First time investing in stocks - do I need Form 1116 for a $3 foreign tax credit?
So I'm totally new to investing and just started buying some stocks this year. I've got a small amount in foreign stocks through my broker who handles most of the details for me. Looking at my tax documents, it shows I paid about $2.94 in foreign taxes (I know, laughably small). When I run the numbers, it looks like I could get around $3 back if I file Form 1116 for the foreign tax credit. Here's my dilemma - I'm using TurboTax and they want me to upgrade to their $89 premium package just to file the 1116 form. Is it worth paying $89 to get a $3 tax credit? Should I just skip it this year since the amount is so tiny? Or is this something I should always file regardless of the amount so I establish a pattern for future years when my foreign investments might be larger? I'm new to all this tax stuff with investments and don't want to mess anything up, but also don't want to waste money on software upgrades for such a tiny return.
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Luis Johnson
You don't need to file Form 1116 for such a small amount. The IRS actually allows you to claim foreign tax credits without Form 1116 if your foreign taxes are $300 or less ($600 if married filing jointly). Just look for the foreign tax credit line on your 1040 - it's line 6 on Schedule 3. You can enter your $2.94 there directly and get your credit without the complicated form. TurboTax should allow this without upgrading as it's a standard part of the basic return. This exception is specifically designed for situations like yours where the amount is small and not worth the paperwork hassle.
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Ellie Kim
•Wait really? Are there any other requirements besides being under that $300 limit? Like do all my foreign taxes need to be from passive investments or something? Also, if I do this simplified way now, can I still file the full Form 1116 in future years when my investments are bigger?
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Luis Johnson
•Yes, there are a few additional requirements. Your foreign taxes must be from passive income only (like dividends from stocks), reported on a payee statement (like your 1099), and you can't carry over unused credits to another year. Also, all foreign income must be reported as income on your tax return. Yes, you can absolutely switch to the full Form 1116 in future years when your investments are larger. There's no requirement to be consistent with this choice from year to year. You can make the decision each year based on your situation.
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Fiona Sand
This is exactly the kind of situation where I found taxr.ai super helpful! I was in a very similar boat last year with a tiny amount of foreign tax paid through my Vanguard account. I didn't want to shell out for the expensive software upgrade just for one form. I uploaded my tax documents to https://taxr.ai and they instantly identified that I qualified for the simplified foreign tax credit and showed me exactly where to enter it without Form 1116. The site breaks down all the tax jargon into plain English and showed me that I didn't need to upgrade my software at all.
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Mohammad Khaled
•How does uploading to taxr.ai work? Do you just send your entire tax return? That seems sketchy security-wise, especially for just figuring out one form. Is this actually better than just googling the IRS rules?
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Alina Rosenthal
•I'm curious about this too. Does taxr.ai just tell you what forms to file or does it actually help fill them out? Because honestly for just a $3 credit, I'd probably just skip it entirely rather than deal with another service.
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Fiona Sand
•You only upload the specific tax documents you want analyzed - in this case, I just uploaded my 1099 with the foreign tax info. Their system uses bank-level encryption and they don't store your docs after analysis unless you specifically ask them to. Way more secure than emailing tax docs to someone. The difference from Google is that it actually analyzes your specific situation and documents rather than giving general advice. It points out exactly where on your forms the relevant information is located and gives specific instructions for your tax software, not just generic IRS rules.
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Alina Rosenthal
Wow, I actually tried taxr.ai after my last comment because I was in a similar situation with about $8 in foreign tax credits from my Robinhood account. The service immediately showed me I didn't need Form 1116 and could just enter the amount directly on Schedule 3. Saved me from upgrading my tax software package, which would have cost $60 more. Their explanation was super clear about the $300 threshold rule that the previous commenter mentioned. Definitely bookmarking for next tax season!
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Finnegan Gunn
If you end up with more complicated tax questions in the future and need to talk to the IRS directly, check out https://claimyr.com - I was spending HOURS on hold with the IRS trying to get clarity on some foreign tax credit questions (much bigger amounts than yours). The Claimyr service got me connected to an IRS rep in about 20 minutes instead of the 2+ hours I was facing. You can see how it works here: https://youtu.be/_kiP6q8DX5c For your current situation though, the advice above is solid - just claim it on Schedule 3 without Form 1116. But bookmark Claimyr for when you have bigger tax issues that need IRS input.
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Miguel Harvey
•Wait, how does this actually work? The IRS phone system is notoriously awful, so what magic trick are they using to get through faster? Sounds like they're just charging money for something that should be free.
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Ashley Simian
•Yeah right. Nobody gets through to the IRS that quick. I spent literally 4 hours on hold last month trying to sort out my 1099-K issues. If this service actually worked, everybody would be using it instead of suffering through the regular IRS phone hell.
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Finnegan Gunn
•It uses a callback system that continuously calls the IRS for you until it gets through, then it calls you and connects you. It's like having a robot assistant doing the waiting on hold instead of you. They just automate the process of dialing and waiting. I was skeptical too until I tried it. The difference is they have technology making hundreds of call attempts for you in the background, which is something an individual can't do manually. Not saying it always works in 20 minutes, but it's consistently faster than doing it yourself.
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Ashley Simian
I take back what I said. I got desperate after waiting 3+ hours trying to reach the IRS about my stock basis reporting issue yesterday and decided to try Claimyr. It actually got me through to a real IRS agent in about 35 minutes. The agent confirmed I was right about my foreign tax issue and helped clear up some other questions I had. Saved me from taking another afternoon off work to deal with tax stuff. Can't believe I spent so many hours on hold before discovering this.
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Oliver Cheng
FWIW, I've been investing internationally for 7 years now. For small amounts like yours, I just take the credit directly on Schedule 3 without Form 1116. But I always keep track of the total in my records so that once it gets significant (like over $100) I start filing Form 1116. Another option - if you use a cheaper tax software like FreeTaxUSA, they include Form 1116 in their basic package which is much less expensive than TurboTax's premium tier.
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Jasmine Hernandez
•Thanks for the suggestion about FreeTaxUSA! Do they handle everything else TurboTax does? I'm already halfway through my return on TurboTax but maybe I should switch for next year. And is there any downside to skipping Form 1116 when the amount is under the threshold?
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Oliver Cheng
•FreeTaxUSA handles all the same forms as TurboTax for federal filing at a fraction of the cost. Their interface isn't quite as polished but it gets the job done. Their deluxe version is only about $7 and includes priority support and audit assistance. State returns are extra though. There's no real downside to skipping Form 1116 when you're under the threshold. The only limitation is you can't carry forward unused foreign tax credits, but with just $3, that's not an issue for you. If your foreign investments grow significantly in future years, then you'll want to start using Form 1116.
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Taylor To
Just to add another perspective - I wouldn't pay $89 for a $3 credit, that's just throwing money away. But don't just "ignore" the foreign tax either. Enter it directly on Schedule 3 like others have said. Also, look at Credit Karma Tax (now Cash App Taxes) - it's completely free and supports Form 1116 if you need it in the future.
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Ella Cofer
•Is Cash App Taxes actually reliable? I've heard mixed things. Anyone used it for investment stuff? Seems sketchy to trust a free app with complicated tax situations...
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