Some issues with 2022 Form 1116B when Adjustment exception is not allowed

[vident]

I am having 2 issues. I also contacted Live support and they were not able to explain and asked that I wait til mid March as it is possible that program is being updated.

Question 1. Form 1116 Copy 1 - TT calculates Gross Income from all sources. This amount is much higher that all gross income I have had as shown in in 1040. Almost 38K higher. In comparison the 2021 form calculated the same number and it was much closer though not exact as form 1040 Gross Income. So what is the source of this calculation? 

Question 2. Unlike 2012 return, this year my Foreign Source dividends and  LTCG is higher than 20k, so TT has the Adjustment flag set and on form 1116 Comp Work sheet has on line 1K reduced my  foreign source qualified dividends and LTCG by 86% and the adjusted income is on 14% of actual amount. If I read the instructions of form 1116 the adjustment - "

To adjust your foreign source qualified dividends, multiply your foreign source qualified dividends in each separate category by 0.4054 if the foreign source qualified dividends are taxed at a rate of 15%, and by 0.5405 if they are taxed at a 20% rate. Include the results on line 1a of the applicable Form 1116."

So second question is why TT is using 0.86 instead on 0.40. I am retired and my actual earned income is much less than income from LTCGs so I am not in the 20% bracket and LTCG are taxed at 15%.

The net effect of these calculations by TT is the on 1116B it prorates the standard deduction by dividing foreign source income by Gross source income (question 1) and deducts it and this number is higher that 14% adjusted income it has come up in Question 2. So it is saying that income is less than deduction and rolling over all Foreign taxes paid instead of giving credit for 2022. 

Question 3. If nothing can be done with these calculations, can the rolled over foreign tax be claimed next year even if I have little or no foreign income/tax paid?

Can anyone help with these questions?

[rogge1722 · Accepted solution]

With regard to question 1: From TT’s on-demand guidance:

Form 1116 (COPY 1) : Line 3ea

Calculated Gross income from all sources:
This is total income before deductions and is the sum of:

Form 1040, lines 1, 2b, 3b, 4b, 5b and 6b plus
Schedule 1 (Form 1040), line 1 plus
Schedule 1 (Form 1040), line 2a plus
Schedule C, line 7 (all copies) plus
All gains reported on Schedule D minus Schedule D, line 11, Subtotal Line A(Form 4797, Gain from Part I) plus
All gains reported on Form 4797 plus
Schedule E, line 3 total plus line 4 total plus
Schedule K-1 Worksheet - Estates and Trusts, Box 14 Code B : Foreign Tax Information section, line 7 (if it has a value); otherwise income reported in Part III lines 5, 6, 7 and 8 plus
Schedule K-3 - Partnerships Line B - Gross income from all sources
Schedule K-1 - Partnership Additional Information page 1, Box 11 section,Code A, line 1 (if positive) and line 3 and line 4 and Code I, line 5
Schedule K-3 - S Corporations Line B - Gross income from all sources
Schedule K-1 - S Corporation Additional Information page 1, Box 10 section, Code A, line 1 (if positive) and line 3 and line 4 and Code H, line 5
Schedule F, line 11 (all copies) plus
Form 4835, line 7 ( all copies) plus
Schedule 1 (Form 1040), line 7 plus
All positive income amounts on the Other Income Statement.

With regard to question 2: From TT’s on-demand guidance.

Form 1116 (COPY 1) -- Foreign Tax Credit Comp Wks : Adjusted QDI income

Line 1l, columns A, B and C:

If the Foreign Qualified Dividends and/or Capital Gains Adjustment Smart Worksheet checkbox is not checked, from Line 1f.

Otherwise, from Line 1g, plus the result of one of the following calculations, depending on whether the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet is used:

If Schedule D Tax Worksheet is used.
 - Line 1j multiplied by the Sch D Tax Worksheet, line 40, divided by the Sch D Tax Worksheet, line 11a. The result is multiplied by 0.7568.
PLUS
 - Line 1j multiplied by the Sch D Tax Worksheet, line 11a minus line 40, divided by the Sch D Tax Worksheet, line 11a.
PLUS
 - Line 1i multiplied by the Sch D Tax Worksheet, line 37, divided by the Sch D Tax Worksheet, line 11b. The result is multiplied by 0.6757.
PLUS
 - Line 1i multiplied by the Sch D Tax Worksheet, line 11b minus line 37, divided by the Sch D Tax Worksheet, line 11b.
PLUS
 - Line 1h minus line 1i minus line 1j, with the result multiplied by the following ratio:
 -- Sch D Tax Worksheet, line 31, multiplied by 0.5405, plus
 -- Sch D Tax Worksheet, line 28, multiplied by 0.4054.
 -- The sum of the above two lines is divided by the sum of Sch D Tax Worksheet, lines 20, 28, and 31. The result is the ratio to be used. If the sum of lines 20, 28, and 31 is 0, the ratio is defined as 1.
NOTE: With the exception of the last line for how to calculate the ratio, the result of any calculation which has a 0 as a denominator is defined as 0.

If Qualified Dividends and Capital Gain Tax Worksheet is used.
 - Line 1h multiplied by the following ratio:
 -- Qualified Dividend/Capital Gain Wksht, line 20, multiplied by 0.5405, plus
 -- Qualified Dividend/Capital Gain Wksht, line 17, multiplied by 0.4054.
 -- The sum of the above two lines is divided by the sum of the Qualified Dividend/Capital Gain Wksht, lines 9, 17, and 20. The result is the ratio to be used. If the sum of lines 9, 17, and 20 is 0, the ratio is defined as 1.

NOTE: Calculated result may be adjusted by up to $2 to allow columns A, B, and C to add up to the Total column after accounting for rounding.

With regard to question  3:

From Pub 514 :

“ You cannot claim a credit for unused foreign taxes in a year to which you carry them unless you also claim a credit  for foreign taxes actually paid or accrued in that year.”

Or as  Drake Software put it , "Form 1116 - You cannot have current year foreign income on Part I, line 1a, without current year foreign tax paid in Part II or vice versa".

[vident]

rogge1772,

Please accept my thanks for answering these questions. 

1. For 1, I followed your instructions and I do not have many of the income sources mentioned, but I added add all the positive numbers from 1040 as instructed and Schedule 1 and Schedule D - cap gains - positive numbers only and positive numbers only from other income. Still the calculation is about 21K less than TT calculated amount. 
2. for line 1F the flag for Foreign qualified Dividends ... is checked. You have mentioned 2 forms of calculations. One using Schedule D Tax worksheet and another Qualified Dividends and Capital Gains worksheet. This worksheet exists in my tax return. On what basis does TT choose the method?

I followed instructions for both. In my case 1i and 1j are 0.  So the last calculation of 1h applies. I followed the steps. Line 31  is the capital gains taxed at 15% rate and is being multiplied by 0.54045.  Schedule D tax worksheet line 28 = 83350 which is the limit for Married filing joint returns below which capital gains are charged at 0% and is being multiplied by 0.4054. This divided by sum of lines 20, 28, 31 which amounts to other income (AGI-net capital gain)+83350+15% capital gains.  This ratio comes up as 0.28368. I do not understand the rationale of the calculation, but this ratio does not match the TT calculated rate.

TT calculated ratio matches the second method using Qualified Dividends and Capital Gain Tax worksheet. Line 20 IS 0. So the ratio is 1h = line 17 which is capital gain taxed at 15%. Denominator is line 9 (capital gain taxed at 0%)+ line 17 (capital gain taxed at 15%). This ratio comes to 0.13968.

However, the instructions I pasted from for 1116 say that first – do not include any foreign source qualified dividends which are taxed at 0% rate. Then to adjust multiply 15% capital gains by 0.4054 and 20% by 0.5405. And this is the adjusted value. Using TT calculation all the foreign taxes are being rolled over. Using the instructions from form 1116 (assuming I am understanding the paragraph correctly), some of the foreign tax credit is being utilized this year.

1. Thanks for the answer to question 3. That means there is a strong possibility that will lose the tax credits if I do not have major foreign income in subsequent years which is likely.

If you have any recommendations on whether  should just let TT do the calculation blindly, but there still is the question of Q 1 where there is a difference of 21K in the calculation, I am all ears.

[rogge1722]

With regard to question 1:

From other postings where the amounts from the algorithm were less than  on line 3e, they were initially using the net gains from Schedule D.   When recalculated using the gross  proceeds, that corrected the difference.

With regard to question 3:

If TT generates a Schedule D, the default  “qualified dividends and capital gain tax worksheet” is replaced by the Schedule D worksheet.

The built-in algorithm is correct, and  the explanation for the “qualified dividends and capital gains worksheet” is correct, but the explanation for the “Schedule D worksheet” is out dated with respect to line numbers.  Using the Schedule D worksheet, here is a shortcut  to calculate the amount retained on 1l.  It does not include any amount in 1i or 1j, so if there are amounts in 1i or 1j, it will be an approximation.

The ratio:

(Line 30 x 0.4054) +(Line 33 x 0.5405)

              Line 2a

Multiply the result by the amount in 1h and that should be or close to the amount in 1l, the amount retained.  Subtract that from 1h and the result is in 1k, the amount  adjusted ; (reduced)

[vident]

rogge1722,

Regarding question 1, that can't be true. If I use gross proceeds which are very different from gains then the calculated amount should be much much higher than it is.  For now, I had done an adjustment on 3e to match the maximum the number I could come up with. This does not include net gains/ It includes only gains and disregards all losses. Rationale still escapes me.

Regarding question 2, if I use the short cut below, I get the ratio as 0.8523. TT calculated ratio is 0.8601. At this moment I have left the TT calculation as is and let the entire foreign tax credit get carried over. TT gave me an option to carry back some of the credit to Tax year 2021 and file an amended return, so I plan to do that.

I will wait till mid March or so and see if any updates to the program fix anything and file after that with what it is calculating.

regards,