Foreign Tax Credit Simplified

[Kram BergGold]

I just read on page 1 of the Instructions to form 1116 that the country by country reporting is no longer required for mutual funds. It goes on to say, see the instructions for line g. I can't find any instructions after line e. Does anyone know more about this or is it just as simple as if your client paid more than $300 or $600 (joint) of foreign taxes on mutual funds you can skip the country by country reporting.

[veritas]

From page 11-8 in TTB

Is this what your looking for?


Election to claim the foreign tax credit without filing Form
1116. Individuals may claim the foreign tax credit by entering
the amount directly on line 47, Form 1040 if the following conditions
are met:
• All foreign source gross income is passive income. For purposes
of the foreign tax credit, passive income includes interest, dividends,
royalties, rents, and annuities. Capital gains not related
to the active conduct of a trade or business are also generally
passive income.
• All the income and any foreign taxes paid on it were reported to
the taxpayer on a qualified payee statement such as Form 1099-
DIV, Form 1099-INT, Schedules K-1 (from Forms 1041, 1065, and
1120S), or similar substitute statements.
• The total creditable foreign taxes are not more than $300 ($600
MFJ).
The election is not available to estates or trusts. Unused credit
cannot be carried over if the election is made.

[travis bickle]

yes, and

somewhere in your software [e.g., your 1099-div input, or your form 1116 input] there will be a method for you to suppress form 1116 so that the amount of foreign tax paid simply flows to L47. and, as already posted, indicate passive income.

[Kram BergGold]

$300/$600 not the issue

When your client has foreign taxes paid due to ownership of an international mutual fund they give us pages explaining the sources of all the dividends and taxes paid in case you have to fill out form 1116 using a column for each country. Now it appears we can skip this and just enter foreign taxes paid $800 on $6000 of dividends using various as the country. At least I hope this is the case, as I can't find the instructions for line g.

[travis bickle]

you're right

When your client has foreign taxes paid due to ownership of an international mutual fund they give us pages explaining the sources of all the dividends and taxes paid in case you have to fill out form 1116 using a column for each country. Now it appears we can skip this and just enter foreign taxes paid $800 on $6000 of dividends using various as the country. At least I hope this is the case, as I can't find the instructions for line g.

and actually "VARIOUS" is simply a requirement from your software company -- to fill in a field. why? because you are allowed to omit Form 1116 in the cases of international mutual funds, hence there will be no form identifying to which country/ies the foreign tax/es were paid.

my software requires me to enter a country code [XX = various] AND to check a box to suppress the Form 1116.

here is the link to the instructions for form 1116 -

http://www.irs.gov/instructions/i1116/index.html

scroll down to Specific instructions, Part I, Line g

[JG EA]

somewhere in your software [e.g., your 1099-div input, or your form 1116 input] there will be a method for you to suppress form 1116 so that the amount of foreign tax paid simply flows to L47. and, as already posted, indicate passive income.

Don't you just have a line 47 entry you can put in? That's the simple way to do it.

[travis bickle]

yup it sure is

Don't you just have a line 47 entry you can put in? That's the simple way to do it.

but the software i am using requires me to enter all information from a 1099-div into the 1099-div template. then, when i make the "foreign tax paid" entry, i have to enter the country code / income category code / etc then and there, and finally, at the bottom of the template is the check-off box to suppress form 1116. then the data are carried to the appropriate areas on the appropriate forms.

i agree there are simpler methods, but this is what i have [sounds to me like "software developer welfare"].

[FEDUKE404]

Form 1116 can be REQUIRED!

Don't you just have a line 47 entry you can put in? That's the simple way to do it.

Ah....no.....if the total foreign taxes paid exceed the $300/$600 limits established by the IRS, you MUST file a Form 1116 if you wish to claim a tax credit.

(I assume you are referring to line 51, and not to line 47, of Form 1040?)

I do concur that "various" is an apparently feasible treatment for an international fund that pays taxes all over the place. OTOH, I still track countries where there is a definite income/tax relationship, such as a Canadian corporation that pays dividends.

FE

[JG EA]

Ah....no.....if the total foreign taxes paid exceed the $300/$600 limits established by the IRS, you MUST file a Form 1116 if you wish to claim a tax credit.

(I assume you are referring to line 51, and not to line 47, of Form 1040?)

Well this is really embarrassing but my software (where I looked to get the line number) still says line 47!) It does print it on line 51.

I am however able to add up the credits without putting them on Form 1116 first.

[FEDUKE404]

Form 1116 warning

JG - I've endured Form 1116 calculations for a couple of years. Things get really antsy with limitations (which frequently occur) and the subsequent carryback or carryforward issues.

One caveat: IIRC, once you break the $600 threshold (MFJ) you are not allowed simply to put in the $600 maximum and keep on going. You must first complete Form 1116 and see what is then allowable. For instance, you may have $800 of foreign taxes but after all of the international dust has settled you may only be able to deduct $500 in the current year.

It would be nice for the IRS to loosen up a bit on the dollar caps, but I'm not holding my breath. I can remember when foreign taxes were "strange," but now they are quite common. I have a couple of clients who once owned stock in a regional bank that was bought out by a Canadian company, which now takes 15% of their dividends as a tax. At least the decline of the $US is giving them some more money in their back pockets!

FE