Confused about Form 1116 and how tax software handles foreign tax credits

Thanks for the explanation! So just to make sure I understand - if I paid $1,200 in taxes to Singapore, but my US tax liability on that same income would only be $1,000, I can only claim $1,000 as a credit? And for the mutual funds, what if I received dividends from them? Do those get included in section 1a even if I haven't sold the investments?

Yes, that's exactly right about the limitation. If you paid $1,200 in Singapore taxes but your US tax liability on that income would only be $1,000, your foreign tax credit would be limited to $1,000. The IRS won't give you more credit than the US tax would have been on that income. For your mutual funds, yes, any dividends or distributions you received should definitely be included in section 1a as income, even if you haven't sold the investments. Dividends are considered income when received, regardless of whether you're still holding the underlying investment. Just remember that unrealized appreciation in value doesn't get reported until you actually sell.

Does it work for people who have income from working overseas too? I worked in Germany for 6 months last year and I'm totally confused about how to handle it. My regular tax software keeps giving me weird errors whenever I try to input the German tax info.

I'm a bit skeptical of these specialized tax tools. How does it actually work with your regular tax filing? Do you still need to manually enter everything it tells you into TurboTax or whatever you're using?

Yes, it definitely works for foreign earned income too! It has specific sections for different types of foreign income - investment income, employment income, rental property, etc. It helped me correctly categorize everything which was the main problem I was having. It's not a replacement for your regular tax software - it's more like a specialized assistant for the foreign tax parts. You still enter the information it gives you into your regular tax software, but now you know exactly what goes where and why. It basically gives you a completed Form 1116 with instructions on where each number should go in your tax software. Saved me hours of frustration.

Wait how does this actually work? I'm confused how some third party service can get you through to the IRS faster? Does it actually connect you to official IRS agents or is it their own tax experts?

This sounds like BS honestly. I've called the IRS plenty of times and while yes the wait times can be long, there's no way some magical service can get you through faster. The IRS phone system is the same for everyone. Sounds like a scam to take advantage of desperate taxpayers.

It connects you with actual official IRS agents - not their own experts. The way it works is they have an automated system that calls the IRS and navigates the phone menu for you, then waits on hold. When an actual IRS agent finally answers, their system calls your phone and connects you directly to that IRS agent. You're literally talking to the same IRS representatives that you would reach if you called yourself. I was skeptical too, but it's not about "cutting the line" - everyone faces the same queue. The difference is their system waits in that queue for you, so you don't have to sit by your phone for hours. For the international tax line that often has 2+ hour hold times, it was absolutely worth it for me. I was able to do other work while their system waited on hold.

Oh that's really helpful! How do I know if all my foreign income counts as "passive category income"? I have some dividends from the Singapore mutual funds, but also got some interest from a foreign bank account. Would both of those count as passive?

Both foreign dividends and foreign interest income are considered passive category income, so yes, those would both qualify. The main types of passive income are: - Dividends - Interest - Royalties - Rents (if you're not in the real estate business) - Annuities - Capital gains from selling investment property If those are your only sources of foreign income and your total foreign taxes paid are under the threshold ($300 single/$600 married), you can just claim the credit directly on Schedule 3 without dealing with Form 1116. This exception is specifically designed for taxpayers with relatively simple foreign investment income who don't need the complexity of allocating expenses and dealing with all the Form 1116 limitations.

Oh no, I had no idea about Form 8621! The tax software hasn't prompted me for anything like that. Are there serious penalties if I don't file it? I've only owned these funds for about 2 years and haven't sold any yet.

Unfortunately, yes - the penalties for not filing Form 8621 can be quite severe. The IRS can impose a penalty of up to $10,000 per form per year, and there's no statute of limitations on unfiled PFIC forms (meaning they can come after you years later). Since you haven't sold the funds yet, you might still have time to make elections that could simplify your reporting going forward. I'd strongly recommend consulting with a tax professional who specializes in international tax before your next filing. Many CPAs aren't familiar with PFIC rules, so you might need to find someone who specifically deals with expat/international tax issues. The PFIC rules are honestly some of the most complex in the entire tax code, and getting it wrong can be very expensive.