Form 1116 Foreign Tax Credits Questions

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catchinup
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Form 1116 Foreign Tax Credits Questions

Post by catchinup »

I have questions about filling out form 1116.

In my Vanguard taxable account I'm holding VFWAX - VNGRD FTSE US IDX ADML. It's the only international fund I own.

The same account also holds VTSAX and Vanguard Federal Money Market fund. I also had some Treasury Bill interest last year, but I don't think that comes into play here.

The 1099 from Vanguard says total dividends and distributions from VFWAX is 8,334.53 and foreign tax withheld was $831.

What should appear then on line 1a?

Also, what's the difference between Line 1a and 3d. When I read the instructions, they should like the same thing to me.

Thanks
jebmke
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Re: Form 1116 Foreign Tax Credits Questions

Post by jebmke »

I believe 1a is the total income from the asset; line 3d is only the income that is taxable in the foreign jurisdiction
Last edited by jebmke on Sun Mar 31, 2024 1:20 pm, edited 2 times in total.
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stan1
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Re: Form 1116 Foreign Tax Credits Questions

Post by stan1 »

Whether you are using Turbo Tax or not, I'd recommend looking TFB's site:
https://thefinancebuff.com/foreign-tax- ... botax.html
talltodd
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Re: Form 1116 Foreign Tax Credits Questions

Post by talltodd »

1a and 3d are the same on my 1116. I use TurboTax.
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grabiner
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Re: Form 1116 Foreign Tax Credits Questions

Post by grabiner »

jebmke wrote: Sun Mar 31, 2024 12:39 pm I believe 1a is the total income from the asset; line 3d is only the income that is taxable in the foreign jurisdiction
Line 1a of Form 1116 reports only the income from foreign sources, not the total income from the fund. Vanguard funds that are eligible for the foreign tax credit (PDF) says that 91.9371% of the distributions from the fund are foreign, so this percentage of the fund dividend would be reported on Line 1a. Remember that the total dividend is the amount paid to you plus the foreign tax withheld.

Instructions for Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) says that Line 3d should usually have the same number as Line 1a. If you had to adjust your Line 1a entry for qualified dividends (only if you are in the 32% tax bracket, or have $20K in foreign source qualified dividends and long-term gains), you do not make this adjustment on Line 3d. (There are other exceptions which do not apply to you, such as salary excluded because you filed Form 2555,)
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yules
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Re: Form 1116 Foreign Tax Credits Questions

Post by yules »

Having to complete Form 1116 is what made me sell my taxable international funds.
Topic Author
catchinup
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Re: Form 1116 Foreign Tax Credits Questions

Post by catchinup »

yules wrote: Sun Mar 31, 2024 10:46 pm Having to complete Form 1116 is what made me sell my taxable international funds.
Agreed. Plus, if you're in a high tax bracket, it's expensive with the dividends and the foreign tax credit is not worth it. I regret owning this and taxable and I have already text loss harvested all the lots I am able to but I still have around $250,000 of it in taxable in a lot I purchased on March 20th, 2020 at the very bottom of the covid crash. So I'd have a huge long-term capital gain if I sold it.
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catchinup
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Re: Form 1116 Foreign Tax Credits Questions

Post by catchinup »

grabiner wrote: Sun Mar 31, 2024 10:17 pm If you had to adjust your Line 1a entry for qualified dividends (only if you are in the 32% tax bracket, or have $20K in foreign source qualified dividends and long-term gains), you do not make this adjustment on Line 3d. (There are other exceptions which do not apply to you, such as salary excluded because you filed Form 2555,)
I am in the 32% marginal tax bracket. I'm asking this question because I'm reviewing my draft tax return and can't figure out where my accountant got the number he entered in line 1A. The number he put in 3D matches total dividends & interest the dividends & distributions detail page, and that includes dividends from VTSAX and Vanguard Federal Money Market in addition to VFWAX.
Topic Author
catchinup
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Re: Form 1116 Foreign Tax Credits Questions

Post by catchinup »

stan1 wrote: Sun Mar 31, 2024 12:40 pm Whether you are using Turbo Tax or not, I'd recommend looking TFB's site:
https://thefinancebuff.com/foreign-tax- ... botax.html
Great article. I subscribe to his newsletter and I actually forgot about this article. Thank you for the reminder!
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grabiner
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Re: Form 1116 Foreign Tax Credits Questions

Post by grabiner »

catchinup wrote: Tue Apr 02, 2024 12:55 am
grabiner wrote: Sun Mar 31, 2024 10:17 pm If you had to adjust your Line 1a entry for qualified dividends (only if you are in the 32% tax bracket, or have $20K in foreign source qualified dividends and long-term gains), you do not make this adjustment on Line 3d. (There are other exceptions which do not apply to you, such as salary excluded because you filed Form 2555,)
I am in the 32% marginal tax bracket. I'm asking this question because I'm reviewing my draft tax return and can't figure out where my accountant got the number he entered in line 1A. The number he put in 3D matches total dividends & interest the dividends & distributions detail page, and that includes dividends from VTSAX and Vanguard Federal Money Market in addition to VFWAX.
The number on Line 1A should be all of your non-qualified dividends from the foreign stock, plus 15/37 of your qualified dividends; see the Form 1116 instructions. A similar adjustment should be made to your total income. (This is not a fair adjustment; the factor should be 15/32, since you pay 15/32 as much tax on qualified dividends as on other income. However, it is the way the tax law is written.)
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