I was filing my taxes for this year and found that the "adjustment exception" on Form 1116 made a big difference to my tax liability. I thought I would share some information on this forum in case it helps others.
Some background - normally you're supposed to adjust your qualified dividends and capital gains for the purposes of Form 1116, in order to take into account that they're taxed at lower rates than ordinary income. However there is an exception available if your dividends/gains are less than $20,000, in which case you enter the un-adjusted amounts. This applies to all income baskets, not just passive category income. Also, you adjust your worldwide dividends/gains.
I notice that TurboTax tells you to do the adjustment manually so many folks may just ignore it. TaxAct does the adjustment for you, but bizarrely only if you tick a box saying your capital gains are over the $20k limit (even if you've entered elsewhere in TaxAct that they're not).
I was eligible to use the adjustment exception, but without it (that is, after doing the adjustments), I noticed that I was able to take a much larger foreign tax credit on general category income than I would have otherwise taken. I think this is because the adjustment makes it so that employment income represents a larger slice of my total income and thus a larger slice of the notional US tax liability, which determines the maximum amount of credit you can take.
Just another one of these things where it's best to do the math both ways and see what makes sense in your situation.
