Foreign Tax Credit (1116) - H&R Block vs TurboTax

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medelste
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Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by medelste »

This is both a heads-up and a question. This year I've run our numbers on both H&R Block (HRB) and TurboTax (TT) online tax software after using TT exclusively for 20 years. (I know it's weird, but hey, I did it during stay-at-home times) Thanks to our lower income, I was able to use their respective free file methods from the IRS website and so was able to get to the point where they produce printable tax forms without paying either company anything.

We have some earned income, some domestic and foreign mutual funds' dividends and sales, we contributed to Traditional and Roth IRAs, we did a Roth conversion, we got a little QBI, we got a little retirement savings contribution credit, and we had a little health insurance marketplace premium tax credit repayment. So I thought it was a broad mix of things to test to see if the two software brands matched outputs.

The result: HRB and TT matched in all areas except for in calculating our foreign tax credit. We hold VTIAX in our taxable account.

1. TT added our deductible IRA contribution to line 3b of form 1116 while HRB did not add the IRA (or anything else) to that line.

2. TT used the value from 1040 line 11b on line 18 of form 1116, while HRB added back our qualified business income deduction to the value from 1040 line 11b, and put that total on line 18 of form 1116.

I see that 3b was covered here earlier (viewtopic.php?t=247038) and the consensus is that the TT approach was correct to add that deduction. So heads up if you're using HRB, you'll need to add deductions manually while answering the foreign tax credit set of questions.

I don't see form 1116 question 18 mentioned on bogleheads to know which software's approach is correct. Any thoughts?

Thank you!
fabdog
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by fabdog »

TT used the value from 1040 line 11b on line 18 of form 1116, while HRB added back our qualified business income deduction to the value from 1040 line 11b, and put that total on line 18 of form 1116.
From the instructions, use the number from 1040 11B, there is no mention of adding back the QBI. There is an adjustment if you had qualified dividends and capital gains
Qualified Dividends and Capital Gain Tax Worksheet (Individuals)

If you completed the Qualified Dividends and Capital Gain Tax Worksheet in your tax return instructions and you don't have to file Schedule D, you may have to adjust the amount of your foreign source qualified dividends and capital gain distributions.

Form 1040 or 1040-SR filers.

You must adjust the amount of your foreign source qualified dividends and capital gain distributions if both of the following apply.

Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet is greater than zero.

Line 25 of the Qualified Dividends and Capital Gain Tax Worksheet is less than line 26 of that worksheet.
There are exceptions for this which I'll let you see if they apply to your specific situation

Adjustment exception.

If you qualify for the adjustment exception, you can elect not to adjust your foreign source capital gain distributions and qualified dividends. You make this election by not adjusting these items. If you make this election, you must elect not to adjust any of your foreign source qualified dividends or capital gain distributions.

Adjustment exception for Form 1040 or 1040-SR filers.

You qualify for the adjustment exception if you meet both of the following requirements.

Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet doesn't exceed:

$321,450 if married filing jointly or qualifying widow(er),

$160,725 if married filing separately,

$160,725 if single, or

$160,700 if head of household.

The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000. For this purpose, ignore any capital gain distributions or qualified dividends you elected to include on Form 4952, line 4g.
https://www.irs.gov/instructions/i1116

So while the number for line 18 MAY need adjusting on your 1116, it's not adjusted for QBI

And just a quick check, if MFJ and total foreign taxes < $600 you can skip 1116...

Mike
tm2
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by tm2 »

(Definitely coming late to the party)

In 2020 I used the H&R Block 2019 Deluxe + Efile + State download for macOS (_not_ online), and I had qualified dividends with foreign tax.

If I understand Form 1116 correctly (hmmm),
  • for line 1a I should scale the foreign-qualified-dividend value by the appropriate magic number (0.4054 or 0.5405) for my capital-gains tax bracket,
  • but for line 3d (Gross foreign source income) I should show the whole foreign-qualified-dividend value (without any scaling).
It seemed as though the implementation for Form 1116 didn't understand the rules qualified dividends at all. Worse, even if I tried to manually correct it myself, it absolutely positively didn't seem to allow me to specify a different value (override) for line 3d -- well, unless I wanted to go with "OVERRIDING THE VALUE WILL PREVENT E-FILING", and if I can't e-file then this isn't the software for me.

Fast forward to now, for tax year 2020, and once again I have qualified dividends with foreign tax, so I'm in the market for a Form 1116 implementation that correctly handles this (or at least doesn't actively impede getting it right).

So... can any H&R Block 2020 users attest that either
  1. the 2020 Deluxe download correctly handles this even though the 2019 version didn't, or
  2. some fancier 2020 download correctly handles this, or
  3. some 2020 online version correctly handles this?
Otherwise I may end up (very) grudgingly returning to TT after a one-year experiment with HRB.

Thanks for any light you can shed.
Chip
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by Chip »

tm2 wrote: Sun Apr 04, 2021 4:03 pm If I understand Form 1116 correctly (hmmm),

for line 1a I should scale the foreign-qualified-dividend value by the appropriate magic number (0.4054 or 0.5405) for my capital-gains tax bracket,
but for line 3d (Gross foreign source income) I should show the whole foreign-qualified-dividend value (without any scaling).

It seemed as though the implementation for Form 1116 didn't understand the rules qualified dividends at all. Worse, even if I tried to manually correct it myself, it absolutely positively didn't seem to allow me to specify a different value (override) for line 3d -- well, unless I wanted to go with "OVERRIDING THE VALUE WILL PREVENT E-FILING", and if I can't e-file then this isn't the software for me.
Welcome to the forum!

I don't use HRB. As you know, TurboTax handles the adjustment correctly.

At the risk of telling you things you already know, the adjustment you're describing only applies if you have more than 20k of qualified foreign source dividends OR have taxable income that puts you in the 32% tax bracket or above. Do either of those conditions apply to you?

Even with the adjustment the line 1a value also includes the unadjusted amount of "non-qualified" dividends paid by the fund.
tm2
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by tm2 »

Thanks, and I'm glad you did post these details
Chip wrote: Mon Apr 05, 2021 3:55 am At the risk of telling you things you already know, the adjustment you're describing only applies if you have more than 20k of qualified foreign source dividends OR have taxable income that puts you in the 32% tax bracket or above. Do either of those conditions apply to you?

Even with the adjustment the line 1a value also includes the unadjusted amount of "non-qualified" dividends paid by the fund.
because I didn't remember nearly as many of them as I ought to have done. A year ago I had most of this straight, but by now I had completely forgotten about including the non-qual portion of the fund's dividends. The tax bracket does apply to me, but this year my total foreign tax seems to be under the $300 threshold for Form 1116, so perhaps this year I could just bypass all the Form 1116 fun, but at present I'm still leaning toward "I'd prefer to include 1116, and get it right, even if it isn't really required".

From some preliminary experimentation with HRB 2020 Deluxe download (for macOS) I think that it, like the 2019 version, doesn't correctly handle this adjustment (nor allow me to manually fix it and still e-file).
nalor511
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by nalor511 »

tm2 wrote: Mon Apr 05, 2021 11:09 pm Thanks, and I'm glad you did post these details
Chip wrote: Mon Apr 05, 2021 3:55 am At the risk of telling you things you already know, the adjustment you're describing only applies if you have more than 20k of qualified foreign source dividends OR have taxable income that puts you in the 32% tax bracket or above. Do either of those conditions apply to you?

Even with the adjustment the line 1a value also includes the unadjusted amount of "non-qualified" dividends paid by the fund.
because I didn't remember nearly as many of them as I ought to have done. A year ago I had most of this straight, but by now I had completely forgotten about including the non-qual portion of the fund's dividends. The tax bracket does apply to me, but this year my total foreign tax seems to be under the $300 threshold for Form 1116, so perhaps this year I could just bypass all the Form 1116 fun, but at present I'm still leaning toward "I'd prefer to include 1116, and get it right, even if it isn't really required".

From some preliminary experimentation with HRB 2020 Deluxe download (for macOS) I think that it, like the 2019 version, doesn't correctly handle this adjustment (nor allow me to manually fix it and still e-file).
If you try to include 1116 and it's not required I believe you will get less of a credit than just using the proper line on 1040
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grabiner
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by grabiner »

nalor511 wrote: Tue Apr 06, 2021 1:10 am If you try to include 1116 and it's not required I believe you will get less of a credit than just using the proper line on 1040
Only if your credit is limited on Form 1116, which is not that common for investors. (However, if your tax software incorrectly adjusts qualified dividends, you might find the credit limited.)
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Chip
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by Chip »

grabiner wrote: Tue Apr 06, 2021 8:22 pm Only if your credit is limited on Form 1116, which is not that common for investors.
Is there any data to support the assertion that it isn't common for investors?
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grabiner
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Re: Foreign Tax Credit (1116) - H&R Block vs TurboTax

Post by grabiner »

Chip wrote: Wed Apr 07, 2021 4:13 am
grabiner wrote: Tue Apr 06, 2021 8:22 pm Only if your credit is limited on Form 1116, which is not that common for investors.
Is there any data to support the assertion that it isn't common for investors?
Just the tax rates. If your foreign tax is less than $600, you aren't forced to adjust your qualified dividends (unless you are in the 32% tax bracket). The foreign tax is usually about 8% of the dividend, and most taxpayers who have foreign stock in taxable accounts pay more than 8% of their total income in tax.
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