[Updated on January 21, 2023 with updated screenshots from H&R Block software for 2022 tax filing.]
When mutual funds and/or ETFs that invest in foreign countries receive dividends or interest, they have to pay taxes to those countries. These mutual funds and/or ETFs report to your broker after the end of the year how much they paid in foreign taxes on your behalf.
When you invest in these mutual funds and/or ETFs outside a tax-advantaged account, your broker will report to you the total foreign taxes you paid through all your funds and/or ETFs. The IRS allows a tax credit for the taxes you paid indirectly to foreign countries.
The foreign taxes paid is reported in Box 7 on the 1099-DIV form you receive from your broker. It’s easy to handle when the total foreign taxes paid from all your 1099-DIV forms is no more than a certain amount — $300 for single and $600 for married filing jointly. You enter the 1099-DIV forms into your tax software and the software will automatically put the total on your tax form (Schedule 3, Line 1).
When your total foreign taxes paid from all your 1099-DIV forms are over the $300/$600 threshold, you’ll need to include Form 1116 in your tax return. I’ll show you how to do this in H&R Block software.
If you use other tax software, please read:
Use H&R Block Download
The following screenshots came from H&R Block downloaded software. The downloaded software is both less expensive and more powerful than H&R Block’s online software.
If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.
I’ll use the same example:
You received a 1099-DIV from your broker. Box 7 “Foreign Tax Paid” on the 1099-DIV shows $700. 100% of this $700 came from a mutual fund or ETF. You only have this one 1099-DIV that has a number in Box 7.
If you import your 1099-DIV forms, double-check the import to make sure all the numbers match your downloaded copies. If you’re entering the 1099-DIV forms manually, type the numbers as shown on your forms.
H&R Block doesn’t say anything about the foreign tax paid or needing a Form 1116 after you enter the 1099-DIV forms. Just continue with your other entries.
Foreign Tax Credit
Foreign Tax Credit comes up much later in the Credits section under Foreign Tax Credit.
Click on “Add Form 1116.”
AMT Simplified Election
If this is the first year you’re claiming the Foreign Tax Credit, H&R Block software asks upfront about the simplified election. Select “Yes” for the simplified election.
Dividend income falls under “passive income.”
The “learn more” popup says you should choose “RIC” as the country when your foreign income came through mutual funds and/or ETFs. “RIC” is the last item in the country dropdown.
You get the foreign income from the supplemental information in your 1099 package from your broker. If you have multiple 1099-DIV forms that reported foreign tax paid in Box 7, you’ll have to add up the foreign income numbers from the respective supplemental information.
Don’t overlook the small note under the gross income input. It says you might need to adjust the amount if it includes foreign capital gains or qualified dividends. When you’re reporting foreign taxes paid from mutual funds and ETFs, the income sure does include qualified dividends. H&R Block doesn’t do the adjustment for you. It asks you to read the IRS instructions, learn how to adjust, and report the adjusted income here. That’s lazy.
Fortunately, many people qualify for an adjustment exception. From the IRS Form 1116 Instructions:
You qualify for the adjustment exception if you meet both of the following requirements.
1. Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet doesn’t exceed:
a. $340,100 if married filing jointly or qualifying widow(er),
b. $170,050 if married filing separately,
c. $170,050 if single, or
d. $170,050 if head of household.
2. The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000.
The dollar amounts in the first requirement correspond to the top of the 24% bracket. You are spared from figuring out how to adjust if your taxable income minus your qualified dividends and long-term capital gains isn’t in the 32% tax bracket or above, and your foreign source capital gain distributions and qualified dividends aren’t $20,000 or more.
If you’re eligible for the adjustment exception and you decide to take the easy route of not adjusting your foreign-source income, you need to claim a corresponding adjustment exception on your total income.
Click on Forms on the top right. Open Form 1116. Scroll down and find Mini-Worksheet for Line 18 just above Line 18. Check the box for using the adjustment exception.
Close the form and return to the interview.
If you don’t qualify for the adjustment exception, good luck learning how to adjust from the Form 1116 instructions. You’re better off switching to TurboTax, which does the adjustment for you when you need it.
We leave this blank because we don’t have any interest expenses.
If you have any above-the-line deductions, such as an early withdrawal penalty from breaking a CD or an HSA contribution made outside payroll, enter the total here. We leave this blank in our simple example because we don’t have those deductions.
We don’t have any direct expenses either.
We have no losses to adjust.
Yes, our 1099-DIV was reported in U.S. dollars.
I chose the simpler “paid” method. Although the “Date paid or accrued” asks for a date in “MM/DD/YYYY” format, you can type “1099 TAXES” to indicate that the foreign taxes were paid on various dates through the 1099 forms. Enter the total foreign tax paid into the Dividends box.
If you have multiple 1099-DIV forms that reported foreign tax paid in Box 7, you’ll have to add up those numbers yourself. I wish the software did the math and auto-populated this field.
All our foreign taxes paid were through mutual funds and ETFs. RIC is the only country to use. We don’t have foreign income from any other countries.
Fortunately, we don’t have any carryover or carryback. If we can’t get 100% credit for the foreign taxes paid this year, we’ll have to create a carryback or carryover, which means we can’t e-file with H&R Block.
We don’t have any reduction either.
We don’t know what the foreign tax rate was. We’re leaving this blank.
We don’t know how to adjust. We’re leaving it blank again.
This is getting ridiculous. All I want is to get the foreign tax credit!
We’re finally done with Form 1116. Are we getting the credit?
Verify on Schedule 3
Click on Forms on the top. Double-click on Form 1040 and Schedules 1-3.
Scroll down to Schedule 3. Line 1 shows our foreign tax credit. You can also look at Form 1116. It looks awfully complicated.
Excess Foreign Tax Credit
We received 100% of the foreign taxes paid as a tax credit in our example. If you paid higher foreign taxes on a lower US income, you may not be able to take 100% of the credit. You’ll have to wait until next year to take the rest of it.
Carrying over part of the credit to the following year requires filing a Form 1116 Schedule B. H&R Block doesn’t have this form in their program. H&R Block tells you to download the form from the IRS website, complete it yourself, and attach it to your paper return. That’s ridiculous.
H&R Block software works when you paid more in foreign taxes than the $300/$600 threshold that requires a Form 1116. You’ll have to gather the foreign income and the foreign dividends from the 1099 supplemental information from your brokers. After it’s all said and done, you’re getting a tax credit for taxes you paid to foreign countries through your mutual funds and/or ETFs.
H&R Block asks you to add up the foreign tax numbers yourself. It asks you to make any necessary adjustments to the foreign-source income, which is quite difficult. The option to activate the adjustment exception is hidden in the Forms mode. You’re on your own when you don’t qualify for the adjustment exception. It also asks you to handle any carryover yourself.
TurboTax does a better job of handling the foreign tax credit than the H&R Block software. See Foreign Tax Credit Form 1116 in TurboTax.
It’s better to avoid the complicated Form 1116 altogether next year by putting your international mutual funds and ETFs in a tax-advantaged account. See Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
Thanks – this is really helpful. Since H&R Block seems to make it very very easy to miss this credit, I realized today that I apparently should have been doing this for at least the last two years. I’m really wondering whether it makes sense to file 1040X’s for the last two year to get that money back (prob about $1400 total), or just avoid the risk of further screwing this up and chalk this up as a lesson learned. Also thinking about moving some of my international allocation to tax deferred so that I can fall under the $600 married exception in the future. I agree with you, this seems like too much of a PITA.
Quick question for you. When you check off the “adjustment exception” box in the forms, do you know what specifically this does? I don’t see a corresponding check box on the printed 1116 form. But it does appear that all my values in the bottom half of Form 1116 Part 1 are not adjusted – so is that all this does?
Harry Sit says
Checking the “adjustment exception” box in the form mode allows you to use the foreign dividend number reported by the broker as-is, without having to adjust the foreign income down by multiplying by 0, 0.4054, and 0.5045. Having a higher foreign income gives you more room to claim the foreign tax credit.
Currently there is a backlog of millions of prior year amended returns at the IRS. Amended returns must be reviewed by a person. In normal times, processing an amended return takes 6 to 12 months, assuming the reviewer has no need to contact the taxpayer. I’d avoid amending returns right now.
If your foreign tax credit for 2022 is limited, look at whether you would actually benefit by carrying it back. If carrying back excess 2022 credit one year would not benefit you, then carry it forward with a schedule B (on turbotax) and potentially make use of it in the next 10 years.
I am using H&R Block 2022 Deluxe (downloaded) software. I want to look at the qualified dividends and capital gains tax worksheet. Block used it to calculate my 1040 line 16 taxes but I cannot find the worksheet anywhere in the software. I cannot find it in Forms, or as a mini-worksheet in Block’s Form 1040 & Sch 1 -3. I am not using Schedule D (which has a tax calculation worksheet) since I only have capital gains distributions and qualified dividends.
What do I have to do to view qualified dividends and cap gains tax worksheet in 2022 Block software?
(I completed the worksheet manually so Block and I are getting the same result.)
Harry Sit says
Even though you’re not using Schedule D, you can still view the worksheet in Schedule D. Click on Forms and find Schedule D. It’s not in bold font in the list of forms when you’re not using it. Open it and scroll down to Line 22.
This question applies to 2022 tax returns filed in 2023. I have a carryover of unused foreign tax credit from 2021 tax return (form 1116 and schedule B filed in 2021 using turbotax). Adding all of that carryforwarded amount to my 2022 foreign tax credit meets the allowance limits on my 2022 Form 1116.
Do I need to attach a 2022 Schedule B to my 2022 return if I include the carryforwarded credit? I’m having trouble understanding the Schedule B filing instructions for Line 10, Form 1116.
Harry Sit says
You need to include a 2022 Form 1116 Schedule B if you’ll use the carryover credit from the previous year. Form 1116 Schedule B provides the breakdown of the carryover used. Unlike capital loss that can be carried forward indefinitely, foreign tax carryover expires after 10 years. So they want to see how much credit expired and you’re using only unexpired credits. Unfortunately the H&R Block software can’t e-file when you need to include Form 1116 Schedule B.
FYI – The entry for “Date paid or accrued” can be set to “1099 TAXES” instead of entering the final date of the year like you did in your example. This accounts for the multiple dates that the tax is actually paid in a typical RIC situation, as shown in your 1099
Harry Sit says
Thank you for this. I updated the screenshot to show “1099 TAXES.”
Mike M. says
I thought I would share my experience and a warning. I worked in Canada for many years and receive a pension from there, 15% of which goes to the Canadian government. I get most of that back as a foreign tax credit. This year I decided to save prep fees and used the H&R Block software. It made a $1500 error in computing my maximum allowable credit resulting in a thousand dollar error in my tax owed. Unacceptable. And of course I had to file paper returns for both federal and state. Next year: TurboTax.
Do you look at Box 1a for the foreign source income on Form 1099-DIV or do you get this for each Etf and mutual fund that had foreign taxes paid only. For eg if box 1a says 1000 but VTIAX which paid the foreign taxes only gave 500USD in dividends, is this the foreign income ( VTIAX foreign income percentage is 100% of the dividends )
Hope this makes sense?
Harry Sit says
You get it from each fund that had foreign income. For example, Fund A $500 @ 100% foreign income + Fund B $300 @ 70% foreign income = $710.
Thank you. That clears up things. Just wanted to check as on my last years taxes the accountant just put whatever was in Box 1A even though only some of the funds had foreign tax.
Appreciate the quick response.