Betsy Wilson is single, under 65, and is a U.S. citizen. She earned
$21,000 working as a night auditor in Pittsburgh. She owns 200 shares
in XYZ mutual fund that invests in German corporations. She received a
dividend of $620 from XYZ, which withheld and paid tax of $93 to
Germany on her dividend. XYZ reported this information to her on Form
1099-DIV.
Betsy elects to be exempt from the foreign tax credit limit because
her only foreign taxable income is passive income (dividend of $620)
and the amount of taxes paid ($93) is not more than $300. To claim the
$93 as a credit, Betsy enters $93 on line 43 of Form 1040. (She can
claim her total taxes paid of $93 because it is less than her
"regular tax," shown on Form 1040 line 40.) She does not file
Form 1116. However, she cannot carry any unused foreign taxes to this
tax year.
If Betsy does not elect to be exempt from the foreign tax credit
limit, she will need to complete a Form 1116 as follows.
To complete Form 1116, Betsy fills in her name and social security
number, and checks the box for passive income. In Part I of the form
she writes the name of the foreign country in column A and shows on
line 1 the amount of income ($620) and type of income (dividends) she
received from XYZ. Next, since Betsy does not itemize her deductions,
she puts her standard deduction ($4,400) on line 3a and completes 3b
and 3c. Her gross foreign source income (line 3d) is $620 and gross
income from all sources (line 3e) is $21,620. She enters $126 on line
6. Line 7 is $494, the difference between lines 1 and 6.
In Part II, Betsy checks the "Paid" box and enters on lines A
and 8 the amount of tax XYZ withheld and paid to Germany.
In Part III, Betsy figures her credit as shown on the completed
form. The computation shows that she may take only $62 of the amount
paid to Germany as a credit against her U.S. income tax. The remaining
$31 is available for a carryback and/or carryover. Because this is the
only Form 1116 that Betsy must complete, she does not need to fill in
lines 22 through 29 of Part IV.
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