2018 Foreign Tax Credit: Adjustment Exception for Trusts & Estates?

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2018 Foreign Tax Credit: Adjustment Exception for Trusts & Estates?

Post by gokartmozart »

I've done a ton of Googling on this without success. I'm hoping some Boglehead might have an answer or provide a lead I can follow.

I am preparing 2018 federal tax returns for a couple of small family trusts. They owned international stock index funds which paid foreign taxes. The foreign taxes were reported on 1099s from the brokerage. I'd like to claim the foreign tax credit.

Trusts must always use Form 1116 to claim the credit. (Individual taxpayers may claim the credit without filing 1116 under certain circumstances.)

The instructions for Form 1116 ask that adjustments be made to both total income and foreign income when some of the income came from qualified dividends and capital gains. These adjustments are described in the 2018 instructions for form 1116 beginning on page 7. Later on that page, there is a description of an Adjustment Exception which if you qualify means you can opt-out of the adjustment. I'd like to opt-out of doing the adjustment for the trust returns because the rules for making the adjustments are very hard to understand.

The thresholds for individual taxpayers qualifying for the adjustment exception are clear. MFJ total income under $315,000 qualifies for example. For trusts however there is only this cryptic statement:
For trusts and estates, see section 904(b) and the regulations issued under that Code section to determine if you qualify for the adjustment exception.
(2018 instructions for Form 1116, page 8 and a couple other pages)

I hoped Internal Revenue Code section 904(b) would state a dollar threshold for trusts to qualify for the adjustment exception (analogous to the MFJ $315,000 threshold) but it does not. I have not found "regulations issued under" 904(b) but I am not confident I am am looking in the right places.

Apparently this used to be more clear. The old 2017 instructions to form 1116 gave a nice specific dollar threshold for trusts of $9,150.

Can anyone add any information?
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Re: 2018 Foreign Tax Credit: Adjustment Exception for Trusts & Estates?

Post by chworkboat »

I couldn't follow the section 904(b) reference either, but there are much simpler exceptions for certain cases. See these sections in the instructions for Form 1116:

Foreign Qualified Dividends and Capital Gains (Losses)

Qualified Dividends and Capital Gain Tax Worksheet (Individuals)
Adjustment exception for Form 1040 filers
Adjustment exception for Form 1040NR filers

Schedule D Filers
Adjustment exception

Also, most of the sections about qualified dividend adjustments have a statement near the beginning like "you must adjust the amount of your foreign source qualified dividends if: ...". These also could be ways out of having to make the adjustments.
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