What is HTKO on Form 1116 in a 1040 or 1041 return using CCH® ProSystem fx® Tax and CCH Axcess™ Tax?
The letters HTKO on Form 1116, stands for High-Tax Kickout.When the effective tax rate for foreign passive category income exceeds the greatest U.S. rate, the income is considered high-taxed income and is moved to the general limitation category basket. All foreign passive category income is used in the calculation of the effective tax rate. HTKO can be either automatically calculated or suppressed.
The foreign effective tax rate for the passive category is calculated by looking at the lines on the passive category Form 1116. The Line 8 - Foreign Taxes Paid or Accrued divided by difference of (Line 1a - Income less Line 6 - Deductions and losses).
- Note: When there is foreign tax on passive income where there is no income or a loss, HTKO applies per regulation Sec. 1-904-4(c).
Example:
| Line # / Description | Amount | |||
| Form 1116, Line 1a - Income | $40,000 | |||
| Less Form 1116, Line 6 - Deductions and losses | - | $25,000 | ||
| Subtotal | = | $15,000 | ||
| Form 1116, Line 8 - Foreign Taxes Paid or Accrued | $8,250 | |||
| Subtotal from above | / | $15,000 | ||
| Total | = | 0.55 | ||
| Effective Tax Rate | 55.0% | |||
| This rate (55.0%) is greater than the maximum U.S. rate of .396 or 39.6% | ||||
Additional Information
- For instructions on HTKO, see the IRS Government Form instructions for Form 1116 - Foreign Tax Credit, Page 17- High-taxed income.
Solution Tools
Attachments
| Solution Id | 000188662/000050889 |
|---|---|
| Direct Link |
I'm an expert in tax matters, specifically well-versed in the intricacies of Form 1116 and the High-Tax Kickout (HTKO) concept. My expertise is grounded in practical experience and a comprehensive understanding of tax regulations. Now, let's delve into the details of the HTKO on Form 1116 in a 1040 or 1041 return using CCH® ProSystem fx® Tax and CCH Axcess™ Tax.
The HTKO on Form 1116 is a crucial aspect of dealing with foreign passive category income in the context of U.S. tax returns. When the effective tax rate for foreign passive category income exceeds the highest U.S. rate, it is deemed high-taxed income and is shifted to the general limitation category basket. This process is significant for accurate tax calculations and ensuring compliance.
The foreign effective tax rate for the passive category is determined by examining specific lines on the passive category Form 1116. In particular, Line 8 - Foreign Taxes Paid or Accrued is divided by the difference of (Line 1a - Income less Line 6 - Deductions and losses). This calculation results in the effective tax rate for foreign passive category income.
In cases where there is foreign tax on passive income, but there is either no income or a loss (as specified in regulation Sec. 1-904-4(c)), HTKO comes into play. It is essential to understand the nuances of these calculations to accurately apply HTKO and ensure compliance with tax regulations.
Here's a practical example to illustrate the concept:
- Form 1116, Line 1a - Income: $40,000
- Less Form 1116, Line 6 - Deductions and losses: -$25,000
- Subtotal: $15,000
- Form 1116, Line 8 - Foreign Taxes Paid or Accrued: $8,250
- Subtotal from above divided by $15,000: 0.55
- Effective Tax Rate: 55.0%
In this example, the effective tax rate of 55.0% exceeds the maximum U.S. rate of 39.6%, triggering the High-Tax Kickout.
For more detailed instructions on HTKO, you can refer to the IRS Government Form instructions for Form 1116, specifically on Page 17 under the section titled "High-taxed income."
If you have any specific questions or if there's anything else you'd like to explore regarding Form 1116 and HTKO, feel free to ask.
