In situations where the qualified dividends and/or capital gains are taxed in multiple tax brackets, the program calculates the adjustment for Form 1116, Foreign Tax Credit, Line 1a based on a ratio of rates between 5% and 15%. The ratio is calculated from the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet.
How to calculate the total adjustment amount on Form 1116
- Basically, the 5% ratio is the amount from the Qualified Dividends & Capital Gain Tax Worksheet, Line 10/Qualified Dividends & Capital Gain Tax Worksheet, Line 6.
- The 15% ratio is 1 minus the just-calculated 5% ratio as shown in the preceding line.
- The foreign capital gain distributions and the foreign qualified dividends are then multiplied by these respective ratios to come up with the amount that belongs to each rate.
- The resulting amounts are then multiplied by 0.1429 for the 5% adjustment amount or 0.4286 for the 15% adjustment amount.
- These results are then added together to come up with the total adjustment amount to report on Form 1116, Line 1a.
- These percentages are per the Form 1116 instructions.
Adjusting the foreign source qualified dividends or capital gain distributions taxed
- You adjust these amounts at the 0% rate by not including them on line 1a.
- Amounts taxed at the 0% rate are on line 10 of the Qualified Dividends & Capital Gain Tax Worksheet in the Form 1040 instructions and line 8 of the Qualified Dividends & Capital Gain Tax Worksheet in the Form 1040NR instructions.
- Any amounts of foreign-source qualified dividends or capital gain distributions taxed at the 15% rate are simply multiplied by 0.4286 and included on line 1a of the Form 1116.
Determining the amount attributable to foreign sources
- Often there are capital gains taxed at the 15% rate other than the foreign-sourced qualified dividends.
- In this situation, the amount taxed at 15% that is attributable to the foreign sourced qualified dividends must be determined.
- From the Qualified Dividends & Capital Gain Tax Worksheet, line 4 is the total of the capital gains.
- The total foreign-sourced qualified dividends must be divided by the total capital gains from line 4 to arrive at the pro rata percentage.
- This percentage is then multiplied by the amount of capital gains taxed at 15% (line 14 of the QD&CTG worksheet) to determine the amount attributable to foreign sources.
- The result of this calculation is then multiplied by 0.4286, which gives the result that flows to line 1a of the Form 1116.
- The adjustment amount is the foreign sourced qualified dividend amount minus this result.
How to override the adjustment
To override this calculation, enter desired amount in Qualified Dividend adjustment [O] in Screen 35.1, Foreign Tax Credit (1116).