I don't know about foreign pensions. So, I'm going to comment just on passive dividend income from investments in a taxable account.
This is complicated. So, I hope I do it justice.
There are 2 important thresholds with respect to taking the Foreign Tax Credit. First, if you have more than $300/$600 (single)/(joint) in Foreign taxes you have to use Form 1116.
I find Form 1116 to be complicated. But, as you've noted, its general idea is to determine what percentage of your income is Foreign sourced and then applies this percentage to the tax you owe to compute the credit. The credit is taken first against Foreign taxes paid in the current year. If the amount of the credit exceeds the current year's Foreign tax paid, you can apply it against Foreign tax you were not able to utilize in the prior 10 years.
The second threshold is that if your Foreign investment income exceeds $20,000 and you were able to treat some or all of it favorably as Qualified Dividends you can no longer claim all of that income as Foreign income.
To adjust your foreign source qualified dividends or capital gain distributions, multiply your foreign source qualified dividends or capital gain distributions in each separate category by 0.3788 if the foreign source qualified dividends or capital gain distributions are taxed at a rate of 15%, and by 0.5051 if they are taxed at a 20% rate. Include the results on line 1a of the applicable Form 1116. You adjust your foreign source qualified dividends or capital gain distributions taxed at the 0% rate by not including them on line 1a.
From your initial post, I suspect you have crossed the $20,000 threshold. Depending on your situation, this threshold is potentially a cliff.
Here's my experience. For several years, we've been doing ROTH conversions up to the top of the 15% bracket. Some portion of our Foreign dividends were qualified. This portion was taxed at 0%. We were keeping our taxes very
low and were able to only partially utilize the tax credit.
Then, in 2013, we exceeded the $20,000 threshold for the first time by just a small amount. This was essentially a cliff for us. We had to exclude
of our foreign qualified dividend income on Form 1116 and were able to take only a very small tax credit.
We've made some adjustments in 2014 because of this. We've shifted part of our international allocation from taxable to tax deferred to get under the $20,000 threshold. After some analysis, we've increased our ROTH conversions (partially because of this and partially because our state's tax law). We now expect to utilize all of 2014's tax and to reach back and use some from 2009.
Originally Posted by Neill
I don't know how much of the form 1116 carry forward is handled by tax s/w.
For TurboTax, this is tracked quite well. However, TurboTax doesn't handle the case of exceeding the $20,000 threshold at all well (at least in the 2013 version). If you google the scenario, you can find out how to trick it into doing the right thing.