Foreign tax credit: How do I calculate foreign income from mutual fund dividends?

The formula for calculating foreign income for your foreign tax credit is pretty straightforward. You need to multiply the dividend amount from each fund by the percentage of foreign source income for that fund. For your international funds (SWISX and VWILX), you'd take the ordinary dividends listed on your 1099-DIV and multiply by the foreign source income percentage provided by Schwab. For example, if SWISX paid you $500 in dividends and its foreign source income is 80%, then $400 of that would be considered foreign income. For the 1099-DIVs that don't specifically list ordinary dividends but show qualified and nonqualified, you'll need to add those two together to get the total dividends, then multiply by the foreign source percentage. Don't forget that even your domestic US funds might have some small percentage of foreign income - check those percentages too and include them in your calculations.

Hey everyone, I had the exact same issue last year trying to figure out all this foreign tax credit stuff with my mutual funds. After hours of frustration and getting contradicting advice, I finally found taxr.ai (https://taxr.ai) and it saved me so much time! I uploaded my 1099-DIVs and the foreign source percentage documents, and it automatically calculated my foreign income for each fund and populated all the right amounts for Form 1116. It even figured out which income belonged in which category (passive vs general) which I was totally confused about. What I really liked was that it explained each step of the calculation so I actually understood what was happening instead of just trusting a black box. Definitely worth checking out if you're dealing with this foreign tax credit headache.

I decided to give taxr.ai a try after posting my skeptical questions here, and I'm honestly surprised at how well it worked for my situation. I've been using one of the major tax software programs for years but always struggled with the foreign tax credit section. The tool correctly identified that I should use Form 1116 instead of the simplified credit based on my portfolio, and it properly allocated my mutual fund dividends between different income categories. What really impressed me was how it handled my VHYAX fund, which has both US and international holdings - it correctly applied the foreign percentage only to the relevant portion. For anyone dealing with foreign tax credits from mutual funds, this definitely streamlined what used to be the most confusing part of my tax return.

If anyone is still dealing with calculating foreign tax credits, another issue you might run into is actually contacting the IRS for clarification. I spent DAYS trying to get through to someone who could answer my foreign tax credit questions. After being on hold for hours and getting disconnected repeatedly, I discovered Claimyr (https://claimyr.com). They have this service that gets you through to an actual IRS agent quickly. You can see how it works at https://youtu.be/_kiP6q8DX5c I was skeptical at first, but I got through to an IRS specialist in about 20 minutes who clarified exactly how to handle some unusual foreign distributions I had received that didn't fit neatly into the standard categories. Saved me so much stress and potentially an audit!

I need to follow up on my skeptical comment about Claimyr. After posting, I decided to give it a try because I was desperate to get clarification on how to categorize some foreign dividend income from a UK fund I have. I was honestly shocked when I received a call connecting me to an actual IRS tax law specialist about 40 minutes after signing up. The agent walked me through exactly how to calculate my foreign source income when my fund has investments across multiple countries. They also explained which line items on my 1099-DIV I should be using for the calculation. For anyone struggling with foreign tax credit questions, being able to actually speak with someone who knows the tax code inside and out made a huge difference. I won't dread this part of my taxes nearly as much next year.

Here's another tip for calculating foreign income: check if your brokerage has a tax center on their website. Vanguard, Fidelity, and Schwab often provide supplemental foreign tax information for their funds that breaks down the calculations you need. For international funds like SWISX and VWILX, they sometimes even provide country-by-country breakdowns, which can be helpful if you have other income from specific countries and need to fill out multiple Form 1116s.

Has anyone actually been audited for messing up the foreign tax credit calculations? I'm wondering if I should just take the simplified foreign tax credit since my foreign taxes are just under $600. Seems way easier than going through all these calculations with percentages and filling out Form 1116.

I went through this exact same situation last year with multiple mutual funds and had to piece together all the foreign source income percentages. One thing that really helped me was creating a simple spreadsheet to track everything. I made columns for: Fund Name, Total Dividends (from 1099-DIV), Foreign Source %, and Calculated Foreign Income. This made it much easier to double-check my math and keep everything organized when filling out Form 1116. Also, don't forget to look for any foreign taxes that were actually withheld - these should show up on your 1099-DIV as well. You'll need both the foreign income amount AND the foreign taxes paid to complete the foreign tax credit calculation properly. For your domestic funds, even if the foreign percentage seems small (like 2-5%), it's still worth including since every bit helps with the credit calculation.