Foreign Tax Credit With Form 1116 In TurboTax and H&R Block Software

When mutual funds and/or ETFs that invest in other 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 you receive from your broker. When the total foreign taxes paid from all your 1099-DIV’s is no more than a certain amount — $300 for single, $600 for married filing jointly — it’s easy to handle. You enter the 1099-DIV’s as usual 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’s 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 scroll down to the next section if you use H&R Block software.

TurboTax

I’ll use this example with TurboTax Deluxe downloaded software.

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’re using TurboTax Online, consider using TurboTax downloaded software next time because it’s both less expensive and more powerful.

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.

After you enter the 1099-DIV, TurboTax says nothing about exceeding the $300/$600 threshold or needing a Form 1116. You continue with the rest of your entries as usual.

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.

TurboTax asks you how much of the income reported 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.

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.

TurboTax suggests you should elect the simplified method. Click on Elect Simplified Calculation.

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!

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.

H&R Block Software

I’ll use the same example in H&R Block downloaded software.

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’re entering the 1099-DIV 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.

It’ll come up much later in the Credits section under Foreign Tax Credit.

Click on Add Form 1116.

H&R Block software asks upfront about the simplified election. Select Yes if you want 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’s that reported foreign tax paid in Box 7, you’ll have to add up the foreign income numbers from the respective supplemental information.

We leave this blank because we don’t have any interest expenses.

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 reported in U.S. dollars.

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?

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.

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’s 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 also asks a number of questions that don’t apply to our simple scenario. It’s easy to click through those once you know they don’t apply.

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