retiredjg wrote: ↑Thu May 06, 2021 6:35 am
Is there a reason that this form seems to be an issue for some starting recently? I don't recall these complaints in years past.
I've seen several different categories of Form 1116 angst this year, some unique to this year and some that I remember from other years (although I don't remember in what relative quantity year-over-year).
Unique to this year:
1. Several big tax software companies had major problems with e-filing returns that included Form 1116. Hints are that there may have been some sort of widespread miscommunication between the IRS and the tax software companies over some change the IRS made. (The pandemic may have aggravated this whole miscommunication situation.)
In any case ... several mega thread with with "Form 1116" in the title got running. There were some comments in the threads by people who took *this* year's problems as a sign that Form 1116 was *always* a huge tax-filing headache (i.e. tended to cause e-filing failure). This seemed to make some people quite anxious about *ever* getting themselves in a situation where Form 1116 would need to be filed. Who knows how widespread this (incorrect) thinking was.
2. Vanguard, for accounts on the old platform, made a change (or perhaps had a one-year pandemic-related "oops") where they didn't send out a separate piece of paper showing some extra information needed for filling out Form 1116. Instead, they provided a worksheet that required people to do two multiplication actions to get to the numbers that used to be provided on the separate form. There was an initial complication that they posted this worksheet only under the "Advisors" Tax Center and not under the "Investors" Tax Center, plus there was an undefined term on the worksheet that required some additional brain cycles to figure out. Within a couple of weeks, they corrected both these problems, putting the worksheet in the "Investors" Tax Center and adding examples showing how to use it.
Nevertheless, the forces of social medial outrage had already been unleashed, tending to make pretty much any thread with the phrase "Form 1116" in the title more active that it would have been in previous years.
3. I saw several threads from people who sold their international mutual funds (e.g. Vanguard Total International Stock), purchased from US-based mutual fund companies, then got all tied up trying to report "foreign" capital gains or losses on Form 1116. (This was a misunderstanding on their part: selling US mutual funds that hold foreign stock produces *US* capital gains/losses, not "foreign" capital gains/losses.) Maybe tax loss harvesting in March 2020 caused this situation to pop up more this year?
Some perennial issues that might or might not have been more discussed this year:
4. Form 1116 has several levels of complexity. Its most complex form is when someone has more that $20,000 in foreign source qualified dividends (a pretty high hurdle) *or* you are in 32% tax bracket or above. Bogleheads seems to have a pretty good population of people in high-income professions or living in very high cost of living places (e.g. all the techies in Silicon Valley). I would guess that getting high compensation (32% tax bracket or above once salary, stock-optiony-thingies, etc are considered) right out education and encountering that most complex version of Form 1116 early on in your tax-reporting life, even if you don't have all that much in international investments, could easily be angst-producing.
5. Retirees with low income (e.g. early retirees), especially when that income is mostly qualified dividends/long term capital gains, once their foreign tax exceeds the $300/$600 level, often get their ability to take the whole foreign tax credit phased out. At that point, they have to start learning about the carry-forward/carry-back rules and often get a lot more focused on the details of Form 1116 (e.g. exactly how deductions get allocated), trying to squeeze every possible dollar of foreign tax-credit out of it. I don't think this type of question was more prevalent that usual on the forums this year, but it is possible that it was and that the pandemic had something to do with income changes that caused people to encounter this situation.
6. I rarely see people bring up
dodecahedon's point about inevitable aging and planning for other people to take over your investments and tax preparation. But, as someone who helps elderly relatives with their investments, finances, and tax preparation ... which causes me to think ahead to who might be helping *my* older self with investments and tax preparation ... and what type of capabilities they have ... and what type of burden I do or don't want to put on them ... I think she raises valid points worth considering. People's situations could easily cause them to come to different conclusions that she has, but they are still points worth considering, especially for older people who are approaching that $300/$600 threshold. (Inexpensive international mutual funds weren't available when now-older people were young investors, so I'm guessing now-older investors tend to have less of them in their taxable portfolios than young investors.) It might not be a feasible point to consider for younger investors, who start out their investing careers where international investment exposure is just as easy and cheap to acquire as US exposure, so they may pass that $300/$600 threshold pretty early on.