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.

[user17714562865]

My other income is taxed at 12%, not 37%.  

[DaveF1006]

The adjustment on Line 1k of the Foreign Tax Credit (Form 1116) Computation Worksheet still applies, even if your income falls in the 12% tax bracket instead of the 37% bracket.

This adjustment helps treat foreign income taxed at lower U.S. rates (0%, 15%, or 20%) the same as ordinary income taxed at higher rates.

My question to you is whether you really need to make this adjustment. The IRS allows you to skip the Line 1k adjustment (meaning you get to keep the full value of your foreign income in the calculation) if you meet both of these criteria:

1. Your total foreign source capital gains and qualified dividends are less than $20,000. 
2. You are below a certain taxable income threshold (for 2025/2026, this is roughly $191,950 for Single filers or $383,900 for Married Filing Jointly)

[user17714562865]

First of all, thank you so much for your help!

My taxable income is less than $383,900 for Married Filing Jointly, however my foreign capital gains and qualified dividends are more than $20,000.

Can you explain how the adjustment is calculated so I can confirm the adjustment is correct?

[DaveF1006]

Yes. If the Capital Gain Rate was taxed at 15%, the multiplier for the adjustment is .4054. At 20%, it is .5405.