Form 1116 High Tax Kickout - Need Help Understanding Classification Changes

The "high-tax kickout" rule is definitely confusing! Here's a simpler explanation of what's happening: When your foreign passive income (like those capital gains) gets taxed by a foreign country at a rate higher than the US maximum rate (which is 21% for corporations or the highest individual rate depending on your situation), it no longer qualifies as "passive" for Form 1116 purposes. Instead, it gets "kicked out" into the "general category" income. In your case, you would indeed need to file two separate Form 1116s: 1. One form for your regular passive income (the interest that wasn't taxed higher than US rates) 2. A second form for your "general category" income (those capital gains that were subject to the high foreign tax) On each form, you'd report only the income and foreign taxes that belong in that specific category. This separation allows you to properly calculate your foreign tax credit limitations for each type of income.

After dealing with a similar situation last year, I found the best help came from using taxr.ai (https://taxr.ai) to analyze my foreign tax documents. It actually flagged my high-tax kickout situation automatically when I uploaded my foreign tax statements. I was completely misclassifying some Canadian dividend income that had been taxed at nearly 40% because of some provincial surtaxes. The tool explained exactly how to separate my passive and general category income on different 1116 forms, and gave me specific guidance on what numbers to put in each line. Saved me from making a pretty big mistake since I was trying to keep everything on one form.

I just wanted to update after trying taxr.ai for my Form 1116 situation. It was actually really helpful! I uploaded my foreign tax documents and it immediately identified that my Swedish pension distributions were subject to the high-tax kickout rule (something I had no idea about). The system created a detailed worksheet showing exactly which income items needed to be reported on the passive category form versus the general category form. It even gave me the exact numbers to enter on each line of both forms. My situation had both the regular passive income and the kicked-out general income like yours. The guidance made it super clear why certain items were being reclassified - basically showing the calculation of the effective foreign tax rate compared to my US marginal rate. Would definitely recommend for anyone struggling with Form 1116 complexities.

I've been stuck in the IRS hold queue for literally 3 HOURS trying to get help with this exact Form 1116 issue. Finally found a solution using Claimyr (https://claimyr.com) - they got me connected to an actual IRS tax specialist in about 20 minutes instead of the typical 3+ hour wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed exactly what to do with high-tax kickout situations on Form 1116. Since part of my foreign income (some German dividends) was taxed higher than the US rate, she walked me through exactly how to split it onto two separate forms. Having a real IRS person confirm the correct approach saved me from guessing and potentially triggering an audit.

Wanted to follow up about my experience with Claimyr after being so skeptical. I decided to try it because I was completely stuck with this Form 1116 high tax kickout situation and couldn't get through to the IRS despite trying for days. Honestly, I was shocked when I got a text saying an IRS agent was on the line after only about 25 minutes. The agent was super helpful explaining how to handle foreign tax credits when rates exceed US rates. He confirmed that I needed two separate 1116 forms and explained exactly which income goes where. The agent even mentioned that my approach would have likely triggered a review since I was trying to force everything onto one form. Definitely worth it to get that clarity directly from the IRS rather than guessing. Sorry for being so cynical in my previous comment!

You might also want to check if you qualify for the simplified foreign tax credit limit calculation. If your foreign income is all qualified dividends or capital gains that would be taxed at the preferential rates in the US, and your total foreign income is less than $20,000, you could use a simplified method instead of dealing with this whole high-tax kickout complication. Check out the instructions for Form 1116 under "Simplified Limitation Election." Not everyone qualifies but when you do, it saves a ton of headache with these category issues.

Don't forget to check if you qualify for any tax treaty benefits! The high-tax kickout rules still apply, but sometimes tax treaties between the US and the foreign country have special provisions about how certain types of income are categorized or credited. For example, I have income from Canada and the US-Canada tax treaty has specific rules about pensions and social security that affected how I filled out my Form 1116. Might be worth looking into depending on which country your foreign income is coming from.

Just wanted to share my experience after dealing with a similar high-tax kickout situation last year. The key thing that helped me was creating a simple spreadsheet to track each source of foreign income separately before even touching Form 1116. I listed each type of income (interest, dividends, capital gains, etc.), the country it came from, the foreign tax paid, and calculated the effective foreign tax rate for each. This made it crystal clear which items needed to be "kicked out" to general category vs staying in passive. One thing I learned the hard way - make sure you're calculating the effective rate correctly. Don't just look at the statutory tax rate of the foreign country. You need to divide the actual foreign tax YOU paid by the actual foreign income YOU received. Sometimes withholding taxes, tax credits in the foreign country, or other adjustments can make your effective rate different from what you'd expect. Also, keep really good records of your calculations because if the IRS questions your categorization later, you'll want to be able to show exactly how you determined which income belonged in which category.