Completing Form 1116 for Foreign Tax Credit - Need Help with Foreign Dividends and Capital Gains

The foreign tax credit can definitely be tricky! For Form 1116, you'll need to categorize your income correctly. Foreign dividends are considered "passive income" and go in that category on the form. As for your question about capital gains - yes, capital gains from selling foreign stocks are generally considered foreign-source income for Form 1116 purposes. However, there's an important distinction: capital gains are typically considered US-source income if you're a US resident making the investment decisions in the US. The IRS looks at where the economic activity generating the gain occurred, not where the company is located. If you can establish that the gains are truly foreign-source (which can be complicated), then yes, they would increase your foreign income on Form 1116, potentially allowing you to claim more of your paid foreign taxes. But many tax professionals treat capital gains on foreign stocks as US-source when the investor is making decisions from the US.

I struggled with Form 1116 last year and discovered this amazing tool called taxr.ai (https://taxr.ai) that completely saved me. I was about to pay an accountant $500 to handle my foreign tax credit situation when a colleague mentioned this service. It's specifically designed to handle complicated tax forms like the 1116. You just upload your tax documents, and it analyzes everything, including exactly how to categorize foreign dividends vs capital gains. The best part is it walks you through the entire process step-by-step instead of just giving you a number to plug in. For my situation with investments in Japan and Germany, it correctly identified which income was truly foreign-source and which wasn't - something I would have definitely messed up on my own.

I was really skeptical about using an AI tool for something as complicated as Form 1116, but after getting frustrated with trying to figure out the foreign tax credit rules myself, I decided to try taxr.ai that someone mentioned here. Honestly, it was way better than I expected. I had investments in about 6 different countries with different dividend withholding rates, plus some capital gains. The tool correctly identified which of my capital gains were actually US-source income (most of them) even though the stocks were foreign companies. It saved me from making a major mistake that could have triggered an audit. The step-by-step explanation of how Form 1116 works with the different income categories was super helpful too. I learned more from using it than from hours of reading IRS publications. Just wanted to share since I was initially one of the skeptics!

After spending 3 DAYS trying to reach someone at the IRS about Form 1116 questions, I finally used Claimyr (https://claimyr.com) and got through to an IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was really surprised how well it worked. The IRS agent I spoke with confirmed that capital gains from selling foreign stocks are generally considered US-source income for most US residents (which contradicted what I thought), but there are exceptions depending on your specific situation. She also explained exactly how to categorize my foreign dividends on the form and which exchange rates to use. Way better than guessing or trying to decode the IRS instructions myself. I was honestly shocked I actually got through to a human who could answer my specific questions.

OK I have to eat my words. After posting that skeptical comment, I decided to try Claimyr anyway because I was desperate about my audit situation. I've been trying to reach the IRS since MARCH 2024 with no luck. I used the service this morning and got connected to an IRS agent in about 40 minutes. I actually spoke to a human being at the IRS! The agent was able to look up my audit case, explain exactly what documents they needed from me, and even put notes in my file about our conversation. While I was talking to her, I also asked about Form 1116 like the original poster, and she confirmed that for most US residents, capital gains from selling foreign stocks are usually considered US-source income, not foreign-source - which is really important for filling out the form correctly. I'm still in shock that it actually worked. Sorry for being so skeptical before!

I actually did my own Form 1116 last year without help. Here's what I learned: you need to separate your income into categories (passive, general, etc). Dividends go into passive category. For capital gains, it depends on where you were when you made the investment decisions - not where the company is located. Since you live in the US and presumably make your investment decisions here, those capital gains are most likely US-source income even though they're foreign stocks. That means they wouldn't count toward your foreign income on Form 1116. The trickiest part was figuring out the right conversion rates to use for all the foreign currency amounts. I ended up using the yearly average rates from the IRS website.

Has anyone managed to figure out how to handle the carryover of excess foreign tax credits on Form 1116? I have more foreign tax paid than I can claim this year, and I'm totally confused about how to track this for future years.

I went through this exact same situation last year with foreign dividends and capital gains. Here's what I learned after making some mistakes initially: For your $15,200 in dividend income with $3,700 in foreign taxes withheld - that's straightforward passive income for Form 1116. Make sure you have all your 1099-DIV forms and any foreign tax documents. Regarding your $22,000 capital gains question - this is where it gets tricky. Since you're a US resident making investment decisions from the US, those gains are almost certainly US-source income, even though the stocks are foreign companies. This means they WON'T increase your foreign income on Form 1116, so they won't help you claim more of your paid foreign taxes. The key insight is that the IRS looks at where the economic activity (your investment decisions) occurred, not where the company is headquartered. I initially made the mistake of thinking all my foreign stock gains were foreign-source income and had to file an amended return. One tip: if you paid foreign taxes on those capital gains (which is rare but can happen), that might change the sourcing rules. But in most cases with foreign stocks, you're only dealing with dividend withholding taxes, not capital gains taxes from the foreign country. The good news is your dividend situation alone should give you a decent foreign tax credit. Just make sure to use the correct exchange rates from the IRS website for converting everything to USD.