Foreign Tax Credits

[user17714562865]

How is line 1k "Adjustment required for QD/LTCG" calculated on the Foreign Tax Credit Computation Worksheet?

[DaveF1006]

Line 1k on the Foreign Tax Credit Computation Worksheet (often titled "Adjustment required for QD/LTCG") is where the software calculates the "reduction" required by the IRS when you have foreign income taxed at lower U.S. capital gains rates.

This calculation is designed to reduce your foreign income so that you don't get a full-value credit for income that was only taxed at $15\%$ or $20\%$ in the U.S.

The IRS requires this because $1 of dividend income taxed at 15% is not "tax-equivalent" to $1 of ordinary income taxed at 37%. To make them equal for the credit limit calculation, the software applies a rate differential.