Foreign tax credit - Form 1116

[gparch1]

Calling all Form 1116 experts!  Client sold rental property in India October of 2023.   Client has a long-term capital gain along with recapture of depreciation from the sale of the property.  This is their only capital gain for 2023.  There is no capital gain from US sources for 2023, and there are no dividends from India or from the US. No investment interest is involved.  I am trying to understand if I need to make the "adjustment to foreign source capital gains" mentioned in Pubs 514 and the Form 1116 instructions.   I completed worksheet A included in the Form 1116 instructions, and line 4 shows zero dollars.   Does that mean I do not have to use the multiplier for the adjustment of the capital gain, and I then enter the entire capital gain (including the depreciation recapture amount from Form 4797) on line 1A of the Form 1116?  ProSeries Professional defaults to adding in the adjustment for some reason - not sure why.

[itonewbie]

Does your client have any ordinary income subject to marginal tax rates?

If so, does your client meet the exception for making adjustments?

[gparch1]

The client had ordinary W2 income from US sources in 2023 and part-year rental income from India until they sold the property.  According to the Form 1116 instructions, it seems that the client does not need to make an adjustment (this is the question I am asking whether or not they do need to make the adjustment) based on filling out Worksheet A.  When I completed worksheet A included in the Form 1116 instructions, line 4 shows zero dollarS since the foreign capital gains are the same as all capital gains for 2023.  Am I missing something?

[itonewbie]

In your case, your client apparently doesn't have any capital loss that would necessitate an adjustment.

Question then is whether your client's ordinary income is within the 24% bracket and whether the capital gains from India is less than $20k.  If it's affirmative for both, there's no need to make any adjustment.

[gparch1]

The client's ordinary income (i.e., without the capital gain) is within the 22% tax bracket and with the capital gain is in the 24% tax bracket.  The capital gain from India exceeds $71,000.   I did not see references to those in the 1116 instructions, just to the Worksheet A and Worksheet B for adjustment exception for capital gains.

[itonewbie · Accepted solution]

That exception is in §1.904(b)-1(b)(3).

For the purpose of this exception, net CG and QD are not considered.  Since 24% is the highest marginal rate for ordinary income that is below the highest rate of 28% chargeable for CG, your client who is within the 22% bracket could have utilized this exception if only his foreign CG had amounted to less than $20,000.

This exception is explained in layman's terms in the F.1116 instructions using the dollar thresholds for 24% to make it easier for the general public to understand.

On the basis your client's foreign CG is $71K, your client will need to make the necessary adjustments for tax differentials on Lines 1a and 18.

[gparch1]

Thanks so much for your help with this (and your patience as we are not used to dealing with capital gains on sales of overseas property)!

[itonewbie]

NP, @gparch1!  Have a great day!