this working copy and use the saved version -- which has a different  name  but represents the original.

Good Luck.

Is there more I can do for you ?

[WriteOffWarrior]

Thank you for the reply regarding the mechanics of editing the forms safely!  I guess I was looking for answers more on the substance.  Let me try to rephrase:

1.  Deductions relating to self employment such as SE taxes, SE 401ks, SE healthcare that are wholly related to 100% USA SE income, should NOT appear on 1116 3b.  Correct, or not?

2.  If correct, is this a known TurboTax deficiency?  If so it seems like a HUGE TurboTax error - it means it is doing it wrong for every Uber driver, hairdresser, consultant with US clients, etc. probably everyone who is SE who isn't working overseas or have international clients and who has to do 1116 -  TurboTax is handling 1116 improperly.  Or, is there some hidden trick to get TurboTax to prompt the user about the income and do form 1116 properly?

[sbs11]

I tried to modify form 1116 Comp Wks on line 3b(1).  However, it cannot be modified.  I tried both deleting the worksheet as well as the form and tried to recreate it, but it did not work.  Can you tell me where exactly in the worksheet to edit it?

[DavidD66]

TurboTax is properly including Schedule 1 deductions on line 3b of Form 1116.  These deductions include Self-Employment Tax, Self-Employed Health Insurance, and Self-Employed Retirement Plan.  According to the IRS instructions for Form 1116, line 3b:

Enter on line 3b any other deductions that don’t definitely relate to any specific type of income (for example, deductions shown on Schedule 1 (Form 1040), Part II, Adjustments to Income)

You should not edit the worksheet to change this entry.

@WriteOffWarrior  @sbs11 

[sbs11]

Is that really true though?  Self-Employment Tax, Self-Employed Health Insurance, and Self-Employed Retirement Plan are definitely related to the self-employment income. If I did not have that income, I would not have had these deductions.

If I had W2 from a corporation, those would have been deducted from my W2 earnings as pretax deductions and would not have shown up here.

So, I do not understand why these are not related to any specific type of income?

[pk]

@sbs11 ,  I am not sure that I am understanding your comments / issue and therefore , please  can you tell more of  what you are trying to do.

As back-ground:

(a) form 1116  is  really a computation mechanism to allocate/ identify US taxes  on your foreign income ( because while  tax treaties require US to give credit for Foreign Taxes paid, US  chooses   to recognize  the full amount but allow ONLY  that amount imposed by US on the doubly taxed income) and  allow a max  of that amount.

(b) It uses a ratio  of  foreign source income to  world income  to allocate  your deductions  ( standard or per Schedule--A  ) and adjustments ( Per schedule- 1 /1A )  to Gross income from foreign sources.

(c)  Thus you end up with  allocated    "taxable income"  on world income and  foreign source  income (s).

(d)  Now you can get a ratio of  foreign source taxable income (s) to  world source taxable income.

(e)  This ratio(s) is now used to allocate  the taxes imposed  on the foreign source income(s).

The resultant  available credit  ( limited), is now available for use  for the current year.  However, note that  FTC being a Non-Refundable  credit, actual used amount may be further limited by available tax liability ( before application/use of FTC).

Given the above, I seek to understand  your comments about  FTC   computation.   I do not think SE adjustment is good example because SE adjustment should really be based on tax-home ( SE income is always where your tax-home is at the moment ).   So please help me understand  your issue.

pk