TurboTax Question Foreign Tax credit

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TurboTax Question Foreign Tax credit

Postby SpringMan » Fri Jan 25, 2013 10:07 am

When going through TurboTax, entering Dividend Income, after inputting foreign tax paid, and dividends, the Report Foreign Dividends screen comes up. I have two applicable funds, Vanguard big FTSE-US, and Fidelity International. For example, say my dividends/distributions were $1200 and my foreign tax paid is $80, it asks to enter the portion of the $1200 that was from a foreign country. Should I enter $1200 since the whole fund is 100% Foreign? Or does some other number need to be computed? Thanks In advance.
edit: It does not seem change my tax whether I enter $1200 or $80 in the above example. I tried it both ways.
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Re: TurboTax Question Foreign Tax credit

Postby kaneohe » Fri Jan 25, 2013 10:54 am

not familiar w/ TT but I'm guessing the reason it is not sensitive to your foreign source income input is that your foreign tax of $80 is less than the "free ride" cutoff of $300/individual or $600/couple MFJ. Above that cutoff, you have to fill in the full F1116 but below that, you just enter the foreign tax on the credit section of the 1040 (no foreign income input required)

see the General Instruction Section at the top of this:
http://www.irs.gov/pub/irs-pdf/i1116.pdf

If you really want to input the correct number for foreign source income, you could contact VG and they could tell you the % of dividend income that was foreign (might also be online).

or try this (click on the fund link for more info):
https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/taxcenter/foreigntaxcredit

like this:
https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/taxcenter/article?file=IWE_TaxFTSEAllWorld
Last edited by kaneohe on Fri Jan 25, 2013 11:26 am, edited 2 times in total.
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Re: TurboTax Question Foreign Tax credit

Postby livesoft » Fri Jan 25, 2013 11:07 am

For accuracy I think it needs to be computed. Not all $1200 of dividends are from foreign sources. I don't know how to find the fraction for that fund, but Vanguard tries to publish the fraction for its funds in an obscure place. The fraction for ETFs is easily found on the website of the ETF creator.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: TurboTax Question Foreign Tax credit

Postby SpringMan » Fri Jan 25, 2013 11:43 am

livesoft wrote:For accuracy I think it needs to be computed. Not all $1200 of dividends are from foreign sources. I don't know how to find the fraction for that fund, but Vanguard tries to publish the fraction for its funds in an obscure place. The fraction for ETFs is easily found on the website of the ETF creator.

You are probably right because even 100% foreign funds hold some cash and cash equivalents but shouldn't that be reported interest with a 1099INT?. Changing this field from 1200 to 80 did not affect my bottom line taxes. kaneohe has a point regarding the limit before needing to fill in anther form. The two foreign fund tax credits for funds I own add up to less than 300. For now, I am going to use 1200 in my example. I won't be filing until late February and will keep monitoring this thread.
Thanks,
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Re: TurboTax Question Foreign Tax credit

Postby HouseStark » Fri Jan 25, 2013 12:17 pm

kaneohe wrote:not familiar w/ TT but I'm guessing the reason it is not sensitive to your foreign source income input is that your foreign tax of $80 is less than the "free ride" cutoff of $300/individual or $600/couple MFJ. Above that cutoff, you have to fill in the full F1116 but below that, you just enter the foreign tax on the credit section of the 1040 (no foreign income input required)


I agree with this. If the amount of foreign tax credit you are claiming is below those limits, then there is no need for the foreign dividend income information to be determined and input, because the Form 1116 should not be generated, or included with the return. The only reason I can think it would be is if there was a Foreign Tax Credit carryover from a prior year, or there was insufficient pre-credit tax liability to use the foreign tax credit on the current return. If those situations don't apply, just input the full dividend income as the foreign income. This is not a misstatement of anything on the return, because the input will not effect the credit calculation or be included in the return.
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Re: TurboTax Question Foreign Tax credit

Postby SobeCane » Fri Jan 25, 2013 4:03 pm

livesoft wrote:For accuracy I think it needs to be computed. Not all $1200 of dividends are from foreign sources. I don't know how to find the fraction for that fund, but Vanguard tries to publish the fraction for its funds in an obscure place. The fraction for ETFs is easily found on the website of the ETF creator.


The link that kaneohe provided states

"Note: The foreign income percentage for this fund was 100%"

https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/taxcenter/article?file=IWE_TaxFTSEAllWorld
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Re: TurboTax Question Foreign Tax credit

Postby Grasshopper » Fri Jan 25, 2013 5:00 pm

This isn't working yet for 2012, but should give you what you need.

https://personal.vanguard.com/us/insigh ... guardfunds
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Re: TurboTax Question Foreign Tax credit

Postby kaneohe » Fri Jan 25, 2013 5:10 pm

The link I provided was for 2011.........didn't check it until I saw grasshopper's post....sorry about that but you get the idea....
Some (very few) companies are good about providing the source income info on the 1099s. Most make you hunt for the info....
in OP's case, probably not critical.
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Re: TurboTax Question Foreign Tax credit

Postby House Blend » Fri Jan 25, 2013 10:43 pm

In past years, I've gotten an extra tax form from VG titled: "Foreign Tax Paid Reporting Information".

It's not a 1099, but it has boxes for Foreign Income, QDI Eligible Foreign Income, and Foreign Income after QDI adjustment.

I assume I'll get a 2012 edition of this form, but haven't yet.
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Re: TurboTax Question Foreign Tax credit

Postby sscritic » Fri Jan 25, 2013 10:47 pm

House Blend wrote:In past years, I've gotten an extra tax form from VG titled: "Foreign Tax Paid Reporting Information".

It's not a 1099, but it has boxes for Foreign Income, QDI Eligible Foreign Income, and Foreign Income after QDI adjustment.

I assume I'll get a 2012 edition of this form, but haven't yet.

Got mine today. My mail is faster than your mail. :)
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Re: TurboTax Question Foreign Tax credit

Postby natureexplorer » Tue Jan 29, 2013 10:39 pm

sscritic wrote:
House Blend wrote:In past years, I've gotten an extra tax form from VG titled: "Foreign Tax Paid Reporting Information".

It's not a 1099, but it has boxes for Foreign Income, QDI Eligible Foreign Income, and Foreign Income after QDI adjustment.

I assume I'll get a 2012 edition of this form, but haven't yet.
Got mine today. My mail is faster than your mail. :)
OK, so I also received the "2012 Foreign Tax Paid Information" form from Vanguard. It has 4 boxes for each fund:
1 Foreign Tax (equal to 1099-DIV Box 6)
2 Foreign Income
3 QDI Eligible Foreign Income
4 Foreign Income After QDI Adjustment

Turbotax asks me the following:
"Report Foreign Dividends
You entered $X of foreign taxes paid. Now enter the portion of the $Y dividends and distributions that was from a foreign country.
Foreign Dividends Received"

What number do I have to enter here? The number from box 2, 3, or 4 from the Vanguard "2012 Foreign Tax Paid Information" form?

I believe the answer is box 2. What is the purpose of the other numbers?

By the way, the number in box 2 equates 98.31% of the total dividends received.
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Re: TurboTax Question Foreign Tax credit

Postby Leesbro63 » Tue Jan 29, 2013 10:45 pm

<oops, never mind...I deleted this comment as incorrect>
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Re: TurboTax Question Foreign Tax credit

Postby House Blend » Tue Jan 29, 2013 11:37 pm

natureexplorer wrote:What is the purpose of the other numbers?


If your income is high enough, or you have more than $20,000 in foreign source qualified dividends, then you need these items to compute your foreign tax credit. The gory details are in the instructions for Form 1116.
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Re: TurboTax Question Foreign Tax credit

Postby AQ » Wed Jan 30, 2013 12:05 am

I just wish the tax code was simpler...
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Re: TurboTax Question Foreign Tax credit

Postby Pacific » Wed Jan 30, 2013 12:47 am

AQ wrote:I just wish the tax code was simpler...


AMEN
+1000000000
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Re: TurboTax Question Foreign Tax credit

Postby natureexplorer » Wed Jan 30, 2013 9:32 am

House Blend wrote:
natureexplorer wrote:What is the purpose of the other numbers?


If your income is high enough, or you have more than $20,000 in foreign source qualified dividends, then you need these items to compute your foreign tax credit. The gory details are in the instructions for Form 1116.
Thanks! At what income level does this become relevant?
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Re: TurboTax Question Foreign Tax credit

Postby kaneohe » Wed Jan 30, 2013 10:56 pm

from F1116 instructions:

Adjustment exception. If you qualify for the adjustment exception, you can elect not to adjust your foreign source capital gain distributions and qualified dividends. You make this election by not adjusting these items. If you make this election, you must elect not to adjust any of your foreign source qualified dividends or capital gain distributions.
Adjustment exception for Form 1040 filers.

You qualify for the adjustment exception if you meet both of the following requirements.

Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet does not exceed:

$217,450 if married filing jointly or qualifying widow(er),

$108,725 if married filing separately,

$178,650 if single, or

$198,050 if head of household.

The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000. For this purpose, ignore any capital gain distributions or qualified dividends you elected to include on Form 4952, line 4g.
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Re: TurboTax Question Foreign Tax credit

Postby grabiner » Thu Jan 31, 2013 12:09 am

kaneohe wrote:from F1116 instructions:

Adjustment exception for Form 1040 filers.

You qualify for the adjustment exception if you meet both of the following requirements.

Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet does not exceed:

$217,450 if married filing jointly or qualifying widow(er),

$108,725 if married filing separately,

$178,650 if single, or

$198,050 if head of household.


These numbers are the bottom of the 33% tax bracket. Line 7 is the amount of ordinary income, not including qualified dividends and capital gains. Thus you qualify under this rule if you do not have any income taxed at 33%.

The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000. For this purpose, ignore any capital gain distributions or qualified dividends you elected to include on Form 4952, line 4g.


Line 4g is used to deduct investment interest, which can only be deducted against investment income. It would be unreasonable to deduct investment interest taxed at your full tax rate against investment income taxed at 15%; therefore, if your investment interest exceeds your short-term gains and non-qualified dividends, you can choose to pay tax at your full rate on enough qualified dividends and long-term gain distributions to get the full deduction.
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Re: TurboTax Question Foreign Tax credit

Postby natureexplorer » Thu Jan 31, 2013 12:14 am

kaneohe & grabiner, thanks! Based on this, I am not eligible. Now what I do have to do?
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Re: TurboTax Question Foreign Tax credit

Postby grabiner » Thu Jan 31, 2013 12:54 am

natureexplorer wrote:kaneohe & grabiner, thanks! Based on this, I am not eligible. Now what I do have to do?


Form 1116 Instructions

You need to identify how much of your qualified dividends are from foreign sources; this will be identified on the forms you received from your brokerage. Then, in order to claim the tax credit, you (or your tax software) multiply the qualified dividends by .4286; this converts the qualified dividends taxed at 15% to an equivalent amount of income taxed at 35%. If you paid 0% tax on any qualified dividends, they are not counted as foreign income at all.

You then go through with the rest of the calculation, determining what percentage of your income (after deductions) is foreign, and claiming as a credit the lesser of the actual foreign tax paid or a prorated share of your US tax.

If your foreign income is all from mutual funds, it's unlikely your credit will be limited.
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Re: TurboTax Question Foreign Tax credit

Postby kaneohe » Thu Jan 31, 2013 10:48 am

natureexplorer wrote:kaneohe & grabiner, thanks! Based on this, I am not eligible. Now what I do have to do?


I find the IRS wording a bit confusing...........I think it should have said: You must adjust if your income exceeds either of those limits.

n.e. : just to clarify, when you said you are not eligible, did you mean that your income did or did not exceed those limits?

grabiner : generally, is making the adjustment more or less favorable to taxpayer?
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Re: TurboTax Question Foreign Tax credit

Postby natureexplorer » Thu Jan 31, 2013 3:15 pm

kaneohe wrote:
natureexplorer wrote:kaneohe & grabiner, thanks! Based on this, I am not eligible. Now what I do have to do?


I find the IRS wording a bit confusing...........I think it should have said: You must adjust if your income exceeds either of those limits.

n.e. : just to clarify, when you said you are not eligible, did you mean that your income did or did not exceed those limits?

grabiner : generally, is making the adjustment more or less favorable to taxpayer?
My income did exceed those limits.
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Re: TurboTax Question Foreign Tax credit

Postby SobeCane » Sat Feb 02, 2013 3:11 pm

Grasshopper wrote:This isn't working yet for 2012, but should give you what you need.

https://personal.vanguard.com/us/insigh ... guardfunds




Link is now up for 2012. 100% Foreign Again.

https://advisors.vanguard.com/VGApp/iip ... lWorld2012
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