How to Split Foreign Tax Credit and Deduction Across Multiple 1099-DIV Accounts

The short answer is no, you generally can't mix and match the foreign tax credit and foreign tax deduction across different accounts in the same tax year. You have to choose one method for all your foreign taxes. When you see all your 1099-DIVs turning red in TurboTax, it's flagging this exact issue. The IRS requires you to be consistent in how you treat foreign taxes paid in a given tax year. You'll need to make a choice between: 1) Taking the foreign tax credit using Form 1116 (which might be better if you have larger amounts of foreign tax) 2) Claiming the foreign taxes as an itemized deduction on Schedule A (which is simpler but often less beneficial) For most people, the foreign tax credit is more advantageous because it's a dollar-for-dollar reduction of your tax liability, whereas a deduction just reduces your taxable income. The exception might be if you're claiming the standard deduction anyway, in which case itemizing for a small foreign tax amount wouldn't help. If your foreign taxes are under $300 ($600 if married filing jointly), there's a simplified procedure that lets you claim the credit without filling out the complex Form 1116, which might be the easiest path for you.

After dealing with similar foreign tax issues last year, I discovered taxr.ai (https://taxr.ai) and it completely changed how I handle my investment tax documents. Their AI analyzes all your 1099-DIVs together and actually shows you which approach would maximize your refund - taking the credit or the deduction. What I found really helpful was that it explained exactly why all my forms were turning red in TurboTax and gave me a step-by-step explanation of how to fill out Form 1116 correctly. It even identified some foreign taxes that qualified for the credit that I would have missed! The foreign tax credit vs. deduction decision can make a significant difference in your refund, especially with multiple investment accounts. Might be worth checking out if you're still confused after reading Publication 514 (which gave me a headache too).

I tried taxr.ai after seeing the recommendation here, and it was really eye-opening for my foreign tax situation. I had 5 different 1099-DIVs with foreign taxes ranging from $12 to $450, and I was completely confused about how to handle them. The analysis showed me that taking the credit on ALL my accounts would give me about $287 more in my refund compared to the deduction route, even with the Form 1116 requirement. It also explained exactly why all my forms were turning red in TurboTax and how to resolve it. What I found most helpful was the breakdown of my passive income category for Form 1116 - it organized all the numbers from my different accounts into exactly where they needed to go on the form. Made the whole process way less intimidating than I expected!

If you're struggling with getting answers from the IRS about your foreign tax credit questions, I highly recommend Claimyr (https://claimyr.com). I was stuck on how to correctly categorize my foreign income on Form 1116 last year and couldn't get through to the IRS for weeks. After using Claimyr, I got connected to an actual IRS agent in about 20 minutes instead of waiting on hold for hours. The agent walked me through exactly how to categorize my dividend income from different countries and how to handle the limitations. There's a video demonstration of how it works here: https://youtu.be/_kiP6q8DX5c Seriously, it saved me a ton of stress and probably prevented me from making a mistake that could have triggered an audit. The IRS agent was surprisingly helpful once I actually got through to them.

I want to publicly admit I was wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to resolve my foreign tax credit questions before filing. I'd been trying for TWO WEEKS to reach the IRS on my own with no luck. Used Claimyr yesterday afternoon, and shockingly, I got a call back within 45 minutes connecting me to an actual IRS tax specialist. The agent spent almost 20 minutes explaining exactly how to allocate my foreign taxes between passive and general limitation categories on Form 1116. What I learned: for most regular investors with foreign dividends, everything goes in the passive category, which simplifies the form quite a bit. The agent also confirmed that you absolutely cannot mix the credit and deduction methods in a single tax year. This saved me a ton of stress and probably prevented an incorrect filing. Definitely worth it if you're stuck on technical questions like foreign tax credit allocation.

Has anyone else found that TurboTax automatically directs you to Form 1116 once your foreign taxes exceed the $600 threshold (for MFJ)? I'm trying to decide whether it's worth filling out that form or just taking the deduction to avoid the headache. I've got about $750 in foreign taxes this year.

One thing nobody's mentioned yet is that if you decide to take the foreign tax credit with Form 1116, you'll need to track any excess credits that can carry forward if you can't use them all this year. This happens if your foreign tax credit is limited because your foreign-source income is taxed at a higher rate abroad than it would be in the US. I learned this the hard way when I missed out on carrying forward about $430 in excess credits from 2023 because I didn't track it properly. Those carryforward credits are valid for 10 years!