Choose from the following frequently asked questions about Form 1116:
- Do I have to use Form 1116 to report a foreign tax credit? If it is not necessary, how can I suppress the form? Why is there no carryover of FTC from a prior year being included?
- Why is the amount showing in view for line 2 of Form 1116 less than what I entered?
- How do I clear red message 5630?
- Form 1116 is present in the return, and an error messages says that an SCH (Unformatted Schedule) must be included. How can this message be resolved?
- How is the amount on Line 3a of the 1116 calculated?
- How is the amount on Line 3e of the 1116 calculated?
- I have entered an amount of carryback/carryover of AMT 1116 Foreign Tax Credit, but the amount is not showing on WKs CARRY and the 1116_AMT is not being produced.
- I have entered information about foreign tax paid in the return, but why isn't the credit generating on the last line of the 1116?
- Why am I not able to select United States as the resident country?
- Where do I enter the High Tax Kick Out (HTKO) for Form 1116?
Is Form 1116 required?
A Form 1116 does not have to be completed if the total creditable foreign taxes are not more than $300 ($600 if married filing a joint return) and other conditions are met; the Instructions for Form 1116 explain:
"You may be able to claim the foreign tax credit without filing Form 1116. By making this election, the foreign tax credit limitation (lines 15 through 21 of the form) will not apply to you. This election is available only if you meet all of the following conditions.
- All of your foreign source gross income was “passive category income” (which includes most interest and dividends). See Passive Category Income, later [in the instructions]. However, for this purpose, passive income also includes (a) income subject to the special rule for high-taxed income described later [in the instructions], and (b) certain export financing interest.
- All the income and any foreign taxes paid on it were reported to you on a qualified payee statement. Qualified payee statements include Form 1099-DIV, Form 1099-INT, Schedule K-1 (Form 1041), Schedule K-1 (Form 1065), Schedule K-1 (Form 1120-S), or similar substitute statements.
- Your total creditable foreign taxes aren't more than $300 ($600 if married filing a joint return).
This election is not available to estates or trusts.
If you make this election, the following rules apply:
- You can't carry over to or from any other year any foreign taxes paid or accrued in a tax year to which the election applies (but carryovers to and from other years are unaffected). See the instructions for line 10, later [in the instructions].
- You are still required to take into account the general rules for determining whether a tax is creditable. See Foreign Taxes Eligible for a Credit and Foreign Taxes Not Eligible for a Credit, later [in the instructions].
- You are still required to reduce the taxes available for credit by any amount you would have entered on line 12 of Form 1116. See the instructions for Line 12, later [in the instructions].
To make the election, just enter on the foreign tax credit line of your tax return... the smaller of (a) your total foreign tax or (b) your regular tax..."
The instructions also note that it may be possible to deduct foreign income taxes instead of taking a credit. In Drake21, there is a global option available under Setup > Options > Calculation & View/Print > Elect to Claim FTC without filing Form 1116 when possible. When this is marked, Form 1116 may not be generated if the taxpayer meets the requirements listed above.
How can Form 1116 be suppressed?
Delete the 1116 screen, go to screen5and enter the amount on Schedule 3, Part I, line 1 (line48 in Drake18 and prior).
If the foreign tax information was entered on screen DIV - 1099-DIV Dividend Income, check the box1116 Not Required in the section labeled "Form 1116/FTC Information" located in the bottom right of the DIV screen.
If the foreign tax information was entered on screen INT - 1099-INT Interest Income, check the box 1116 Not Required in the section labeled "Amount that is."
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Why is the amount showing in view for line 2 of Form 1116 less than what I entered?
The following information applies to Drake17 and prior.
If the taxpayer is itemizingdeductions on Schedule A, and is required to reduce their total itemizeddeductions based on their AGI, then each of the itemized deductionsthat are subject tothe reduction must be decreased by thereductionpercentage. The expenses for line 2 of Form 1116 are subjectto this reduction as it applies to the taxpayer's itemized deductions.
Wks Sch A shows the calculation of the itemized deduction reduction for Schedule A.
To find the reduction percentage, divide the amount on line 10 ofWks Sch A by the amount on line 1 of Wks Sch A.In the above example, the reduction percentage is 93.1422%(41,914/45,000). This means that 93.1422% of the total deduction amountentered is allowed to carry to Schedule A, line 29:
Per the 2017 Form 1116 instructions,this reduction percentage must also be appliedto "each itemizeddeductionsubject to the reduction to determine theamount to enter onthe appropriate lineof Form 1116."The software applies this reductionpercentage to the amount entered for line 2 of Form 1116 automatically.In this example, $25,000 was entered on line 2 of screen1116. The reduction percentage of 93.1422% was applied, thus reducing the amount of expenses allowed on line 2 to $23,286.
Note: The itemized deduction reduction percentage applies to lines 3a and 4a of Form 1116 as well:
For more information, see the Form 1116 Instructions or Schedule A Instructions.
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How do I clear red message 5630?
EF Message 5630 states:
Form 1116 - You cannot have current year foreign income on Part I, line 1a, without current year foreign tax paid in Part II or vice versa.
DIV screen
Check your entries on the DIV screen.
- Lines 1-2. You must make an entry in the Total column and then in either the Foreign Amount or Foreign Percent column.
- If you entered a percentage or an amount in the Foreign Percent or Foreign Amount column and don't need it, remove it to clear the message.
- Line 7 (Line 6 in Drake17 and prior). If the information in lines 1-2 is correct, enter the amount of Foreign tax paid. Select 1116 NOT required (bottom of the screen) only if the taxpayer can make that election.
Note: If the taxpayer is required to have Form 1116, amounts would need to be entered in both theForeign Amountor Foreign Percent column of lines 1-2 and the Foreign Tax fields.
- Line 8 (Line 7 in Drake17 and prior). Be sure to select the Foreign country involved to avoid EF message 5901.
- Select 1116 NOT required(bottom of the screen) only if the taxpayer can make that election.
Note: A NOTES page displays Note 243 if you do not answer theSchedule B Part III Foreign Account Questions,which are at the top of boththeINTscreen andDIVscreens (or available on screen1 Name and Addressunder the Resident State information if the answer for all questions should be 'No').
INT screen
Check your entries on the INT screen.
- Line 6. Be sure you have entered an amount on line 6, Foreign tax paid.
- Line 7. Select aForeign countryto avoid message 5901.
- Select1116 NOT required only if the taxpayer can make that election
A NOTES page displays Note 243 if you do not answer theSchedule B Part III Foreign Account Questionslinked at the top of theINTscreen (or available on screen1 Name and Addressunder the Resident State information if the answer for all questions should be 'No').
1116 screen
If you are entering your data directly on the 1116 screen, be sure to include the following data:
- Part I - Taxable Income/Loss from Outside US
- Type of income taxed
- Country
- Gross income from sources within country entered above
- Part II - Foreign Taxes Paid or Accrued
- Enter the amount of taxes paid for the type of income. If you use the Foreign Currency column, a statement is required. Open the SCH screen (on the Miscellaneous tab) to create Statement #397.
Foreign transactions coming from a K-1 for a 1065 (partnership) or 1120-S (s-corporation) should be entered on screen 1116 (if applicable).
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Form 1116 may require additional supporting statements for certain line items. Use the SCH screen link on screen 1116 to prepare any required statements. On the SCH - Unformatted Statementscreen, in the Type of attachment/statement number and title field, select the statement code appropriate for the1116 screen entry. Enter the text of the needed explanation (see the Instructions for Form 1116for information on what the IRS expects to be included in the statement).In View, on the page labeled STATEMENT that is generated, the code isconverted to a statement #, which is displayed on Form 1116 near theappropriate line.
Use the following codes for Form 1116 statements:
| SCH screen drop list selection for 1116 entry | Screen 1116 entry location | Associated message ifSCH statement is not prepared |
| 394 1116 Ln 1b, Personal Income | Part I, Line 1b option box | 5493 |
| 395 1116 Ln 2, Expenses | Part I, line 2, 'Regular Tax' column | 5509 |
| 396 1116, Ln 3b, Other Deductions (includes other deductions, such as alimony paid entered on screen 4) | Part I, line 3b, 'Regular Tax' column | 5499 |
| 397 1116, Tax Paid or Accrued | Part II, 'Foreign Taxes Paid or Accrued' | 5510 |
| 398 1116, Conversion Rate | Various | None |
| 399 1116, Carryback or Carryover | Part III, line 10 (Drake20 and prior- see Related Linksbelow for details) | 5022 |
| 400 1116, Tax Reduction | Part III, line 12 | 5058 |
| 401 1116, Adjustments | Part III, line 16 (adjustments to line 15) | 5513 |
| 407 1116, Ln 2 AMT Expenses | Part I, line 2, Alt Min Tax column | 5508 |
| 408 1116, Ln 3b AMT Other Deductions | Part I, line 3b, Alt Min Tax column | 5507 |
| 409 1116, AMT Carryback or Carryover | Part III, Carryback/carryover of AMT 1116 Credit (Drake20 and prior) | 5506 |
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How is the amount on Line 3a of the 1116 calculated?
Starting in Drake18, line 3a comes from certain itemized deductions or the standard deduction amount. Per the 1116 Instructions:
"Enter the following itemized deductions (from Schedule A (Form 1040 or 1040-SR)) on line 3a.
- Medical expenses (line 4).
- General sales taxes (line 5a).
- Real estate taxes for your home (line 5b).
If you don't itemize deductions, enter your standard deduction on line 3a."
The following applies to Drake17 and prior:
The Instructions for Form 1116state
"Itemized deduction limit.If you must reduce the total amount of your itemized deductions onSchedule A (Form 1040), line 29 (or Form 1040NR, Schedule A, line 15),you must reduce each of the itemized deductions that are subject to thereduction by the reduction percentage before you complete lines 2, 3a,and 4a."
The Instructions for Schedule A (Form 1040) state
"Usethe Itemized Deductions Worksheet, to figure the amount to enter online 29 if the amount on Form 1040, line 38, is over $313,800 if marriedfiling jointly or qualifying widow(er); $287,650 if head of household;$261,500 if single; or $156,900 if married filing separately."
If the total amount of itemizeddeductions on Schedule A line 29 must be reduced using the ItemizedDeductions worksheet, that worksheet is produced by the software as WK_A(WK_A_ in Drake15 and prior).
For line 3a of Form 1116, Foreign Tax Credit, the instructions specify that these deductions should be entered from Schedule A:
- Medical expenses (line 4)
- General sales taxes (line 5)
- Real estate taxes (line 6).
If WK_A is produced, the reductionpercentage calculated by that worksheet is applied to these deductionsand the reduced total appears on line 3a of Form 1116.
The following example illustrates this calculation for line 3a.
Example. A Schedule A displays these deductions for a single taxpayer with an adjusted gross income (line 38 of the 1040) of $277,381.
- General Sales Tax $1,553
- Real Estate Taxes $12,000
- Home Mortgage Interest $10,000
The line 29 total, $23,014, is annotated "SEE WK_A", indicating that the line 29 total has been reduced by the software.
To determine the reduction, the 1116 instructions direct you to:
"Dividethe amount on line 9 of the worksheet (the overall reduction) by theamount on line 3 of the worksheet (total itemized deductions subject tothe reduction). This is your reduction percentage. Apply this reductionpercentage (expressed as a decimal rounded to at least four places) toeach itemized deduction subject to the reduction to determine the amountto enter on the appropriate line of Form 1116."
On WK_A, line 9 ($539), is 2.29%(.02288...) of line 3 ($23,553) (the software calculates the reductionpercentage decimal beyond four places).
There are no medical expenses in the example, so the reduction percentage decimal is applied
- to the general sales tax:
$1,553 - ($1,553 x .02288…) = $1,517.47 - to the real estate taxes
$12,000 - ($12,000 x .02288…) = $11,725.44
The total, $13,242.91, rounds to $13,243 and flows to line 3a of Form 1116.
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How is line 3e of Form 1116 calculated in the software?
If no amount is entered in the data entry on the 1116 for line 3e an amount will automatically be calculated by the software.
This amount is calculated by adding all gross income sources on the return before deductions and losses are taken. This also includes any gains that are on the 1040.
For more information on the calculation of line 3e, see the Form 1116 instructions.
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The1116_AMT will only produce when needed to calculate amounts on the 6251 Alternative Minimum Tax form. If the1116_AMT is not produced, Foreign Tax Credit AMT amounts will not carry toWKs CARRY (WK_CARRY in Drake15 and prior). To force the forms to produce, select Print Form 6251 on thePRNT Print Options screen. This will calculate the 6251 even when not required and amounts will carry to1116_AMT andWKs CARRY.
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If you have entered an amount offoreign tax paid in the return, an amount of foreign income earned mustalso be entered in order for a credit to be calculated on the 1116 form.
If the amount of foreign tax paid was entered:
- on the 1116 screen, you must make an entry on line 1a for the Gross income from sources within country entered above.
- on theDIV - 1099-DIV Dividend Incomescreen, the amount of foreign income must be entered on line 1, or line 2a, in the column labeledForeign AmountorForeign Percent.
- on the INT - 1099-INT Interest Income screen, the amount of foreign income must be entered in the section labeledAmount that is on the line forForeign Interest.
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Why am I not able to select United States as the resident country?
Leave the Resident country field blank on the 1116 screen and the software assumes the taxpayer or spouse is residing in the United States. There is no need to select U.S. from the drop list.
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Where do I enter the High Tax Kick Out (HTKO) for Form 1116?
The high tax kick out can ben entered on the 1116 screen > line 13. This prints a literal of "HTKO" below line 13 on Form 1116.
When it comes to Form 1116 and foreign tax credits, there's a labyrinth of rules and requirements. To tackle these questions effectively, let's break down the key concepts and solutions:
Do I have to use Form 1116 to report a foreign tax credit?
You're not obliged to file Form 1116 if your total creditable foreign taxes don't exceed $300 ($600 for joint filers) and if specific conditions are met. This option is available for individuals with passive category income, reported on qualified payee statements like Form 1099-DIV, Form 1099-INT, etc.
Suppressing Form 1116:
You can suppress Form 1116 by deleting the 1116 screen or, on screens like DIV or INT, check the box labeled "1116 Not Required" if the foreign tax information is entered there.
Line 2 discrepancy:
The amount on line 2 of Form 1116 might differ due to itemized deductions subject to reduction based on the taxpayer's AGI. The reduction percentage is applied to various deductions and automatically adjusts the line 2 amount.
Clearing red message 5630:
This message might pop up due to discrepancies between foreign income and foreign tax paid entries on specific screens like DIV, INT, or the 1116 screen. Ensure proper entries in these fields or select "1116 NOT required" where applicable.
Resolving SCH (Unformatted Schedule) error:
If Form 1116 triggers a request for an SCH, use the SCH screen linked on the 1116 screen to generate necessary statements, providing explanations or details supporting your 1116 entries.
Calculation of amounts on different lines (3a, 3e, etc.):
- Line 3a reflects itemized deductions like medical expenses, sales taxes, and real estate taxes (or standard deduction if applicable).
- Line 3e is calculated automatically by the software, aggregating all gross income sources before deductions and losses.
Addressing issues with AMT 1116 Foreign Tax Credit:
If the 1116_AMT form isn't produced, ensure you've selected "Print Form 6251" in the Print Options screen to force the calculations needed for the 1116_AMT and WKs CARRY.
Generating the credit on the last line of Form 1116:
For the credit to generate, ensure both foreign tax paid and foreign income earned are entered correctly on relevant screens like DIV, INT, or directly on the 1116 screen.
Resident country selection and HTKO:
Leave the Resident country field blank to assume residence in the United States. To enter the High Tax Kick Out (HTKO), input it on line 13 of the 1116 screen.
Navigating Form 1116 requires meticulous attention to detail, particularly regarding income sources, deductions, and foreign tax entries across various screens. Be vigilant in ensuring accurate inputs and selections to avoid errors and optimize the foreign tax credit claim.
