Foreign tax credit on qualified dividends if in 15% tax bracket

[jgcpa]

I just want to make sure I am reading the instructions correctly. Client is in the 15% tax bracket (MFJ). Has $608 of foreign qualified dividends and $7000 of foreign source income (passive) from Canada. (1099s/K-1). Can I take  a credit for the foreign dividends even though they were all qualified dividends ( taxed at 0%)? 

[itonewbie · Accepted solution]

Since no US tax is assessed on the dividends, no FTC will be allowed for 2018.  However, unutilized FTC may be carried back/forward.

You may also want to check whether the dividends are from foreign mutual funds, which would generally be subject to PFIC rules and could have adverse US tax consequences.

[jgcpa]

I did find an exception to the adjustment . Adjustment exception. If you qualify for the adjustment exception,you can elect not to adjust your foreign source qualified dividends. You make this election by not adjusting these dividends.. If you make this election, you must elect not to adjust any of your foreign source qualified dividends. You qualify for the adjustment exception if the amount of your foreign source net capital gain, plus the amount of your foreign source qualified dividends, is less than $20,000 and one of the following applies to you.  

Does this mean that I can take the foreign tax credit even though no US tax is assessed on the dividends?

[itonewbie]

When the Final Regulations for §904 were issued back in 2004, §1.904(b)-1(b)(3) and (e)(2) were added to carve out an exception, which, according to TD 9141, "is intended to permit taxpayers to avoid the complexity of computing the rate differential adjustments in cases where the failure to make the adjustments does not result in a significant divergence from the results contemplated by section 904(b)(2)(B)."

Based on the letter of the law, you may decide not to make the rate differential adjustment and create a limitation for FTC.

[jgcpa]

Is the limitation  created by the calculations in Form 1116?

[itonewbie]

Yes, it is.