State income taxes. State income taxes (and certain taxes measured by taxable income) are definitely related and allocable to the gross income on which the taxes are imposed. If state income tax is imposed in part on foreign source income, the part of your state tax imposed on the foreign source income is definitely related and allocable to foreign source income.
Foreign income not exempt from state tax. If the state does not specifically exempt foreign income from tax, the following rules apply.
If the total income taxed by the state is greater than the amount of U.S. source income for federal tax purposes, then the state tax is allocable to both U.S. source and foreign source income.
If the total income taxed by the state is less than or equal to the U.S. source income for federal tax purposes, none of the state tax is allocable to foreign source income.
Foreign income exempt from state tax. If state law specifically exempts foreign income from tax, the state taxes are allocable to the U.S. source income.
Example. Your total income for federal tax purposes, before deducting state tax, is $100,000. Of this amount, $25,000 is foreign source income and $75,000 is U.S. source income. Your total income for state tax purposes is $90,000, on which you pay state income tax of $6,000. The state does not specifically exempt foreign source income from tax. The total state income of $90,000 is greater than the U.S. source income for federal tax purposes. Therefore, the $6,000 is definitely related and allocable to both U.S. and foreign source income.
Assuming that $15,000 ($90,000 − $75,000) is the foreign source income taxed by the state, $1,000 of state income tax is apportioned to foreign source income, figured as follows:
$15,000 / $90,000 × $6,000 = $1,000
HueyLD wrote:Re: state income taxes paid
Since your state does not exempt foreign source income from taxation, a portion of your state tax liability may be definitely related to your foreign source income. You need to perform calculations per the instructions above and put the resulting amount on line 2 of Form 1116.
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?
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!"?
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.
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?
grabiner wrote: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.
ShortStop wrote:grabiner wrote: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.
I thought I had this figured out, but now I'm confused again. Are you saying that the state income tax deduction on Schedule A (before prorating) is not the number I should using? Because if so, why does TurboTax want to willy-nilly put the number on Form 1116? Is it the deduction minus the April 2009 payment? And what if I'll be getting a refund this year? Is it the deduction minus the payment minus the refund? Could they make this any more confusing?????
grabiner wrote:And given that you are told not to follow common sense there, you might reasonably do the same for the year of the taxes, and apportion your tax payments in 2010 according to your 2010 state income taxes, even if some of them were payments made for other years.
Foreign source income generally does not include gain realized on the sale or exchange of personal property by a U.S. resident as defined in section 865(g).
House Blend wrote:I'm slogging my way through Form 1116 and encountering similar questions.
My only foreign taxes involve dividends distributed by a Vanguard mutual fund. I also qualify for the "adjustment exception", meaning that I don't have to fuss with the special treatment of qualified dividends.
I also have a small amount of short term capital gains, plus a large amount of long term capital losses (including carryovers), all involving Vanguard mutual funds. Some of these gains and losses involve international mutual funds. Line 13 of 1040 will show a capital loss of $3000.
My guess is that all of these gains and losses are considered to be US-source income, not foreign source. Correct? Pub. 514 and the instructions for Form 1116 seem vague on this point (and a lot of other points ).
House Blend wrote:I find grabiner's interpretation of the treatment of charitable contributions a bit puzzling. One could argue that having foreign income makes it feasible to make contributions, so why shouldn't this deduction be prorated across US and foreign income? In any case, it seems to me be safer to add this on line 3b, especially since it doesn't affect the bottom line on my tax credit.
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