FreeTaxUSA and Form 8621: What Its Forms List Leaves Out

By Edward Parsons, CPA · licensed since 2009

Key takeaways

• FreeTaxUSA’s published list of supported forms doesn’t include Form 8621. The list doesn’t say it is complete, and FreeTaxUSA has no help page on Form 8621.
• The same page lists customers living outside the United States when they file among the situations FreeTaxUSA doesn’t support.
• FreeTaxUSA does support Form 8938 and the foreign tax credit for dividends reported on a 1099-DIV. Both sit next to Form 8621 on a foreign-fund return, and both assume the PFIC side has been handled.
• Form 8938’s instructions let you leave a PFIC off Form 8938 only because you report it on Form 8621, and ask how many Forms 8621 you filed.
• Foreign tax withheld on a PFIC distribution is split under the Form 8621 instructions. The share tied to prior PFIC years can only reduce the deferred tax on Form 8621, and any of it left unused can’t be carried over.
• Work out the Part V figures first, with a tool built for the section 1291 calculation, such as the PFIC Calculator & Form 8621 Generator.

FreeTaxUSA is popular with people who are comfortable doing their own return and don’t want to pay for features they won’t use. Many of them hold a foreign fund or two, often bought through a US brokerage account, and they reach the same question everyone does: where is Form 8621?

This guide covers what FreeTaxUSA’s own pages say, the two forms it does support that interact with Form 8621, and why those two are where a foreign-fund return quietly goes wrong.

Does FreeTaxUSA support Form 8621?

Its published forms list doesn’t include it.

FreeTaxUSA publishes a long list of the federal forms its program supports. Form 8621 isn’t on it. The list doesn’t say it is complete, and I couldn’t find a FreeTaxUSA help article about Form 8621 at all. The one FreeTaxUSA help page that mentions Form 8621 does so only to explain when an asset doesn’t have to be reported on Form 8938.

The same forms page has a short list of items FreeTaxUSA doesn’t support. Two matter here:

• Foreign employment income reported on Form 2555, the foreign earned income exclusion.
• Customers living outside the United States when they file.

So if you live abroad, FreeTaxUSA’s own page says it isn’t built for you, whatever you hold. My guide to tax software for Americans abroad and Form 8621 covers the expat programs instead.

If you live in the US and hold a foreign fund, the answer is the same one TurboTax users get: the form you need isn’t in the program. My guide to what to do when TurboTax doesn’t do Form 8621 explains why consumer software leaves it out, and which tax software supports Form 8621 sets every program side by side.

Why does Form 8938 depend on Form 8621?

Because Form 8938 lets a PFIC off only when Form 8621 carries it.

FreeTaxUSA lists Form 8938, the statement of specified foreign financial assets, among the forms it supports. A foreign fund is usually one of those assets. The Form 8938 instructions say you don’t report an asset on Form 8938 if you report it on certain other forms, Form 8621 among them. Instead, you identify on Form 8938 which of those forms you filed, and how many.

That exception assumes the Form 8621 exists. A return that takes the shortcut on Form 8938 and never files the Form 8621 behind it has a hole in it, and the hole is on a form that says so.

My guide to how the FBAR, Form 8938 and Form 8621 differ explains how the three overlap for one account.

What happens to foreign tax withheld on a PFIC distribution?

The Form 8621 instructions split it, and only part of it is an ordinary foreign tax credit.

Some foreign funds pay distributions with foreign tax withheld. FreeTaxUSA’s help page says it supports the foreign tax credit when the foreign income and taxes are reported on a 1099-DIV, a 1099-INT or a K-1. For an ordinary foreign stock, that is the whole story.

For a PFIC taxed under the default rules of section 1291, it isn’t. The Form 8621 instructions say the creditable foreign taxes on a distribution are apportioned between the part that is an excess distribution and the part that isn’t. The taxes tied to the excess part are then allocated across your holding period the same way as the excess itself. The share that lands in each prior PFIC year can only reduce the deferred tax for that year, on line 16d, and never below zero. No unused amount carries over. The rest is handled under the ordinary foreign tax credit rules.

So the foreign tax figure on your 1099 is not, by itself, the credit you claim in the usual place. Part of it belongs inside the Form 8621 calculation, part of it may simply go unused, and how much of each depends on that year’s excess distribution and your holding period.

What else does the PFIC calculation need?

More history than any 1099 carries. For each fund, block by block:

• every purchase and reinvested distribution, each one a block with its own holding period;
• a 125% test against what each block received in the three prior years;
• the excess allocated across every day you held the shares;
• tax on each prior year’s share at that year’s top rate;
• interest compounded daily at the IRS rate for each quarter, under section 6621.

My guide to the PFIC excess distribution regime explains what that calculation is doing and why.

What should I do before I file?

1. Confirm the fund is a PFIC. See whether your foreign mutual fund is a PFIC and test it with the free PFIC Analyzer.
2. Check which years need a form. See who must file Form 8621 and the $25,000 and $50,000 exception.
3. Work out Part V. The PFIC Calculator & Form 8621 Generator runs the PFIC tests, the 125% test for each block, the allocation, the rates and the interest, and fills in the official Form 8621 for each fund and year, with workpapers behind every figure.
4. Then make the rest of the return agree with it: the dividends, the sale, Form 8938, and the foreign tax credit, including the share of foreign tax tied to each excess distribution. None of them stands alone once a PFIC is involved.

Glossary

• Form 8938: the statement of specified foreign financial assets, filed with your return above certain thresholds.
• Form 1116: the form for claiming the foreign tax credit on a personal return.
• Excess distribution: the part of a year’s distributions above 125% of the average for the three prior years. A gain on sale is treated as one.
• Line 16d: the Form 8621 line for the foreign tax credit tied to an excess distribution.
• PFIC: a passive foreign investment company, including most foreign mutual funds and ETFs. See what a PFIC is.

Frequently asked questions

Does FreeTaxUSA support Form 8621?

FreeTaxUSA’s published list of supported forms doesn’t include Form 8621, and it has no help page about the form. The list doesn’t say it is complete, so check inside the program for the year you are filing.

Can I use FreeTaxUSA if I live abroad?

FreeTaxUSA’s forms page lists customers living outside the United States when they file, and foreign employment income on Form 2555, among the situations it doesn’t support.

Does FreeTaxUSA support Form 8938?

Yes, FreeTaxUSA lists Form 8938 as supported. The Form 8938 instructions let you leave a PFIC off Form 8938 only if you report it on Form 8621, and ask you to state how many Forms 8621 you filed.

Can I claim the foreign tax credit on PFIC dividends in FreeTaxUSA?

FreeTaxUSA supports the foreign tax credit for income reported on a 1099-DIV. For a PFIC, the Form 8621 instructions apportion the foreign tax between the excess and nonexcess parts of a distribution, and the share tied to prior PFIC years can only reduce the deferred tax on Form 8621, with no carryover. So the 1099 figure isn’t simply the credit.

Where do I get the Form 8621 figures if FreeTaxUSA doesn’t do it?

From a tool built for the section 1291 calculation, run before Form 8938 and the foreign tax credit go in. The PFIC Calculator & Form 8621 Generator produces the completed Form 8621 for each fund and year, with workpapers behind every figure.

Check the forms that lean on Form 8621. Test the fund with the free PFIC Analyzer, then let the PFIC Calculator work out Part V before Form 8938 and the foreign tax credit go in.

FreeTaxUSA and TurboTax are trademarks of their respective owners. This guide is not affiliated with or endorsed by either. Product features are described from the makers’ own pages as of this writing and can change.