Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
K-1 Box 16 Foreign Transactions
Posted by: Ramu, April 7, 2009 05:32PM
I need to enter Blackstone Schedule K-1 (Form 1065) information using TaxAct standard edition and I am lost on Part III where I need to input Box 16 Foreign Transactions details. The K-1 I received, shows following codes and $ amount: A: Various, B: 1060, D: 409 E: 17, H: 56, I: 5. The schedule K-1 explanation for these codes states the following (A: Name of country or US possession, B: Gross Income from all sources), (Foreign Gross Income Sourced at partnership level = D: Passive Category, E: General category), (Deductions allocated and apportioned at partner level = H: Other).

Now two questions:
(Q1) When I look at Form 1116, I don’t see these codes anywhere on the form. How to correspond Schedule K-1 codes with Form 1116 codes?

(Q2) Tax software already generated 1116 for Passive income (due to a foreign dividend) and will not let me create another one. What should I do?

Thank you for helping me.

Re: K-1 Box 16 Foreign Transactions
Posted by: Art, April 7, 2009 05:36PM
How much foreign tax total on your whole tax return? If under $300 ($600/MFJ) consider not entering that information via the K-1 and entering it directly on the foreign tax credit line of the 1040.

Re: K-1 Box 16 Foreign Transactions
Posted by: rbotterb, April 7, 2009 05:43PM
I would agree with Art that you want to manually do your form 1116 entries on your own rather than having a software package do it from a K1 screen - most either don't handle them properly given the various options you have, or as you have run into has problems merging form 1116 entries from mulitple investments you have put into the software.

Roger

Re: K-1 Box 16 Foreign Transactions
Posted by: Ramu, April 7, 2009 10:23PM
I only have $24 on 1040 Foreign credit line. My problem is that how to relate those Schedule K-1 codes (A: Various, B: 1060, D: 409 E: 17, H: 56, I: 5) with IRS Form 1116 ?

Re: K-1 Box 16 Foreign Transactions
Posted by: Art, April 7, 2009 10:26PM
Ignore the 1116. Add $24 to the foreign tax credit line of the 1040.

Re: K-1 Box 16 Foreign Transactions
Posted by: Ramu, April 7, 2009 11:13PM
I think I did not explain this well. Currently I have $24 on 1040 Foreign credit line without accounting for schedule K-1 amounts which suggests that I have Foreign transactions "Gross Income from all sources" amounting to $1060 and then also I have "Foreign gross income sourced at partnership level" passive category $409. Thanks

Re: K-1 Box 16 Foreign Transactions
Posted by: Art, April 8, 2009 03:55AM
Once more, my suggestion is IGNORE THE 1116. Ignore the K-1 line 16 foreign stuff. Add the foreign tax paid, to the foreign tax credit line of the form 1040.

Re: K-1 Box 16 Foreign Transactions
Posted by: Ramu, April 8, 2009 11:44AM
Thank you Art, This is what I will do but which amount represent the foreign tax (A: Various, B: 1060, D: 409 E: 17, H: 56, I: 5.) or do I need to calculate the tax manually and then add that directly to the foreign tax credit line on 1040.?

Re: K-1 Box 16 Foreign Transactions
Posted by: caesark, April 8, 2009 12:02PM
If anyone has knowledge here it would be an education for most of us. I believe these terms are confusing to most tax preparers.
Exactly what is the difference among the following terms:

“Gross income from all sources” – Isn’t it implied this is at the partner level?
“Gross income sourced at partner level” – How/why does this differ from the above term?
“Foreign gross income sourced at partnership level” – Why is income at the partnership level relevant for the taxpayer’s 1040?


Re: K-1 Box 16 Foreign Transactions
Posted by: AlvinS, April 8, 2009 03:45PM
I don't have the answers but I have two K-1's with foreign tax and can give you a little insight into where Turbotax puts the numbers on form 1116.

16B Gross Income from all sources
- gets included on 1116 line 3e along with all other income on your return

16D Foreign Gross income sourced at partnership level - passive category
- this goes to 1116 line 1a

16I Deductions allocated and apportioned at partnership level to foreign source income
- this goes to 1116 line 2

16L Total foreign taxes paid
- this goes to 1116 part II, this is how much was actually paid and the most you can hope to get credit for.

16M Total foreign taxed accrued
- this goes to 1116 part II, same as 16L accept the foreign taxes were accrued instead of paid. If you have both 16L and 16M, appears you need to file two form 1116, one for "paid" and one for "accrued".

Seems strange to me that one would have all the other foreign tax information but no 16L or 16M specifying the actual amount you're trying to get credit for.

FWIW: I think of the 1116 as trying to make sure you don't get more credit for the foreign taxes paid than what you would have paid in taxes if it had been taxed at US rates. So with lots of mysterious adjustments, a simplistic way to look at it is that it's basically trying to limit the ratio of your foreign tax to income (foreign taxes paid / foreign source income) to your total 1040 tax to total 1040 income (total taxes paid / total income).

- Al

Re: K-1 Box 16 Foreign Transactions
Posted by: Ramu, April 9, 2009 03:40AM
Thank you every one for helping me (and probably some other people). After doing some research I discovered that it's better to ignore Box 16 foreign transactions all-together as it may result in some tax saving/credit but will make filing lot more complex. What I read from different internet sources is that the most important information that must be reported accurately is Box 1 thru 14 of K-1 (two most important fields in K-1 are Interest Income (Box 5) and Dividend info (Box 6A&B)). This interpretation may be in-accurate or mis-leading. Unfortunatley, the Blackstone Group's tax support service is terrible. I called them and tried to get some help but they simply refer to IRs publications. It is ironic that Blackstone Group can pay money to hire tax support service (that does nothing but point towards IRS web site and publications) but can't spend some pennies on printing one single page graphical guidance on their schedule K-1. Probably this is because even they dont understand their own K-1.

Re: K-1 Box 16 Foreign Transactions
Posted by: caesark, April 9, 2009 01:14PM
Al,

Thanks for your insights, they are very useful.

I also find myself frequently "stepping back" from the Form 1116 and attempting to rationalize the process. And, yes the basic concept is very simple: do not expect to get a credit for tax paid at a higher rate to a foreign country than the tax (rate) that would have been paid to the US! But, when you dig into the "nitty gritty" of the terminology, and especially the obfuscation of the K-1, you lose the simple concept completely.

Also, FWIW, I have observed that my tax software takes no steps to place in line 1A ONLY the portion of dividends sourced in foreign countries. No separate input line, and no questions asked. AND, in a return I was preparing yesterday, I inadvertently discovered the software was adjusting dividends to 14.29% (applicable to the 5% rate) instead of 42.86% (applicable to 15% rate) and the dividends were clearly being taxed at 15%. So the warning is to never completely trust the software, always take a close look at the calcs and make sure they make sense.

Re: K-1 Box 16 Foreign Transactions
Posted by: caesark, April 9, 2009 01:17PM
By the way, I should have mentioned in the above post, I was actaually reviewing a 2007 return when there was a 5% rate.



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