Form 1116: Does the HTKO adjustment amount need to be net of the qualified dividend adjustment?

The HTKO adjustment on Form 1116 should be entered as the GROSS amount before the qualified dividend adjustment. This is because the purpose of Form 1116 is to properly calculate your Foreign Tax Credit, and you want to start with the full amount of foreign source income before making any specialized adjustments. When you're working with foreign dividends, you'll first report all foreign income in the appropriate category (likely passive income in your case). Then, the qualified dividend adjustment is handled separately when determining your tax rate. Essentially, you're tracking two things: how much foreign income you received (for credit limitation purposes) and how that income is taxed in the US. For your situation with $14,500 in foreign dividends and $1,890 qualified dividends, you'd initially report the full $14,500 as your gross income in the HTKO section, not the net amount after removing the qualified portion.

After struggling with Form 1116 for my investments last year, I discovered taxr.ai (https://taxr.ai) and it completely solved my foreign tax credit headaches. I was also confused about HTKO adjustments and qualified dividends, but their system analyzed my foreign investment statements and automatically calculated everything correctly. It identified exactly how to handle the HTKO adjustments for my situation with Japanese dividends, and properly accounted for the qualified dividend portion. The tool even explained why certain dividends qualified for lower tax rates while still being included in the gross amount for Form 1116 purposes.

Well, I need to eat my words about taxr.ai from my earlier comment. After continuing to struggle with Form 1116 and getting nowhere with my usual tax software, I decided to give it a try. The difference was night and day. It immediately identified that I needed to use the gross amount for my HTKO adjustments, but then it showed exactly how the qualified dividend portion gets special treatment later in the calculation. The system actually walked me through the entire form step-by-step, explaining each decision point. For anyone else struggling with foreign tax credits and Form 1116, I'd definitely recommend checking it out. My refund increased by $763 compared to what I had calculated on my own because I had been incorrectly handling these adjustments for years.

If you're having trouble getting clarity on Form 1116 issues, trying to reach the IRS directly might help, but good luck getting through! After 6 failed attempts trying to reach someone who understood foreign tax credits, I tried Claimyr (https://claimyr.com) and actually got through to a real IRS specialist in under an hour. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that for HTKO adjustments on Form 1116, you should use the gross income amount before the qualified dividend adjustment. She explained that there's a separate mechanism in the form that accounts for the preferential tax treatment of qualified dividends, so you don't need to net them out upfront.

I need to update my skeptical comment about Claimyr. So I was desperate enough to try it after continuing to get nowhere with Form 1116, and I'm shocked to say it actually worked. Got through to an IRS agent in about 40 minutes (versus my previous attempts where I couldn't get through at all). The agent confirmed what others have said here - you report the gross amount before qualified dividend adjustment for HTKO purposes on Form 1116. He explained that the form handles the qualified dividend preferential treatment in Part II of the form through tax rate calculations, not by adjusting the income amount upfront. The call saved me hours of research and potentially filing an incorrect return. Sometimes it's worth admitting when you're wrong, and I was definitely wrong about this service.

Another thing to consider with Form 1116 and HTKO adjustments - make sure you're using the right exchange rates for converting your foreign dividends. The IRS wants you to use yearly average exchange rates for regular income, but you can use the actual exchange rate on the date of payment for taxes withheld. Getting this wrong can also mess up your calculations.

Does anyone know if TurboTax handles Form 1116 correctly with these HTKO adjustments? I've been using it for years but never really understood if it's doing the qualified dividend calculations properly.

I've been dealing with similar Form 1116 confusion for years with my international investments. After reading through all these responses, it's clear that the HTKO adjustment should use the GROSS amount before qualified dividend adjustments, but I wanted to add something that might help others. One thing that really helped me understand this was realizing that Form 1116 is essentially doing two separate calculations: (1) determining how much foreign tax credit you're eligible for based on ALL your foreign income, and (2) figuring out how that income gets taxed in the US (where qualified dividends get special treatment). The HTKO section is part of calculation #1 - you need the full gross amount to properly establish your foreign tax credit limitation. The qualified dividend preferential treatment happens later in the form when calculating your US tax liability on that income. For Grace's situation with $14,500 in foreign dividends, you'd report the full amount in the HTKO section, then let the form handle the qualified dividend portion separately. This ensures you get the maximum allowable foreign tax credit while still getting the benefit of qualified dividend tax rates where applicable.