When mutual funds and/or ETFs that invest in foreign countries receive dividends or interest, they have to pay taxes to those countries. After the end of the year, these mutual funds and/or ETFs report to your broker 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, $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 is over the $300/$600 threshold, you’ll need to include a Form 1116 in your tax return. I’ll show you how to do this in TurboTax and H&R Block software.
I start with TurboTax. Please jump to the next section if you use H&R Block software.
TurboTax
The screenshots below came from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download.
I’ll use this simple scenario as an 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.
Enter 1099-DIV
If you’re entering your 1099-DIV manually, you have to check a box on the 1099-DIV entry screen to reveal the additional input fields. Then you put the foreign tax paid number into Box 7. If you imported your 1099’s, double-check that all the numbers from the import match your downloaded copy.
We don’t have any of these uncommon situations.
TurboTax asks you how much of the dividend on your 1099-DIV was from foreign countries. This information isn’t on the 1099-DIV itself. Your broker may have included supplemental information with the 1099-DIV. For instance, Fidelity provides the breakdown of total foreign income in its 1099 package.
After you’re done with one 1099-DIV, continue with your other 1099-DIV forms. We only have one 1099-DIV form in our example.
Foreign-Source Income
At a much later point, TurboTax will ask you about the foreign tax paid under Deductions & Credits -> Estimates and Other Taxes Paid -> Foreign Taxes.
After a brief introduction, the first question is whether you’d like to take a tax deduction or a tax credit. The “help you decide” popup says in general you’re better off taking the credit. So click on “Take a Credit.”
Next, TurboTax asks you which countries you received dividend income from. A small note says select RIC for any income received from a mutual fund or other Regulated Investment Company. U.S.-based mutual funds and ETFs fall into this category. RIC is the first item in the country dropdown.
Then you report income received from country “RIC.” Click on Report Income.
Now you say foreign tax paid from which 1099-DIVs were paid to country RIC. If all your foreign taxes paid were from mutual funds and/or ETFs, select all your 1099-DIV’s that have a number in Box 7.
The foreign dividend you entered in the 1099-DIV automatically shows up here.
TurboTax asks whether you’d like to review the 1099-DIV forms you entered before. We answer “No” here because we already entered the 1099-DIV forms correctly.
Simplified Limitation for AMT
Now it asks you about a “simplified foreign tax limitation election.” If this is the first year you encounter this, choose the first option. If you remember you did this before, choose the second option.
If this is the first year you’re eligible for the election, TurboTax suggests you should elect the simplified method. Click on Elect Simplified Calculation.
If you used TurboTax last year and you already elected the simplified method, TurboTax reminds you that you should continue with the simplified method. Answer “Yes” here.
Foreign Taxes Paid
We don’t have any other foreign income or expenses. Click on Yes.
TurboTax auto-filled these. No changes are necessary for us.
We don’t have any carryover from previous years. A carryover is created when you paid more in foreign tax than the tax credit you’re allowed. Your leftover foreign tax paid is carried over to the following year.
After going through all these, we’re getting 100% credit for the $700 foreign tax paid. Woo-hoo!
Verify on Schedule 3
You can verify that you’re getting the foreign tax credit by clicking on Forms on the top right. Find Schedule 3 in the left navigation pane and look at the number on Line 1. 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. TurboTax will tell you that you’ll have to wait until next year to take a portion of the credit.
Carrying over part of the credit to the following year requires filing a Form 1116 Schedule B. TurboTax will automatically generate Schedule B when you need it.
H&R Block Software
The following screenshots came from H&R Block downloaded software. The downloaded software is way better than 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.
Enter 1099-DIV
If you’re entering the 1099-DIV form manually, type the numbers as shown on your form. If you import, double-check the import to make sure all the numbers match your downloaded copy. H&R Block doesn’t say anything about the foreign tax paid or needing a Form 1116 after you enter the 1099-DIV. Just continue with your other entries.
Foreign Tax Credit
It’ll come 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.
Foreign-Source Income
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’s 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.
Adjustment Exception
Fortunately, many people qualify for an adjustment exception. 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. $329,850 if married filing jointly or qualifying widow(er),
b. $164,925 if married filing separately,
c. $164,925 if single, or
d. $164,900 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 other deductions either.
We don’t have any direct expenses either.
We have no losses to adjust.
Yes, our 1099-DIV was reported in U.S. dollars.
Foreign Taxes
I chose the simpler “paid” method. Enter the end of the year as the date paid. Enter the total foreign tax paid into the Dividends box. If you have multiple 1099-DIV’s that reported foreign tax paid in Box 7, you’ll have to add up those numbers yourself. I wish the software should’ve done 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.
We don’t have any carryover or carryback.
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 one 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 new form in their program for 2021. 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.
Summary
Both TurboTax and H&R Block software work when your total foreign taxes paid exceeds the $300/$600 threshold that requires a Form 1116. Either way, you’ll have to gather the foreign income 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.
TurboTax is more integrated with the 1099-DIV forms you already entered. H&R Block asks you to add up the foreign tax numbers yourself. Because you have to add up the foreign income anyway, you can add up the foreign tax numbers at the same time. H&R Block software 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 clearly does a better job in handling the foreign tax credit than the H&R Block software.
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Raju Agrawal says
Very nice and clean example. I am using HRB but for me it is not giving the whole amount as credit. My Ireland Dividend is 2564 and the taxes are 641. HRB is calculating the credit of only $68. Its going thru the worksheets to calculate the number in field 3e to be only 28,552. Just curious why? sure, you probably need more numbers to answer… Using the standard deduction of 12,400. AGI is 70416.
Thanks – Raju
Harry Sit says
The general idea is that you’re allowed a credit only by your average U.S. tax rate. If a large part of your taxable income is qualified dividends and long-term capital gains, and you end up paying only $1,500 to the U.S., which is about 2.6% of your $58k taxable income, then you’re allowed a credit no more than 2.6% of your foreign income. The rest will be carried over to next year.
P Morein says
Brokerage firms report foreign dividend income differently in the supplemental information. Vanguard provides a nice explanation of the required adjustment for qualified foreign dividends. Schwab only includes total foreign income in the foreign supplemental information. You have to go to the detailed qualified dividend information to compute the foreign qualified dividends in order to adjust total foreign income.
Wendy says
I follow the turbo tax instruction. but I got an error. (missing qualified dividend info)
how to get qualified dividend information based on Schwab foreign supplemental information (only has dividends and tax paid)
Harry Sit says
See comment #2 above. Go to a different section in the supplemental information to find it.
Larry Roles says
Sounds like there is a huge problem with Turbo Tax (TT) this year with respect to claiming the foreign tax credit, resulting in the inability to e-file. Have you heard of this? See: https://ttlc.intuit.com/community/tax-credits-deductions/discussion/not-able-to-e-file-due-to-simplified-amt-foreign-tax-credit/00/2109133/page/2
I also did an internet search using the term “Federal e-file problems from AMT foreign tax credit reporting” and the only results I got related to intuit or TT.
Anyone hear of such problems with H&R block? I’m thinking of switching, but the complexity of their process, as shown, is off-putting
KANG CHIANG says
Need help for data input to 2020 TT premier section 1099 -Div & form 1116.
1. 1099-Div –
A. “Foreign Dividend Received”
what is the proper data put in the blank? – Total Foreign ordinary dividend(Fidelity), Foreign Income(Vanguard) OR Foreign Qualified Dividend (Fidelity) , QDI eligible foreign income( Vanguard).
B. TT skipped the “”Foreign Dividend Received” & I could not input the data for Vanguard and one of schwab accounts. Did you encounter the problem?
2. 1116 section
what is the Foreign resource income? foreign dividends or QDI dividends.
Do we have any way to verify the final data before TT print out the final form 1116.
Thank you for your help.
Harry Sit says
“Foreign dividend received” means just what it says – the total dividend you received from the international funds, regardless of whether it was qualified dividend or not. I’m not sure what you meant by “skipped” or “could not input.” The “foreign dividend received” number isn’t on the 1099-DIV itself. You find it on the supplemental information. If you imported the 1099-DIV, click on Edit and go through it again. If that still doesn’t work, delete the imported 1099-DIV and re-enter the 1099-DIV manually. The foreign-source income in the Form 1116 section is the same as the foreign dividends, regardless of whether it was qualified. The “Forms” button on the top right will display a list of forms on the left. You can look at the form before printing.
KANG CHIANG says
I. The “Skipped” means that it does not show the “Report Foreign Dividends” section, so I can not put the “Foreign Dividends Received” data in the “blank”. It happened three brokers to us.
(No problem with Other Brokerages)
1. Vanguard, 2. Robinhood, Schwab.(two accounts numbers – one works the other one skipped the section).
I have tried delete both Vanguard and Robinhood data and download the data again and also have tried to enter data manually in Vanguard and Robinhood. There are no “Report Foreign Dividends” section that I can not put the “Foreign Dividend received” data in the blank.
II. One more question “Foreign Dividend Received”.
What do I suppose to select
a)Mutual Fund/RIC, b) other source
if we have Foreign ETFs and Foreign company
Stocks?
I select other source. I hope it is correct for the TT software(TT should have three selection Mutual Funds/RIC + other source).
Thank you for your help.
Harry Sit says
Did those 1099-DIVs have foreign tax paid in box 7? Foreign dividend received is only relevant when you paid foreign tax from those accounts. This post only covers foreign tax paid from international mutual funds and ETFs (“RIC”). If you have direct holdings of foreign stocks, you add the respective countries under “Where did you receive dividend income from?”
Giri says
Harry,
Thanks for the blog post.
This year TT will not let me e-file my return, because of the 1116 form issue. I felt it is due to the carryover requiring a new schedule, and IRS says the new schedule will be available by 3/31/22, but will not support e-filing. There may be other issues like the AMT simplified method election, like last year.
Appreciate any suggestions for resolving this.
Thanks.
giri
Coriander says
If you have foreign tax carryforward, it requires a new Form 1116 Schedule B which TurboTax doesn’t yet support and which will prevent e-filing. As a work-around, you can eliminate the carryforward. If you have a carryforward from last year, in the questionnaire section you will have the choice not to claim it. If you have a carryforward from this year, go to “Forms” in TurboTax (download version only), select the Form 1116 worksheet, go to the box at the bottom which has the carryforward number, right click and select “override,” and change the number to zero. This eliminates the need for Schedule B. If you want the carryforward, wait until Schedule B is available 3/31 and paper-file an amended return that includes it.
Giri says
Thanks a bunch. There is a significant reduction in the credit when I set the carryover to zero. I may have to endure the inconvenience of mailing a paper return after several years. Do you know if the Schedule will be available in TT to fill on-line? It seems to be a rehash of the carryover tables the 1116 worksheet already has.
Harry Sit says
Late changes from the IRS create work for the tax software vendors. I would cut TurboTax some slack and just wait until 3/31. The delay from filing on paper will probably be longer than waiting a month to e-file.
michael says
Giri, Harry, Coriander,
hmm, looking at reply #7 (user: Coriander): in my form 1116 Comp Wks-> “FTC Carryovers from 2020 and 2022), I think I have to override BOTH the 2020 (1st section total) and the 2022 (total), to make them ‘0’ ;
in my case the totals were some $267 & $298 respectively. I am to receive a $99 FTC for 2021 Tax Year. Few years back I had to use the 1116 when my FT went over $300 (SingleFiler).
in 2021 I sold all my Foreign MF holdings, and plan to never buy them again in taxable side.
1)
is there any downside, in my case to the ‘override’ to ‘0’ ?
2)
seems to produce a $99 FTC whether I choose Simplified Method or the 1116 Long form, I vaguely recall something about once one begins using a form 1116, they can never return to the simplified method ever? though TurboTax seems to be offering it (and reclicking throught the step-by-step SM or 1116 produces same number) ?
3)
earlier I had just deleted the 1116 and started over without any carryovers completed for 2018-2020 and turbotax spit out a larger $129 FTC
4)
am allowed to do that ? and/or why would unused carryovers end up creating a LOWER FTC
What to do ?
Giri says
The 1116 Carryover Schedule B will be available for print on 3/10/22 and for e-filing on 3/11/22 as per TT.
m says
maybe I get the $99 lower FTC because, the appropriate form 1116b is NOT available yet?
think I’m willing to lose $300 or the $129 FTC(+$30 over the $99) by just zero’ing out the Carryovers, as Coriander says , and wash my hands of the FTC & TT , hopefully I can still e-file
Harry Sit says
3/11 is only a few days away. Don’t override anything and don’t move away from the simplified method.
m says
Yes, I see Giri’s new information re: next week, vs. 3/31/22, and that one *will be able to e-file, hope it happens.
meanwhile my form 1116s started in 2018, so I’m unclear if there is even an option to use the Simplified Method for 2021?
(and/or the methodology to try both SM and 1116 to check which has the larger FTC)
Giri says
There seems to be some confusion regarding the term “Simplified Method”.
My little understanding is
1) There is a simplified method for regular tax FTC, wherein, you can claim FTC without filing form 1116. This is limited to credit less than $300 per person and only passive income. If your credit exceeds this amount and/or you have other types of income, SM cannot be used, even if you used it before (i.e. any requirement to continue SM cannot be enforced).
2) The simplified method for FTC AMT implies that the same income is used for both regular tax and AMT FTC as opposed to calculating the AMT income separately. This election cannot be changed without IRS approval.
Harry Sit says
I was referring to the simplified method for AMT.
m says
not part of Harry’s write up. But, when one must do the 1116 for FTC, just curious how one is to know what the LTCGs are?
on my vanguard VBS and MF statements all I see are QD but no information on LTCG, on the MF form it list “total CG dist” which is $0
on the VBS form there is no reference to “CG” at all $0 or otherwise.
for “foreign income” I believe I used the “foreign source income” supplemental page. (similar to the USG income supplemental)
KR says
Harry, if I wait to file until after 3/31, can I e-file using Turbotax? I do not have any foreign tax carryover from prior years, but I will have a big one for this year (2021).
Also, how do I use the carryover credit in future? Can I offset against my US income tax? Do I need to have enough foreign income as well?
Thank you!!
Harry Sit says
TurboTax says e-file with Schedule B will start tomorrow.
The residual credit will be added to the foreign tax paid number next year and go through the same limit calculation again. Depending on your income composition, you may be able to use it up or it may snow ball bigger and bigger until the oldest carryover expires after 10 years.
Joe says
Any idea if HR Block will incorporate Schedule B and when? Paper filing is not problem but if the interview will handle Schedule B in a few days, that is easier than reading the instructions and forms and preparing them manually.
Janice Sample says
Thank you so very much for your post regarding the foreign tax and the Schedule 1116 form. I only paid $11 in foreign tax but my statement clumped all the earning together making it over $300, but only $190 was earned that was foreign. Your very nice and clear screen shorts helped me get through Turbo Tax when I was stuck. Grateful to have found your article.
Joe says
Has anyone successfully e-filed with Turbotax who needed Schedule B to Form 1116? I know someone who insists on e-filing even though I have told them paper filing is no big deal.
HR Block certainly doesn’t handle Form 1116 well – and I am not certain they handle it correctly this year as far as they handle it. Last year was the first year they even had an interview I think. It took a bit this year to figure out how to properly fill out the worksheet that feeds numbers into Schedule B. I suspect Block will handle it better in future years.
Unless I am mistaken, the $329,850 for the adjustment exception is NOT your taxable income – it is your taxable income less qualified dividends and capital gains. That is, it is essentially your income taxed at ordinary income rates. So you can have higher income – even substantially higher – and still qualify for the exception if the higher income is qualified income.
That said, best to avoid having to adjust. For most that means making sure you have less than $20,000 of foreign tax. I think adjusting has the effect of reducing the amount of credit that can be utilized, so the benefits of having a foreign tax credit are smaller.
This is all unnecessarily complicated for folks who only have foreign dividend income from funds or publicly traded foreign securities.
Harry Sit says
I e-filed with Form 1116 and Schedule B successfully with TurboTax. You’re correct – the income threshold for the adjustment exception is the income taxed at ordinary income tax rates, i.e. taxable income without qualified dividends and long-term capital gains. I edited the post.