ShortStop wrote:For Part 1, line 1a, TurboTax gives the option of using the 1099-DIV Box 1a (Total Ordinary Dividends) amount or another number of my choosing. I just received a 2010 Foreign Tax Paid Reporting Information form with the amount in Box 2 (Foreign Income) being a little less than the 1099-DIV amount. Which is correct for Form 1116 line 1a?
Use the foreign income amount. Your fund may have some US income in its dividends, such as from Treasury bills that it holds for liquidity, US stocks that are somehow in the fund, or short-term gains that have been distributed along with the dividends
From what I have read, the Box 2 makes more sense. If it is Box 2, do I have to provide supporting proof (e.g. a copy of the form) so that the IRS won't come back later saying "Where did you get this number? You owe us money!"?
Hold onto the form in case you are audited. However, using the Box 2 number rather than the Box 1 number results in a lower tax credit, so the IRS is unlikely to complain.
For Part 1, lines 3a and 3b, I am really having a problem. I have only three items on my 1040 Schedule A - state income taxes, real estate taxes, and gifts to charity. TurboTax wants to put all three of them on line 3a. (Since I won't be filing with TT that's not really a problem, but I want to know WHY?) From what I have read 3a should only contain medical expenses, real estate taxes, new motor vehicle taxes, and possibly general sales taxes.
TurboTax gets this wrong; following the Form 1116 instructions is correct. (I think the logic is that gifts to charity must be made in the US, and thus are connected with your US income.)
But TT still wants to put my state income taxes on line 3a5a. Is TT correct? Also, since my state does not exempt foreign income from taxes should the amount be somehow prorated?
It should be, but this is a calculation which is impossible for tax software to do correctly, because the number is not yet known, and not all the data that is available has been entered. Prorating the state taxes according to your federal income is a good estimate. Only after you fill out your state tax form for 2010 will you know how much of your state income taxes relate to your foreign income. And if you paid 2009 state tax in April 2010, that state tax is not related to your 2010 foreign income at all, but it could be related to your 2009 foreign income.
(My own situation for this form will be even more complicated, because I moved mid-year. None of the 2010 tax I paid to Maryland is related to foreign income, because all my foreign income was earned in December after I moved to New Jersey. Meanwhile, a much larger share of the 2010 tax paid to New Jersey is related to foreign income, since I earned only a small part of my salary but all my foreign income in New Jersey.)
It is likely that any mistakes you make on the form will not matter. I discovered these errors last year, after comparing the 2008 form from TurboTax with the 2009 form from TaxAct (TaxAct got everything except state tax right), but either way, the maximum credit allowed was double the foreign tax I paid.