Worksheet for Additional Foreign Tax Credit on U.S. income

I have just come off the phone with an IRS advisor at the London embassy. He told me that the correct way to take a foreign tax credit for the UK tax I pay on US source income (dividends and bank interest) is not with any Form 1116, but by using the "Worksheet for Additional Foreign Tax Credit on U.S. income" that is on page 35 of Publication 514.

I have made a calculation using this form and it seems to compute an amount of credit  that looks right. But I am puzzled by the statement on page 23 of the instructions

"But do not use this worksheet to figure the additional credit under the treaties with Australia and New Zealand. In addition, except as provided in regulations, the worksheet does not apply for tax years beginning after August 10, 2010."

I quoted that last phrase to the IRS person. He said, "Nonsense. They would not be putting the form in the instructions unless you are supposed to use it."

Is he right? Does anyone have any experience with this? Is it something to do with "except as provided in regulations"? I wonder what regulations.

p.s. The embassy official also said something which struck a chord. The instructions for Form 1116 are really aimed at what he called "high rollers" and "wheeler-dealers".

Links to all of the current Code and Regulations can be found here:

http://www.irs.gov/Tax-Professionals/Tax-Code,-Regulations-and-Official-Guidance

One assumes you have a name and badge number of the IRS official you spoke with. Perhaps you should ask asking him which sections of the Code or Regulations he is relying on in his interpretation.

guya: No, I don't have a badge number. That was very quickly spoken at the start. I remember only his first name. Next time I will make a note. Or maybe I'll phone back. But I doubt if he could have quoted from the regulations. You do not say whether or not you think his advice was correct.

My hunch is that he must surely be wrong. When I use this worksheet it computes the fraction of my income that is US source, and then uses that to figure the fraction of my US tax bill that is US source related. But that is crazy, since my US income is dividends, which are taxed at just 15%. The worksheet therefore over-calculates the proportion of my tax bill that is US source related, and then ends up offering me too large a tax credit. The calculation that makes more sense is the one in that is made in finding the adjusted AGI for Line 18 of Form 1116 in which the contribution of qualified dividends to the AGI (net of deductions) is adjusted downwards.

None of my UK source income is taxed by the US (since I have far away more tax credits than I need in respect of UK tax paid.) The only part of my income that can be taxed by the US is US source
qualified dividend income. If that were taxed at 15% I think I would need to pay a smaller amount than it would cost to ask a UK-US specialist to compute it. Maybe I should pay less than 15% to the US. But in any case I am going to pay the balance up 32.5% to the UK, minus the UK dividend tax credit, so my net of tax will be the same - it is really just a question about which country gets what size of share. My preference is to give the largest possible share to the UK, but perhaps it is safest just give the US 15% and then claim that as a credit on my UK self-assessment. I understand that under treaty the US can take up to 15%, although there must be cases in which the US would want less than 15%, as when a person has a low total income.