SE tax deduction on Form 1116 line 3b

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Topic Author
dqbydt
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Joined: Fri Jan 04, 2019 3:55 pm

SE tax deduction on Form 1116 line 3b

Post by dqbydt » Wed Mar 13, 2019 7:06 pm

There have been several posts involving the notorious Form 1116 on this forum, and I understand the basic idea about allocating deductions between US vs foreign income. As experimented here by @Chip: viewtopic.php?t=247038#p3880463 (and as I have verified myself) TurboTax includes the SE tax deduction on line 3b (which is ostensibly for "deductions not definitely related to a specific class of income").

My question is: isn't the SE tax deduction directly related to one's *US* self-employment? How can it be considered a "not definitely related" deduction?

kaneohe
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Re: SE tax deduction on Form 1116 line 3b

Post by kaneohe » Wed Mar 13, 2019 10:07 pm

"1a Gross income from sources within country shown
above
and of the type checked above (see
instructions):
1a
............................
Deductions and losses (Caution: See instructions.):
2 Expenses definitely related to the income on line
1a (
attach statement) . . . . . . . . .
3 Pro rata share of other deductions not definitely
related:
a Certain itemized deductions or standard deduction
(see instructions) ."
*****************************************************************
The form in line 2 is asking for deductions directly related to the income in line 1 which is foreign
income. The SE tax is directly related to US income, not foreign income (assuming the SE work is here).

Topic Author
dqbydt
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Re: SE tax deduction on Form 1116 line 3b

Post by dqbydt » Wed Mar 13, 2019 11:37 pm

kaneohe wrote:
Wed Mar 13, 2019 10:07 pm
The form in line 2 is asking for deductions directly related to the income in line 1 which is foreign
income. The SE tax is directly related to US income, not foreign income (assuming the SE work is here).
I agree; but in that case is TurboTax wrong in including the deductible part of SE tax on line 3b? How would they commit such an obvious error? (My SE work is indeed in the US, and TT knows about that.)

kaneohe
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Re: SE tax deduction on Form 1116 line 3b

Post by kaneohe » Thu Mar 14, 2019 10:31 am

I must be missing something...................my understanding is that Pt I of F1116 is calculating the taxable foreign income. Line 1 is the gross foreign income. Line 2 is asking for deductions directly related to the foreign income. Line 3 is asking for deductions not directly related to the foreign income. The SE tax deduction is not directly related to the foreign income so does not go on line 2. .....but it is a deduction so why wouldn't it belong on line 3?

kaneohe
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Re: SE tax deduction on Form 1116 line 3b

Post by kaneohe » Thu Mar 14, 2019 10:34 am

duplicate removed

Topic Author
dqbydt
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Re: SE tax deduction on Form 1116 line 3b

Post by dqbydt » Thu Mar 14, 2019 3:21 pm

Well, from the instructions for F1116,
Line 3b. Enter on line 3b any other
deductions that don't definitely relate to
any specific type of income (for
example, the deduction for alimony paid
from Schedule 1 (Form 1040), line 31a).
So it would seem that 3b is supposed to include only deductions that don't relate to any specific source of income. Doesn't that mean the SE tax should not be included? (And if that's the case, is TurboTax in error?)

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grabiner
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Re: SE tax deduction on Form 1116 line 3b

Post by grabiner » Thu Mar 14, 2019 10:23 pm

IRS Publication 514 is still under development, but the IRS Publication 514 draft says:
Deductions not definitely related. You must apportion to your foreign income in each separate limit category a fraction of your other de-ductions that are not definitely related to a specific class of gross income. If you itemize, these deductions are medical expenses, general sales taxes, and real estate taxes for your home. If you do not itemize, this is your stand-ard deduction. You also should apportion any other deductions that are not definitely related to a specific class of income, including deductions shown on Form 1040, lines 23–35; or Form 1040NR, lines 24–34.
Lines 23-35 still exist, now on Schedule 1; they are adjustments to income. But this suggests that the IRS believes Line 9 (QBI deduction) is not in the same category.

Logically, QBI should be definitely related to a specific class of gross income, the business income against which you deduct it. If your business income was all in the US, then the entire QBI deduction is against US income; if it was all in a foreign country, the deduction is against foreign income.

However, logic doesn't always govern the IRS rules. Line 27 (one half of self-employment tax) is also directly related to the business in which you earned self-employment income, but this publication says that it should be treated as "not definitely ralated". And some of the other deductions which moved from the old Schedule A to the new Schedule 1 are similar; educator expenses (line 23), and those business expenses which are still deductible (line 24) are related to a particular job.
Wiki David Grabiner

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dqbydt
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Re: SE tax deduction on Form 1116 line 3b

Post by dqbydt » Fri Mar 15, 2019 1:38 am

Ah! At last, an official source of corroboration! Thanks @grabiner for pointing it out. Logic doesn't govern the rules, indeed. I just couldn't reconcile how SE tax is "not definitely related". But they say it isn't, and so may it be. I'm happy to take all the deductions I can, of course :D

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grabiner
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Re: SE tax deduction on Form 1116 line 3b

Post by grabiner » Fri Mar 15, 2019 7:51 pm

dqbydt wrote:
Fri Mar 15, 2019 1:38 am
Ah! At last, an official source of corroboration! Thanks @grabiner for pointing it out.
Caution: this is not official. The IRS itself says that the publication I cited is a draft, not to be used for tax filing. One month from the tax deadline, the official publication has not been released.
Wiki David Grabiner

Topic Author
dqbydt
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Re: SE tax deduction on Form 1116 line 3b

Post by dqbydt » Sat Mar 16, 2019 12:37 am

grabiner wrote:
Fri Mar 15, 2019 7:51 pm
Caution: this is not official. The IRS itself says that the publication I cited is a draft, not to be used for tax filing. One month from the tax deadline, the official publication has not been released.
Got it. I'll keep tracking P514 to see if the language changes. Thank you.

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