Question

Foreign Tax Credit - Glitch in Program Calculation of Amount of Foreign Tax Credit?

Forum|Forum|1 year ago
April 11, 2025
1 reply
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I have foreign taxes paid of $610.47 on line 7 of form 1099-DIV. All of the foreign taxes paid were on passive ordinary dividend income from line 1a of form 1099-DIV. The TurboTax program assumes I must file form 1116 because the foreign taxes paid exceeded $600, which could be a limiting factor as I am married filing jointly. However, if you log into TurboTax.intuit.com and read Claiming the Foreign Tax Credit with Form 1116, you will discover when you scroll down to the heading Foreign Tax Credit Without Form 1116, that there are three conditions where you do not need to file Form 1116. The first of these, which is applicable to me, is “if all your foreign taxed income was 1099 reported passive income, such as interest and dividends, you don’t need to file form 1116, provided that any dividends came from stock you owned for at least 16 days.” That is the situation with my $610.47 foreign taxes paid. Apparently the TurboTax program will not allow you to take the full $610 credit on passive foreign income because it thinks you are subject to the second condition, which says that you must file form 1116 if you paid more than $600, but by implication must conclude that some or all of the income was not passive income. This becomes apparent because the program prompts you to tell the program what entity or country paid the. foreign dividend on which the foreign taxes were paid. In my case, using form 1116, TurboTax only allowed me a $309 foreign tax credit, instead of the $610 credit I should be entitled to without having to file form1116. They applied the excess $301 as a carryover to my 2025 taxes.

I believe this is a program oversight that needs to be addressed by TurboTax. If anyone can explain to me where my thinking is incorrect, I would appreciate hearing from them in this forum. Also, if I am correct in my analysis, does someone know how to report this oversight to TurboTax?

Thank you.

TurboTax Premier Online

P

pk12_2

@11486 , sometimes it is better to claim only the safe harbor amount of US$600 for MFJ filer. You will get the full amount. If you choose the form 1116 , it is always going to be limited to LESSER of actual Paid and Allocated US tax on the same foreign source income. The allocation is based on multiplying the total US tax on world income by the ratio of Foreign Source income to World Income. That is what the tax treaty calls out.

Is there more I can do for you ?

1

11486Author

I am not sure if you addressed my issue with the program. As I stated above, one of the exceptions to filing form 1116 according to turbotax.intuit.com is if all the foreign tax income was passive income. That is the case with me. I did not choose to file form 1116, the program demanded it, which I think is wrong. I found the first sentence of your answer interesting because I thought I would be misreporting to the IRS the amount of foreign taxes paid. If there is indeed a "safe harbor" of $600 to avoid filing form 1116, that is news to me and the program did not give me that option. I certainly would have just claimed a $600 foreign tax credit if I knew such a maneuver was above board. In any event, I appreciate your input.

1

11486Author

@11486

Page 18 of Pub 514 ( on the subject of whether the safe harbor amount exists)

Exemption from foreign tax credit limit.

You will not be subject to this limit and will be able to claim the credit without using Form 1116 if the following requirements are met.

Your only foreign source gross income for the tax year is passive category income. Passive category income is defined later under Separate Limit Income. However, for purposes of this rule, high-taxed income and export financing interest are also passive category income.
Your qualified foreign taxes for the tax year are not more than $300 ($600 if married filing a joint return).
All of your gross foreign income and the foreign taxes are reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).
You elect this procedure for the tax year.

If you make this election, you cannot carry back or carry over any unused foreign tax to or from this tax year.

This election exempts you only from the limit figured on Form 1116 and not from the other requirements described in this publication. For example, the election does not exempt you from the requirements discussed earlier under What Foreign Taxes Qualify for the Credit..

PK - How you are now defining the “safe harbor” for the foreign tax credit is like saying the standard deduction is the “safe harbor” for deductions. Nobody does that.