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MMK4
Level 2

Form 1116: Where to include IRA Withdrawal - in Passive or General income?

IRS requires two separate forms 1116 for general income and for passive income. They explain these categories but no mention of IRA, 401(k). TurboTax does not distribute automatically on Form 1116 the income between the general income and passive income, so I wonder under which category should the IRA Withdrawal go?

Thank you!

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3 Replies

Form 1116: Where to include IRA Withdrawal - in Passive or General income?

you do not get a Foreign Tax Credit or even a deduction for foreign taxes paid by the IRA. the tax was not imposed directly on you but on the IRA. 

 

 

 

 

MMK4
Level 2

Form 1116: Where to include IRA Withdrawal - in Passive or General income?

I am a US Citizen living in Canada, and I will have to pay Canadian taxes on my withdrawal from my US IRA account. So I expect my US tax return to show somewhere that I paid taxes in Canada for the withdrawal, and the 1116 form looks like the logical place to do so.

MMK4
Level 2

Form 1116: Where to include IRA Withdrawal - in Passive or General income?

here is the answer Chat GPT gave me, quite helpful, hope it is right:

For IRA and 401(k) withdrawals, the classification on Form 1116 depends on the source and nature of the income. Here's how the IRS typically handles these accounts:

1. IRA Withdrawals and 401(k) Distributions:

  • General Income Category: Withdrawals from traditional IRAs, 401(k)s, or other similar retirement accounts are generally classified as general income for Form 1116 purposes. These are not considered passive income because they are based on deferred earnings from employment or contributions during active work years.

2. Roth IRA Withdrawals:

  • Tax-Free Withdrawals: If you withdraw from a Roth IRA and meet the IRS rules for qualified distributions, it does not generate taxable income and would not appear on Form 1116.
  • Non-Qualified Withdrawals: If the withdrawal does not meet the qualifications, the taxable portion (earnings) may fall under general income, while any return of contributions remains non-taxable.

3. Foreign Tax Credit Allocation:

  • If foreign tax was paid on income generated within an IRA (e.g., dividends, interest from foreign investments), the foreign income might need to be classified separately. However, once withdrawn, the character of the income is typically lost, and it becomes ordinary income for tax purposes.

4. TurboTax or Tax Software Handling:

  • Tax software like TurboTax might require you to manually specify income categories for Form 1116. You should categorize IRA and 401(k) withdrawals under the general income category unless specifically instructed otherwise by a tax advisor or if the IRS has issued guidance to the contrary for your situation.

If you're still unsure, consulting a tax professional can help ensure proper classification for your situation, particularly if you are dealing with foreign tax credit claims.

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