11619: 1116 - Frequently Asked Questions

1. 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?
2. How do I clear red message 5630?
3. 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?
4. How is the amount on Line 3a of the 1116 calculated?
5. How is the amount on Line 3e of the 1116 calculated?
6. 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.
7. 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?
8. Why am I not able to select United States as the resident country?
9. Where do I enter the High Tax Kick Out (HTKO) for 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?

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 screen 5 and enter the amount on Schedule 3, Part I, line 1 (line 48 in Drake18 and prior).

If the foreign tax information was entered on screen DIV - 1099-DIV Dividend Income, check the box 1116 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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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 the Foreign Amount or 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 the Schedule B Part III Foreign Account Questions​, which are at the top of both the INT screen and DIV screens (or available on screen 1 Name and Address under 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 a Foreign country to avoid message 5901.
• Select 1116 NOT required only if the taxpayer can make that election

A NOTES page displays Note 243 if you do not answer the Schedule B Part III Foreign Account Questions linked at the top of the INT screen (or available on screen 1 Name and Address under 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 is present in the return, and a red message says that an SCH (Unformatted Schedule) must be included. How can this message be resolved?

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 Statement screen, in the Type of attachment/statement number and title field, select the statement code appropriate for the 1116 screen entry. Enter the text of the needed explanation (see the Instructions for Form 1116 for information on what the IRS expects to be included in the statement). In View, on the page labeled STATEMENT that is generated, the code is converted to a statement #, which is displayed on Form 1116 near the appropriate line.

Use the following codes for Form 1116 statements:

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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 1116 state

"Itemized deduction limit. If you must reduce the total amount of your itemized deductions on Schedule A (Form 1040), line 29 (or Form 1040NR, Schedule A, line 15), you must reduce each of the itemized deductions that are subject to the reduction by the reduction percentage before you complete lines 2, 3a, and 4a."

The Instructions for Schedule A (Form 1040) state

"Use the Itemized Deductions Worksheet, to figure the amount to enter on line 29 if the amount on Form 1040, line 38, is over $313,800 if married filing 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 itemized deductions on Schedule A line 29 must be reduced using the Itemized Deductions 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 reduction percentage calculated by that worksheet is applied to these deductions and 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:

"Divide the amount on line 9 of the worksheet (the overall reduction) by the amount on line 3 of the worksheet (total itemized deductions subject to the reduction). This is your reduction percentage. Apply this reduction percentage (expressed as a decimal rounded to at least four places) to each itemized deduction subject to the reduction to determine the amount to 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 reduction percentage 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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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.

The 1116_AMT will only produce when needed to calculate amounts on the 6251 Alternative Minimum Tax form. If the 1116_AMT is not produced, Foreign Tax Credit AMT amounts will not carry to WKs CARRY (WK_CARRY in Drake15 and prior). To force the forms to produce, select Print Form 6251 on the PRNT Print Options screen. This will calculate the 6251 even when not required and amounts will carry to 1116_AMT and WKs CARRY. 

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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?

If you have entered an amount of foreign tax paid in the return, an amount of foreign income earned must also 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 the DIV - 1099-DIV Dividend Income screen, the amount of foreign income must be entered on line 1, or line 2a, in the column labeled Foreign Amount or Foreign Percent.
• on the INT - 1099-INT Interest Income screen, the amount of foreign income must be entered in the section labeled Amount that is on the line for Foreign 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.