Drake Tax - 1116: Frequently Asked Questions

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 and future, 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.

Delete the 1116 screen, go to screen 5 and enter the amount on Schedule 3, Part I, line 1.

If the foreign tax information was entered on screen DIV, check the box 1116 Not Required in the section labeled Form 1116/FTC Information located in the bottom right.

If the foreign tax information was entered on screen INT, check the box 1116 Not Required in the section labeled Amount that is.

Steps to clearing EF Message 5630 vary depending on which screens were used to enter foreign income or tax paid.

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. 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.

• Line 8. 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.

INT Screen

• Line 6. Be sure you have entered an amount for Foreign tax paid.

• Line 7. Select a Foreign country to avoid EF Message 5901.

• Select 1116 NOT required only if the taxpayer can make that election

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 and 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).

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 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/Print mode, 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:

SCH screen drop list selection for 1116 entry	Screen 1116 entry location	Associated message if SCH 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
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

Starting in Drake18, line 3a comes from certain itemized deductions or the standard deduction amount. Per the Instructions for Form 1116:

"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."

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 Instructions for Form 1116.

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. To force the forms to produce, select Print Form 6251 on the PRNT screen. This will calculate the 6251 even when not required and amounts will carry to 1116_AMT and WKs CARRY.

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 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 screen, the amount of foreign income must be entered in the section labeled Amount that is on the line for Foreign Interest.

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 US from the drop list.

The high tax kick out can be entered on the 1116 screen > line 13. This prints a literal of "HTKO" below line 13 on Form 1116.