On Form 1116, you must choose the appropriate category of foreign source income based on the type of income you received. The IRS requires a separate Form 1116 for each category of income, and you must check only one box per form. The categories are defined in the General Instructions and include:
Categories of Income
- Section 951A Category Income: Includes global intangible low-taxed income (GILTI) from certain controlled foreign corporations (CFCs).
- Foreign Branch Category Income: Business profits attributable to qualified business units (QBUs) in foreign countries. Does not include passive income.
- Passive Category Income: Includes dividends, interest, royalties, rents, annuities, and capital gains not related to active business. Excludes high-taxed income and financial services income from financial services entities.
- General Category Income: Includes wages, salary, overseas allowances, income from active business conduct, and gains from inventory or depreciable property used in business.
Special Considerations
- High-Taxed Income: If passive income is taxed at a foreign rate exceeding the highest U.S. tax rate, it is reclassified as another category (e.g., general category). You must use a separate column labeled "HTKO" on Form 1116 and adjust the foreign tax amounts accordingly. Enter the amount as a negative on the passive form and positive on the reclassified form.
- Multiple Forms Required: If you have multiple types of foreign income (e.g., dividends and wages), you must complete a separate Form 1116 for each category. For example, one form for passive income (dividends) and another for general income (wages).
- Schedule B: Required if you have a foreign tax carryover for any category except Section 951A category income.
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Disclaimer: Always verify details with the current year’s Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.