How to Enter Foreign Tax Credit

[msindc1]

Colleagues:

Hopefully someone can help me now that April 15 is done!

I constantly have difficulty with inputs for the Foreign Tax Credit.

The Screen 35 inputs are easy, no problems there.  The routine entries for dividends on Screen 12 are also easy.  But I cannot figure out the proper way to do entries for the Foreign Tax Credit on the Dividends screen.

The 1099 reports foreign taxes paid, fine.  And usually at the end of the 1099 will be a statement of the foreign income received and the associated foreign tax paid.  In the Foreign Tax Credit section of Screen 12 it asks for "percentage foreign or amount, if different - Total Ordinary Dividends" and for qualified dividends and for capital gains distributions.

So assume that the 1099 says the following:

Total Ordinary Dividends $7,020

Qualified Dividends $2,963

Foreign taxes paid $76

Foreign dividends received $1,088

The 1099 is reporting total foreign dividends (i.e., no breakdown between qualified and nonqualified.  So how do I allocate?  And, more fundamentally, what do I put where?  I would assume that I put 1088 in the "percentage foreign or amount - total ordinary" field, but when I do that the numbers on the 1116 do not match the actual amount of foreign dividends!

Help!

Micah

[PhoebeRoberts]

1) "So how do I allocate?"

You look through the million pages of 1099 detail and figure out what specific qualified dividends foreign taxes were withheld from. I initially thought that cursing the broker as I worked would be helpful, but billing the client for the extra time needed seems to make it less miserable. (I upgraded my version of Acrobat this year, too, and exporting the entire thing to Excel and then manipulating the relevant rows is less tedious than typing the numbers by hand.)

2) "I would assume that I put 1088 in the "percentage foreign or amount - total ordinary" field, but when I do that the numbers on the 1116 do not match the actual amount of foreign dividends!"

You also need an amount in the qualified and capital gains distributions fields directly below that one. If none, enter -1.

Don't forget that the IRS currently wants everything broken out country by country, too.

[abctax55]

*Some*brokerage statements break it out very nicely; some don't.

I'm considering firing all clients that use brokerages that *don't* as I agree with Phoebe that it's a pain to look thru all those pages.  And just NOT a good use of our professional time.

[BobKamman]

If it's under $300 / $600, why bother?  You don't need the 1116.

I had one return this year where the amount was $649.  I entered it (ProSeries) but made a mental note to go back and change it to $600 once I used it for the state return.  The note got erased, so that's how the return was filed.  (Paper.)  I'm waiting for the clients to tell me if they hear anything from IRS about it.  

[abctax55]

I agree Bob.  I glance at the detail and if nothing (including the amount) is material I just move on down the road.

[PhoebeRoberts]

Obviously not an issue for returns where the taxpayer is eligible for the election not to file an 1116, although the instructions clearly say "You are still required to take into account the general rules for determining whether a tax is creditable." One of the things I've learned in trying to prepare some larger-dollar returns correctly is that Switzerland withholds at 35%, despite the treaty rate being 15%. 

[IntuitAlicia · Accepted solution]

@msindc1 

When completing the Foreign Tax Credit using the Dividend screen there are a few things to keep in mind.  

1. Make sure you've set up a basic 1116 income category item in Screen 35.1. Enter the name of the foreign country, and the category of income. No further information needs to be entered here at this point (though options are available for certain scenarios when needed).

2. In Screen 16, once you've entered your details for Federal and State, scroll down to the Foreign Tax Credit section.

3. In this section you'll first tie this dividend item to the applicable 1116 set up in Screen 35.1.

4. In the fields below you will make the following considerations:

a. "Percentage foreign (.xxx) or amount, if different - Total Ordinary Dividends" - If this is left blank, the program default will assume 100% of the Total Ordinary Dividends entered above are considered Foreign.  If this is not the case, enter either a percentage (.xxx) or the dollar amount that is considered Foreign (-1 = none).

b. "Percentage foreign (.xxx) or amount, if different - Qualified Dividends" - If this is left blank, the program default will assume 100% of the Qualified Dividends entered above are considered Foreign.  If this is not the case, enter either a percentage (.xxx) or the dollar amount that is considered Foreign (-1 = none). (note: if no qualified dividends were entered above, you can leave this blank to match Federal)

c. "Percentage foreign (.xxx) or amount, if different - Capital Gain Distributions" - If this is left blank, the program default will assume 100% of the Capital Gain Distributions entered above are considered Foreign.  If this is not the case, enter either a percentage (.xxx) or the dollar amount that is considered Foreign (-1 = none). (note: if no capital gain distributions were entered above, you can leave this blank to match Federal)

5. Foreign income tax withheld (foreign currency) or Foreign income tax withheld (U.S. dollars)" enter your foreign income tax withheld here.

a. If the income tax withheld is reported as foreign currency, enter the amount in 'foreign currency' and 'U.S. dollars' and complete the "Foreign currency conversion (Ctrl+E)" input field in Screen 35.1, Foreign Taxes Paid or Accrued.

b. If the income tax withheld is reported in US dollars, enter the amount in 'U.S. dollars' only.

6. (if applicable) Check the box for Foreign taxes accrued if you have chosen to take a deduction for the foreign taxes accrued, as apposed to paid. This will mark the "Accrued" box on Part II of Form 1116.

7. (if applicable) Check the box for 1099 taxes.

8. (if applicable) Enter the Date paid or accrued (if not 1099 taxes). If the dividend item relates to Form 1116, enter in the respective input fields the percentage (in .xxxx format) or amount related to the foreign account, income tax withheld (foreign and U.S.), and the date (in m/d/y format) the tax was paid. The program includes dividends entered in gross income.

Step 4a, 4b, and 4c is where you can run into adjustment issues on the 1116 if these are not filled out correctly. Always start with the default amount printed above, then adjust as needed.