The IRS has released an updated practice unit on Qualified Dividends and Capital Gains Rate Differential Adjustments. The abstract is as follows:
The United States (U.S.) taxes its individual residents and citizens on their worldwide income. To prevent double taxation, U.S. taxpayers are allowed a credit for foreign income taxes “paid or accrued” on income that is taxed by both the U.S. and a foreign country. This credit is known as the Foreign Tax Credit (FTC). The FTC, however, has limitations. Under IRC 904, the amount of FTC a taxpayer is allowed in a taxable year is subject to an overall limitation based on the proportion of taxpayer’s foreign source taxable income to the taxpayer’s worldwide taxable income. The purpose of the overall limitation is to ensure that the FTC reduces a taxpayer’s U.S. tax on foreign income but does not reduce the U.S. tax on U.S. income. The overall limitation is expressed as follow:
[Foreign source taxable income in each basket / Worldwide taxable income] X pre-credit US Tax
Further limitations in computing the FTC, such as the rate differential adjustment (which reduces the foreign source qualified dividends and capital gains in the numerator and the denominator of the fractional limitation above), are required.
In this Practice Unit, we will examine the steps necessary to compute the rate differential adjustment for U.S. individual taxpayers.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.