No adjustment on form 1116 with 300k domestic and 80k foreign qualified dividends?

[puravidapto]

I have 300,000 US qualified dividend and 80,000 India qualified dividend only as income. I believe the line 1 and line 18 should be adjusted per form 1116 instructions https://www.irs.gov/pub/irs-pdf/i1116.pdf on page 9 because one of the two conditions for adjustment exception does not meet (please note, it says both conditions need to be met), which is:

• The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000.

However, proconnect does not make any adjustments:


The qualified dividend worksheet is copied below. Please let me know if this is my misunderstanding or a software bug for which I should contact Intuit.

[itonewbie · Accepted solution]

Take a second look at § 1.904(b)-1, especially paragraph (b).  The instructions for F.1116 for these complex regulations are somewhat abbreviated.

[puravidapto]

The instruction is the fine, but it requires careful reading.

There are two conditions that you do not make adjustment:

• Line 5 of the Qualified Dividends and Capital Gain Tax
Worksheet is greater than zero.
• Line 23 of the Qualified Dividends and Capital Gain Tax
Worksheet is less than line 24 of that worksheet.

When you do need to make adjustment, there are two conditions for exception. I do not satisfy the exception conditions, but I satisfy the conditions not to make adjustment.

Now a new question: is it allowed to report qualified foreign dividend as non-qualified foreign dividend?

The reason is while qualified dividend pays less tax, it also gets less foreign tax credit due to the required adjustments in line 1a and line 18 of form 1116. The foreign tax credit carryover is useless as there will not be foreign income for next 10 years. While non-qualified foreign dividend pays regular tax and no adjustment is needed, and it can turn out to be better. Hence the question, can I report qualified foreign dividend as non-qualified, and long term foreign capital gain as short term?

To show the differences between claiming foreign qualified and non-qualified dividend, we use the following income on joint return of two senior citizens:

scenario 1:

qualified US dividend 300k
non-qualified India dividend 80k with 28k foreign tax paid
w-2 income of 30701
foreign tax credit 19743
tax = 39316

scenario 2:

Same as scenario 1 except the foreign dividend is qualified
foreign tax credit 6969
tax = 42751

[itonewbie]

Apparently, you haven't read the regs in details.

[itonewbie]

The filing instructions are not contrary to what the regs say, just that they don't go into as much details.  To understand the technicalities, you need to go to the source, which is the regs.

[puravidapto]

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@itonewbie wrote:

Apparently, you haven't read the regs in details.

---

which reg will help me to find answer to my question?

[abctax55]

These?  That were pointed out by Jensen previously in the thread?

Take a second look at § 1.904(b)-1, especially paragraph (b).  

[itonewbie]

"Now a new question: is it allowed to report qualified foreign dividend as non-qualified foreign dividend?"

Take a look at §1(h)(11)(C).  It's either it is foreign qualified dividend or it is not.  There's no provision for elective treatment like those in §163, AFAIK.  And I can't see any reason why you would.

[puravidapto]

@abctax55 Thank you for the IRC reference. Do you have a link for Jensen's thread? I tried but did not successfully search for it.

I am okay with the original question whether to make adjustment, no adjustment needed with my original example. My remaining issue is whether I can elect to report qualified foreign dividend as non-qualified for reduced net tax after foreign tax credit (my post in this thread has two scenarios with amount details). 

[itonewbie]

@puravidapto Everything you are asking about is right here in this thread.  @abctax55 was referring to the response above...

[itonewbie]

There's also a similar discussion recently: https://accountants.intuit.com/community/proconnect-tax-discussions/discussion/form-1116-cap-gains-a...

[puravidapto]

Got it, thanks. I thought Jensen was a different person who wrote something in a different thread.

Summarize:

- In my original example of 300k domestic qualified dividend and 80k foreign dividend, no adjustment needed. The reg and instruction say so. I guess this is due to that there is a differential treatment on the foreign dividend in the tax return (the max rate is 15% on the entire return). The situation will change (adjustments needed) when we introduce a wage exceeding the standard deduction by $1.

- We cannot qualified dividend as non-qualified dividend as there are no provisions to do so. Treat them as what they are regardless it increases tax or reduces tax.

Thanks gentlemen!