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1040 easy Publication 957 - Main Content Table of Contents 1. 1040 easy What is Back Pay?Reporting Back Pay Back Pay Under a Statute Nonstatutory Back Pay Format for Report to the SSA Questions 2. 1040 easy Special Wage PaymentsReporting Special Wage Payments Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments Nonqualified Deferred Compensation and Section 457 Plans Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) PlansSpecial rule for box 11 of Form W-2 (distributions and deferral in the same year). 1040 easy 1. 1040 easy What is Back Pay? Back pay is pay received in a tax year(s) for actual or deemed employment in an earlier tax year(s). 1040 easy For social security coverage and benefit purposes, all back pay, whether or not under a statute, is wages if it is payment for covered employment. 1040 easy Damages for personal injury, interest, penalties, and legal fees included with back pay awards are not wages. 1040 easy Report all back pay. 1040 easy However, the tax year(s) for which back pay is credited as wages for social security purposes is different if it is awarded under a statute. 1040 easy See Back Pay Under a Statute , later, for more information. 1040 easy Reporting Back Pay The Internal Revenue Service (IRS) and the SSA consider back pay awards to be wages. 1040 easy However, for income tax purposes, the IRS treats all back pay as wages in the year paid. 1040 easy Employers should use Form W-2, Wage and Tax Statement, or electronic wage reports to report back pay as wages in the year they actually pay the employee. 1040 easy The SSA no longer accepts reports on tapes, cartridges, and diskettes. 1040 easy Example. 1040 easy In 2012, Terry Morris earned wages of $50,000. 1040 easy In the same year, she received $100,000 in settlement of a back pay case against her employer that covered the periods January 2007 through December 2011. 1040 easy Her employer properly reflected social security wages of $110,100 and Medicare wages of $150,000 on her 2012 Form W-2. 1040 easy However, if an employer did not include back pay wages on a previously filed Form W-2, magnetic media, or electronically filed wage report, the employer should prepare a wage correction report, Form W-2c, Corrected Wage and Tax Statement, or electronically filed report, to add the back pay award to the wages previously reported. 1040 easy Example. 1040 easy If, in the above example, Terry Morris' employer had prepared her 2012 Form W-2 reporting social security and Medicare wages of only $50,000 each, the employer would have to correct that report. 1040 easy A Form W-2c correcting the 2012 Form W-2 would show previously reported social security and Medicare wages of $50,000 and the correct amount of $110,100 for social security wages and $150,000 for Medicare wages. 1040 easy SSA treatment of back pay under a statute. 1040 easy   Under the law, the SSA credits back pay awarded under a statute to an individual's earnings record in the period(s) the wages should have been paid. 1040 easy This is important because wages not credited to the proper year may result in lower social security benefits or failure to meet the requirements for benefits. 1040 easy   However, back pay under statute payments will remain posted to the employee's social security earnings record in the year reported on Form W-2 (or Form W-2c) unless the employer or employee notifies the SSA (in a separate, special report) of the back pay under a statute payment. 1040 easy Then, the SSA can allocate the statutory back pay to the appropriate periods. 1040 easy   If a back pay award is not made under a statute, the SSA credits back pay as wages in the year paid. 1040 easy    If employers do notify the SSA of this payment, they should prepare a special report (with the information noted below) and send it to: Social Security Administration Attn: CPS Back Pay Staff 7-B-15 SWT 1500 Woodlawn Drive Baltimore, MD 21241-0001 Be sure to send this special report to the above address because the SSA handles it separately from other reports. 1040 easy    If you paid the back pay award in the same tax year to which it applies, report the wages on that year's Form W-2. 1040 easy No further action is necessary. 1040 easy Example. 1040 easy In 2012, Judy Wilson received a salary of $30,000 and a back pay under statute award of $2,000 for the period January through June 2012. 1040 easy Her employer properly reported wages of $32,000 for social security and Medicare on her 2012 Form W-2. 1040 easy No further action is necessary. 1040 easy Information the SSA needs to properly credit back pay under a statute (special report). 1040 easy   After you complete the special report, you or the employee should send it to the SSA when or after you submit the Form W-2 (on paper or electronically) to the SSA for the year you pay the statutory back pay to the employee. 1040 easy There is no statute of limitations on the filing of the special report to enable the SSA to allocate the wages. 1040 easy The special report must include the following information. 1040 easy The employer's name, address, and employer identification number (EIN). 1040 easy A signed statement citing the federal or state statute under which the payment was made. 1040 easy If the statute is not identified, the SSA will assume the payment was not under a statute and will not allocate to earlier period(s). 1040 easy The name and telephone number of a person to contact. 1040 easy The SSA may have additional questions concerning the back pay case or the individual employee's information. 1040 easy A list of employees receiving the payment and the following information for each employee: The tax year you paid and reported the back pay. 1040 easy The employee's social security number (SSN). 1040 easy The employee's name (as shown on his or her social security card). 1040 easy The amount of the back pay award excluding any amounts specifically designated otherwise, for example, damages for personal injury, interest, penalties, and legal fees. 1040 easy The period(s) the back pay award covers (beginning and ending dates—month and year). 1040 easy The other wages paid subject to social security and/or Medicare taxes and reported in the same year as the back pay award (if none, show zero)*. 1040 easy Do not include the back pay award shown in that wage report. 1040 easy If you originally submitted the report under an establishment number, show that number and the amount of money that is to remain under that establishment number. 1040 easy The amount to allocate to each reporting period*. 1040 easy This includes any amount you want allocated (if applicable) to the tax year of the award payment. 1040 easy If you do not give the SSA specific amounts to allocate, the SSA does the allocation by dividing the back pay award by the number of months or years covered by the award. 1040 easy *Note. 1040 easy   For periods before January 1, 1978 (before January 1, 1981, for state and local government employers covered by a Section 218 agreement), show the wage amounts for each calendar quarter ending March 31, June 30, September 30, and December 31. 1040 easy For all tax years, show and identify the social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) separately. 1040 easy MQGE is applicable to federal employees beginning in 1983, and for certain state and local government employees beginning in 1986. 1040 easy For tax years 1991 and later, list the social security and Medicare wages separately. 1040 easy If you originally reported the individual's wages under an establishment or payroll record unit number, show the amount of wages to remain in the award year for that number and furnish that number to the SSA along with the EIN. 1040 easy Back Pay Under a Statute Back pay awarded under a statute is a payment by an employer following an award, determination, or agreement approved or sanctioned by a court or government agency responsible for enforcing a federal or state statute that protects an employee's right to employment or wages. 1040 easy Examples of pertinent statutes include: Age Discrimination in Employment Act, Americans with Disabilities Act, Equal Pay Act, Fair Labor Standards Act, National Labor Relations Act, State minimum wage laws, and State statutes that protect rights to employment and wages. 1040 easy Payments based on laws that have a similar effect to those listed above also may qualify as payments made under a statute. 1040 easy Back pay awards, under some of the statutes listed above, may be compensation for personal injury and not pay for employment. 1040 easy Such awards are not wages for social security coverage purposes. 1040 easy If a court-approved or sanctioned settlement agreement states that the agreement is not an admission of discrimination, liability, or act of wrongdoing, the statement does not change the nature of a back pay award. 1040 easy The payments made in such a settlement may still be back pay and wages under the rules discussed here. 1040 easy Nonstatutory Back Pay A payment for back wages negotiated between an employer and employee without an award, determination, or agreement approved or sanctioned by a court or government agency, the payment is not made under a statute. 1040 easy Delayed wage payments and retroactive pay increases resulting from union negotiation or payments under local ordinances or regulations are back pay and are wages. 1040 easy However, they are not payments made under a statute. 1040 easy If you are uncertain whether the back pay award was under a qualified statute, you may need to contact your personnel department or legal counsel or the attorney who filed the suit. 1040 easy Format for Report to the SSA Use the format shown in Table 1, later, to send the SSA the information needed to properly credit back pay under a statute. 1040 easy In a cover letter, include: Name and address of the employer, Statute under which you paid the back pay, Name and telephone number of the employer contact, and Signature of the reporting official. 1040 easy Under certain circumstances, back pay may be a special wage payment and excluded from wages counted under the social security earnings test. 1040 easy If you pay back pay to an employee age 61 or older, report it to the SSA in accordance with this section. 1040 easy Read Special Wage Payments, later, for additional reporting instructions. 1040 easy Questions If you have questions concerning back pay under a statute, call the SSA at 1-800-772-6270. 1040 easy Exception. 1040 easy   If you are a state or local government employer who was covered by an agreement under Section 218 of the Social Security Act before January 1, 1987, and you paid a back pay award before January 1, 1987, which you did not report to the SSA, contact your state Social Security Administrator's office. 1040 easy Table 1. 1040 easy Format for Report (Under Covering Letter) to Request SSA to Allocate Back Pay Under Statute Wages Employer's EIN: xx-xxxxxxx Tax Year in Which Award Payment Was Paid: 2012 (1) SSN and Employee Name (2)1 Award Amount and Period(s) (3)2,3 Other Soc. 1040 easy Sec. 1040 easy /Med. 1040 easy Wages Paid In Award Year (4)3 Allocation     Soc. 1040 easy Sec. 1040 easy Med. 1040 easy /MQGE Year Soc. 1040 easy Sec. 1040 easy Med. 1040 easy /MQGE xxx-xx-xxxx HELEN T. 1040 easy SMITH $100,000 1/2009 - 12/2012 $40,000 $40,000 2009 2010 2011 2012 $20,000 25,000 27,000 28,000 $20,000 25,000 27,000 28,000 xxx-xx-xxxx SAM W. 1040 easy EVANS 30,000 7/89-12/91 -0- -0- 1989 1990 1991   6,000 12,000 12,000 xxx-xx-xxxx ROLAND S. 1040 easy ADAMS 15,000 7/80-12/81 -0- -0- 9/80 12/80 1981 3,500 3,500 8,000   1Exclude amounts specifically designated as damages, penalties, etc. 1040 easy  2Exclude the amount of back pay, if any, included in that amount. 1040 easy  3For periods before January 1, 1978 (and for state and local government (Section 218) employers before January 1, 1981), show the wage amounts by calendar quarters. 1040 easy The social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) must be shown separately FOR ALL YEARS. 1040 easy (Wages subject ONLY to MQGE would be shown in the Medicare/MQGE column; no wages would be shown in the Soc. 1040 easy Sec. 1040 easy column. 1040 easy ) For tax years 1991 and later, the social security and Medicare wages must be listed separately. 1040 easy Explanation of examples. 1040 easy Helen T. 1040 easy Smith–The back pay award, excluding interest, was $100,000 for the periods 1/2009-12/2012. 1040 easy In 2012, this employee was also paid $40,000 in other wages. 1040 easy (Her Form W-2 for 2012 reported $110,100 for social security and $140,000 for Medicare. 1040 easy The SSA allocation will result in adjusted posted wages of $68,000 for social security and $68,000 for Medicare for 2012. 1040 easy ) Sam W. 1040 easy Evans–The back pay award was $30,000 for the periods 7/89-12/91. 1040 easy This employee was hired in 1989 and was subject to MQGE only. 1040 easy He was no longer employed by this governmental employer in 2012. 1040 easy (His Form W-2 for 2012 reported $30,000 for social security and $30,000 for Medicare. 1040 easy After the SSA allocation, he will not have any net posted wages for 2012. 1040 easy ) Roland S. 1040 easy Adams–The back pay award was $15,000 for the periods 7/80-12/81. 1040 easy He was no longer employed by this state and local government (Section 218) employer in 2012. 1040 easy (His Form W-2 for 2012 reported $15,000 for social security and $15,000 for Medicare; after the SSA allocation, he will not have any net posted wages for 2012. 1040 easy ) If the state Social Security Administrator's office needs more information, they can contact the SSA at the following address:   Social Security Administration Office of Income Security Programs Office of Earnings and Program Integrity Policy 6401 Security Boulevard 2506 OPS Baltimore, MD 21235 2. 1040 easy Special Wage Payments A special wage payment (SWP) is an amount paid by an employer to an employee (or former employee) for services performed in a prior year. 1040 easy Employers should report to the SSA special wage payments made to employees and former employees who are recipients of social security retirement benefits. 1040 easy Special wage payments made to a retired employee receiving social security or to an employee who continues to work while receiving social security benefits may reduce the benefits the individual receives if not reported to the SSA. 1040 easy Special wage payments may include (but are not limited to): Accumulated sick and vacation pay, Back pay, Bonuses, Deferred compensation, Payments because of retirement, Sales commissions, Severance pay, and Stock options. 1040 easy Note. 1040 easy Payments made after retirement that are part of the normal payroll cycle should not be routinely reported as special wage payments. 1040 easy Earnings Test. 1040 easy   Benefits paid to a social security beneficiary under full retirement age may be reduced if the beneficiary continues to work. 1040 easy The SSA uses the information in boxes 1, 3, and 5 of Form W-2 to determine the beneficiary's current year earnings. 1040 easy Special wage payments, which are for services performed in a prior year, will increase the current year earnings on Form W-2, which also may result in a reduction in the beneficiary's benefits. 1040 easy If a benefit is reduced because of a special wage payment, the beneficiary must get documentation from the employer before the SSA can restore the deducted portion. 1040 easy Therefore, employer reports of special wage payments help prevent incorrect benefit reductions. 1040 easy Reporting Special Wage Payments Employers must report special wage payments for income tax purposes and social security and Medicare taxes in the year received. 1040 easy Report income, social security, and/or Medicare taxes for special wage payments on Form W-2. 1040 easy See Nonqualified Deferred Compensation and Section 457 Plans, later, for reporting nonqualified deferred compensation plan deferrals and payments on Form W-2. 1040 easy In addition, report to the SSA special wage payments made during the reporting year to retired employees and employees who continue to work while receiving social security benefits. 1040 easy Submit reports after the close of the tax year. 1040 easy To avoid delays in processing, submit reports in time to reach the SSA by April 1. 1040 easy Use one of the following reporting methods. 1040 easy Electronic reporting. 1040 easy   Special wage payment files can be sent electronically by logging onto Business Services Online (BSO) via the socialsecurity. 1040 easy gov website. 1040 easy BSO enables organizations and authorized individuals to conduct business with and submit confidential information to the Social Security Administration. 1040 easy You must register to use this website. 1040 easy The web address is www. 1040 easy socialsecurity. 1040 easy gov/bso/bsowelcome. 1040 easy htm. 1040 easy   Use the specifications and record layout shown in  Table 2, later. 1040 easy Only one file at a time may be submitted. 1040 easy If your file is large (>10MB), or you have a slow internet connection, the transmission will be faster if the file is zipped. 1040 easy A zipped file contains a file that has been compressed to reduce its file size. 1040 easy WinZip and PKZIP are examples of acceptable compression packages. 1040 easy   Electronic submissions not meeting the specifications in Table 2 will be rejected. 1040 easy Paper listing. 1040 easy   A paper listing can be used to report special wage payments to several employees. 1040 easy Use the format shown in Table 3, later. 1040 easy Submit paper listings to the local SSA office nearest your place of business. 1040 easy Visit www. 1040 easy socialsecurity. 1040 easy gov/locator to find a Social Security office near you. 1040 easy Form SSA-131. 1040 easy   Use Form SSA-131 to report special wage payments made to an employee. 1040 easy Also use this form to report nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in box 11 of Form W-2. 1040 easy    This image is too large to be displayed in the current screen. 1040 easy Please click the link to view the image. 1040 easy Publication 957 Reporting Back Pay to the Social Security Administration Instructions for Form SSA–131   EMPLOYER INSTRUCTIONS FOR COMPLETING SPECIAL WAGE PAYMENT FORM 1. 1040 easy Provide the EIN that was used or will be used to report the employee's wages on the Form W-2. 1040 easy 2. 1040 easy Enter the date the employee retired. 1040 easy Enter “Not Retired” if the employee has not retired. 1040 easy 3. 1040 easy Enter the date that the employee last performed services; was not expected to return to work; and was not subject to recall to render additional services. 1040 easy This date should be the same as or earlier than the date in item “2”. 1040 easy Enter “Not Retired” if the employee has not retired. 1040 easy 4. 1040 easy Enter the wages that were paid to the employee in the tax year that were for services that were performed in years prior to the tax year or that were paid on account of retirement. 1040 easy  Examples (not all inclusive) of payments to be included: Payments in lieu of vacation that were earned in a year prior to the tax year. 1040 easy Accumulated sick payments which were paid in a lump sum based on “retirement” as the sole condition of payment. 1040 easy Accumulated sick payments paid at or after the date in item 3, which were earned in a year prior to the tax year. 1040 easy Payments “on account of retirement”–dismissal, severance or termination pay paid because of retirement. 1040 easy Bonuses which are paid pursuant to a prior contract, agreement or promise causing the employee to expect such payments regularly; or announced to induce the employee to work more steadily, rapidly or efficiently or to remain with the employer. 1040 easy Stock Options. 1040 easy   Do not include in item “4” payments: For annual, sick, holiday, or vacation pay if used (absence from work) prior to the date of retirement (earlier of items “2” or “3”). 1040 easy That were reported or will be reported under “Nonqualified Plans” on the Form W-2. 1040 easy That were deducted from the employee's wages and paid to a deferred compensation plan (e. 1040 easy g. 1040 easy , 401k). 1040 easy Employees health and dental plan benefits (non-covered/non-taxable for Social Security Wages). 1040 easy Bonuses earned and paid in the tax year. 1040 easy 5. 1040 easy Check whether payments listed in item 4 will be made for years after the tax year. 1040 easy If yes, please show the amounts and years in which these will be paid, if known. 1040 easy 6. 1040 easy Nonqualified deferred compensation and section 457 plans only. 1040 easy If you were unable to report nonqualified deferred compensation or section 457 plan payments and deferrals (contributions) on Form W-2 because both payments and deferrals occurred during the year, show the amount of wages earned by the employee during the tax year. 1040 easy Generally, the wages earned will be the compensation reported in block 1 of Form W-2 less payments from a nonqualified deferred compensation (or 457) plan, but including any amounts deferred under the plan during the tax year (See IRS Publication 957). 1040 easy Paperwork/Privacy Act Notice: This report is authorized by regulation 20 CFR 404. 1040 easy 702. 1040 easy The information that you provide will be used in making a determination regarding the amount of Social Security benefits payable to the above named individual. 1040 easy While your response is voluntary, if you do not respond we may not be able to make a correct determination regarding the amount of Social Security benefits payable to the above named individual for the year in question. 1040 easy We may also use the information you give us when we match records by computer. 1040 easy Matching programs compare our records with those of other Federal, State, or local government agencies. 1040 easy Many agencies may use matching programs to find or prove that a person qualifies for benefits paid by the Federal Government. 1040 easy The law allows us to do this even if you do not agree to it. 1040 easy Explanations about these and other reasons why information you provide us may be used or given out are available in Social Security Offices. 1040 easy If you want to learn more about this, contact any Social Security Office. 1040 easy The Paperwork Reduction Act: This information collection meets the clearance requirements of 44 U. 1040 easy S. 1040 easy C. 1040 easy §3507, as amended by Section 2 of the Paperwork Reduction Act of 1995. 1040 easy You are not required to answer these questions unless we display a valid Office of Management and Budget control number. 1040 easy We estimate that it will take you about 20 minutes to read the instructions, gather the necessary facts, and answer the questions. 1040 easy Form SSA-131 (8-2001) EF (06-2002)   Submit Form SSA-131 to the SSA office nearest your place of business. 1040 easy Or, the employee can submit it to the SSA office handling the claim. 1040 easy You or the employee must submit this form before the SSA can exclude the special wage payments for purposes of the earnings test. 1040 easy If reporting on more than one employee, complete a separate Form SSA-131 for each employee or use the paper listing format (except for reporting nonqualified and section 457 plan deferrals and payments) in Table 3. 1040 easy Do not report payments from nonqualified deferred compensation or section 457 plans that were reported in box 11 of Form W-2. 1040 easy Use Form SSA-131 if deferrals to and payments from nonqualified or section 457 plans occurred during the tax year. 1040 easy Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments A nonstatutory (nonqualified) option to purchase stock which is exercised in a year after the year in which the option was earned is a special wage payment. 1040 easy It should not count for the social security earnings test. 1040 easy Nonstatutory (nonqualified) options exercised as special wage payments by retired employees or employees who continue to work while receiving social security benefits should be reported by employers using the above reporting methods. 1040 easy Nonqualified Deferred Compensation and Section 457 Plans A nonqualified deferred compensation plan is a plan or arrangement established and maintained by an employer for one or more of its employees that provides for the deferral of compensation, but does not meet the requirements for a tax-qualified deferred compensation plan. 1040 easy For social security and Medicare purposes, deferred compensation plans for employees of state and local governments (section 457 plans) are treated the same as nonqualified plans. 1040 easy Nonqualified and section 457 plans are reported differently than other special wage payments. 1040 easy See Reporting Amounts Deferred to Nonqualified and Section 457 Plans below for specific instructions. 1040 easy Reporting Amounts Deferred to Nonqualified and Section 457 Plans Generally, when the related services are performed, nonqualified deferred compensation is subject to social security and Medicare tax when deferred. 1040 easy However, if nonqualified and section 457 plans contain provisions that delay the employee's right to receive payments from the plan, a period of substantial risk of forfeiture exists. 1040 easy The plans' deferrals, or contributions, are not subject to social security and Medicare taxes until the period of substantial risk of forfeiture ends. 1040 easy No risk of forfeiture. 1040 easy   If there is no risk of forfeiture, report wage amounts deferred to a nonqualified deferred compensation or section 457 plan in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. 1040 easy Example. 1040 easy Company X's nonqualified deferred compensation plan allows the deferral of up to $20,000 of employee salaries each year. 1040 easy The plan has no risk of forfeiture. 1040 easy In 2012, Employee A defers $20,000 to the plan from a total salary of $200,000. 1040 easy Form W-2 Completion Amount Box 1 $200,000 Box 3* 110,100 Box 5 200,000 *Wage base maximum for tax year 2012 Risk of forfeiture lapses before retirement. 1040 easy   If the substantial risk of forfeiture lapses before the employee retires, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. 1040 easy The accumulated deferrals are reported along with any other social security and Medicare wages earned during the year. 1040 easy   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. 1040 easy If the employee continues working, future deferrals are social security and Medicare wages when they are earned. 1040 easy    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. 1040 easy Risk of forfeiture lapses at retirement. 1040 easy   When an employee's right to a payment is contingent upon working until retirement, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, as social security and/or Medicare wages in the year of retirement. 1040 easy Add the amount to other wages paid in that year, and enter in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. 1040 easy   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. 1040 easy    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. 1040 easy Example—risk of forfeiture. 1040 easy At the end of the risk-of-forfeiture period for Company Y's nonqualified deferred compensation plan, Employee B's accumulated deferrals, plus interest earned by the plan, are $120,000, not including B's $20,000 deferral for this year. 1040 easy B's wages, including this year's deferred amount, are $80,000. 1040 easy Form W-2 Completion Amount Box 1 $60,000 Box 3* 110,100 Box 5 200,000 Box 11 120,000 *Wage base maximum for tax year 2012 Reporting Payments From Nonqualified and Nongovernmental Section 457 Plans When an employee or former employee retires and begins receiving payments (distributions) from a nonqualified or nongovernmental section 457 plan, report the payments in boxes 1 and 11 of Form W-2. 1040 easy Report payments (distributions) from a governmental section 457 plan on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040 easy Example. 1040 easy Employee D retired from the XYZ company and began receiving social security benefits. 1040 easy XYZ paid D a $12,000 bonus upon retirement for sales made in a prior year, and D received $25,000 in payments from XYZ's nonqualified deferred compensation plan. 1040 easy In addition, D agreed to continue performing services for XYZ, but on a part-time basis for wages of $15,000 per year. 1040 easy D made no deferrals to the nonqualified plan this year. 1040 easy Form W-2 Completion Amount Box 1 $52,000 Box 3 27,000 Box 5 27,000 Box 11 25,000 Report the $12,000 bonus to the SSA using electronic reporting, a paper listing, or Form SSA-131. 1040 easy For more information, see Reporting Special Wage Payments , earlier. 1040 easy Reporting Payments and Deferrals in the Same Year Do not complete box 11 when payments (distributions) are made from a nonqualified plan and deferrals are reported in boxes 3 and/or 5 of Form W-2 (including current year deferrals). 1040 easy Report to the SSA on Form SSA-131 the total amount the employee earned during the tax year. 1040 easy Normally, the amount earned is the amount reported in box 1 of Form W-2 less payments from a nonqualified or section 457 plan, but including any amounts deferred under the plan during the tax year. 1040 easy See Form SSA-131 and its instructions, earlier. 1040 easy Example. 1040 easy Employee K retired this year from Company XYZ and began receiving social security benefits. 1040 easy During the year he earned wages of $50,000 and deferred $35,000 of the wages into the company's nonqualified deferred compensation plan. 1040 easy K also received $75,000 in payments from the company's nonqualified plan. 1040 easy Form W-2 Completion Amount Special Wage Payment $75,000 Wages 50,000 Minus: deferral 35,000 Total reported in Box 1 $90,000     Wages including deferral reported in  Boxes 3 and 5 $50,000     Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Amount from Box 1 of Form W-2 $90,000 Minus: payments from a nonqualified plan 75,000 Plus: amounts deferred into the plan during the year 35,000 Total wages earned for purposes of Form SSA-131 (item 6) $50,000 Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) Plans It is not necessary to show amounts deferred during the year under an NQDC plan subject to section 409A. 1040 easy If you report section 409A deferrals, show the amount in box 12 of Form W-2 using code Y. 1040 easy For more information, see Notice 2008-115, 2008-52 I. 1040 easy R. 1040 easy B. 1040 easy 1367, available at www. 1040 easy irs. 1040 easy gov/irb/2008-52_IRB/ar10. 1040 easy html. 1040 easy Special reporting rules apply when an NQDC plan is not compliant with section 409A (when there has been a “plan failure”). 1040 easy Income included under section 409A from an NQDC plan is reported in box 1 and box 12 of Form W-2 using code Z. 1040 easy See Notice 2008-115. 1040 easy The following examples use small dollar amounts for illustrative purposes. 1040 easy However, the amount reported in box 3 of Form W-2 is always limited by the social security earnings wage base (for example, $110,100 for 2012). 1040 easy The term “vested” in the following examples means that the amount deferred is not subject to a substantial risk of forfeiture. 1040 easy Conversely, the term “not vested” means that the amount deferred is subject to a substantial risk of forfeiture. 1040 easy The examples assume that the NQDC plan is in compliance with section 409A, and that amounts deferred under the plan are not includible in gross income as they are deferred. 1040 easy For purposes of the examples, it is assumed that the regular pay of the employee is remuneration for employment and wages for employment tax purposes except to the extent the deferral of a portion of the regular pay results in a reduction in wages. 1040 easy Example 1: Deferral that is immediately vested (no substantial risk of forfeiture) with no distributions and no vesting of prior-year deferrals. 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into her employer’s NQDC plan. 1040 easy The deferral of $20 was vested upon deferral and there was an employer match of $10 under the plan, which was also vested. 1040 easy Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10. 1040 easy Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 vested deferral) $180 Box 3 ($200 Regular pay plus $10 Employer match, vested) 210 Box 5 ($200 Regular pay plus $10 Employer match, vested) 210 Box 11 -0- Example 2: Deferral with delayed vesting (substantial risk of forfeiture) of employee and employer portions (no distributions and no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. 1040 easy The deferral of $20 was not vested upon deferral, and there was an employer match of $10 under the plan, which was also not vested. 1040 easy Regular pay = $200; Deferral, not vested = $20; Employer match, not vested = $10. 1040 easy Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, not vested) $180 Box 3 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 5 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 11 -0- Example 3: Deferral that is immediately vested with prior-year deferrals and investment earnings on the prior-year deferrals that are now vesting (no distributions). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. 1040 easy The deferral of $20 was vested upon deferral. 1040 easy During the year, $100 of prior-year deferrals and $15 of investment earnings on the $100 of prior-year deferrals became vested. 1040 easy Regular pay = $200; Deferral, vested = $20; Vesting of prior-year deferrals = $100; Vesting of investment earnings on $100 of prior-year deferral = $15. 1040 easy Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, vested) $180 Box 3 ($200 Regular pay plus $100 vested prior-year deferral plus $15 earnings on deferral) 315 Box 5 ($200 Regular pay plus $100 vested prior-year deferral plus $15 vested investment earnings on prior year deferral) 315 Box 11 ($100 vested prior-year deferral plus $15 earnings) 115 Example 4: No deferrals but there are distributions (no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $100, and the employee deferred no pay into the employer’s NQDC plan. 1040 easy There was no vesting of prior-year deferrals under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $100; Distribution = $50. 1040 easy Form W-2 Completion Amount Box 1 ($100 Regular pay plus $50 Distribution) $150 Box 3 ($100 Regular pay ) 100 Box 5 ($100 Regular pay) 100 Box 11 ($50 Distribution) 50 Special rule for box 11 of Form W-2 (distributions and deferral in the same year). 1040 easy   If, in the same year, there are NQDC distributions and there are deferrals that are reportable in boxes 3 and/or 5 (current or prior-year deferrals) of Form W-2, do not complete box 11. 1040 easy Instead, report on Form SSA-131 the total amount the employee earned during the year. 1040 easy * Submit the SSA-131 to the nearest SSA office or give it to the employee. 1040 easy   *Generally, the amount earned by the employee during the tax year for purposes of item 6 of Form SSA-131 is the amount reported in box 1 of Form W-2 plus current-year deferrals that are vested (employee and employer portions) less distributions. 1040 easy Do not consider prior-year deferrals that are vesting in the current year. 1040 easy If there was a plan failure, the box 1 amount in this calculation should be as if there were no plan failure. 1040 easy Example 5: Deferral that is immediately vested and there are distributions (no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy There was also an employer match of $10. 1040 easy The deferral and employer match were vested upon deferral. 1040 easy There was no vesting of prior-year deferrals under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10; Distribution = $50. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, vested) $230 Boxes 3 and 5 ($200 Regular pay plus $10 vested employer match) 210 Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Item 6 - amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $30 vested current year employee deferral and employer match) $210 Example 6: Deferral with delayed vesting and there are distributions (no vesting of prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy The deferral was not vested upon deferral. 1040 easy There was no vesting of prior-year deferrals under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, not vested = $20; Distribution = $50. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay minus $20 deferral that is not vested) 180 Box 11 ($50 Distribution). 1040 easy 50 Example 7: Deferral that is immediately vested and there are distributions (also vesting of prior-year deferrals and earnings on those prior-year deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy The deferral was vested upon deferral. 1040 easy There was vesting of $100 of prior-year deferrals and $15 of earnings on the $100 prior-year deferral under the plan. 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, vested = $20; Distribution = $50; Vesting of prior-year deferrals ($100) and earnings on those prior-year deferrals ($15) = $115. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 vested deferral $230 Boxes 3 and 5 ($200 Regular pay Plus $115 vested prior deferral (with vested earnings on the deferral)) 315 Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Item 6, amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $20 vested current year deferral) $200 Example 8: Deferral with delayed vesting and there are distributions (vesting of prior-year deferrals, including employer matches, and earnings on those deferrals). 1040 easy For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. 1040 easy The deferral was not vested upon deferral. 1040 easy There was also vesting of prior-year deferrals and employer matches and earnings on these amounts under the plan ($115). 1040 easy During the year, there were total distributions of $50 from the plan to the employee. 1040 easy Regular pay = $200; Deferral, not vested = $20; Distribution = $50; Vesting of prior-year deferrals and employer match = $100 plus earnings on that $100 of $15. 1040 easy Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay plus $115 vested prior-year deferral and prior year employer match and earning on the prior year amounts minus $20 deferral that is not vested) 295 Leave Box 11 blank. 1040 easy File Form SSA-131 -0-     Form SSA-131 Completion Item 6 ($230 Amount from Box 1 of Form W-2 minus $50 Distribution) $180 Table 2. 1040 easy Specifications for Electronic Reporting of Special Wage Payments Record Position  Field Size   Description Start End 1 3 3 Record Type—must include only the capital letters “SWP” 4 12 9 SSN—must be numeric and may not be all zeros 13 27 15 Last Name—all capitals and no punctuation; may have blanks on right only 28 38 11 First Name—all capitals and no punctuation; may have blanks on right only 39 39 1 Middle Initial—must be either a capital letter or blank 40 48 9 EIN—must be numeric and may not be all zeros 49 59 11 Payment—must be numeric; may not be all zeros; last two digits on right are assumed to be cents; no period or dollar sign 60 63 4 Payment Year—must be only a four-digit year 64 66 3 SSA Office Code—must be numeric and may be all zeros 67 67 1 Payment Type Code—must be the capital letter “T” 68 117 50 Filler  The record format is a fixed length of 117. 1040 easy  The file format is ASCII. 1040 easy  Submit only one file at a time. 1040 easy   Table 3. 1040 easy Sample—Paper Listing for Reporting Special Wage Payments to Several Employees Report of Special Wage PaymentsTax Year: Page of A. 1040 easy Employer Name: EIN:   Address: Contact Name:     Phone: ( )   . 1040 easy 1) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 2) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 3) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 4) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other: 5) B. 1040 easy Employee Name: (Last) (First) (MI)   C. 1040 easy SSN: D. 1040 easy SWP:$ E. 1040 easy Type: Other:     INSTRUCTIONS:   Enter tax year and page number. 1040 easy   A. 1040 easy Employer name, employer identification number (EIN), address, the name of a contact person, and a phone number where the contact person can be reached during normal business hours. 1040 easy   B. 1040 easy Employee's name. 1040 easy   C. 1040 easy Employee's social security number (SSN). 1040 easy   D. 1040 easy Total amount of special wage payments made to the employee. 1040 easy   E. 1040 easy Type of special wage payment from the following list: (1) Vacation Pay, (2) Sick Pay, (3) Severance Pay,  (4) Bonus, (5) Deferred Compensation, (6) Stock Options, and (7) Other—Please explain. 1040 easy   Do not use a paper listing for nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in block 11 of Form W-2. 1040 easy (Get Form SSA-131. 1040 easy )                 Prev  Up  Next   Home   More Online 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The 1040 Easy

1040 easy Publication 514 - Main Content Table of Contents Choosing To Take Credit or DeductionChoice Applies to All Qualified Foreign Taxes Making or Changing Your Choice Why Choose the Credit?Credit for Taxes Paid or Accrued Foreign Currency and Exchange Rates Foreign Tax Redetermination Who Can Take the Credit?U. 1040 easy S. 1040 easy Citizens Resident Aliens Nonresident Aliens What Foreign Taxes Qualify for the Credit?Tax Must Be Imposed on You You Must Have Paid or Accrued the Tax Tax Must Be the Legal and Actual Foreign Tax Liability Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) Foreign Taxes for Which You Cannot Take a CreditTaxes on Excluded Income Taxes for Which You Can Only Take an Itemized Deduction Taxes on Foreign Mineral Income Taxes From International Boycott Operations Taxes on Combined Foreign Oil and Gas Income Taxes of U. 1040 easy S. 1040 easy Persons Controlling Foreign Corporations and Partnerships Taxes Related to a Foreign Tax Credit Splitting Event How To Figure the CreditLimit on the Credit Separate Limit Income Allocation of Foreign Taxes Foreign Taxes From a Partnership or an S Corporation Figuring the Limit Qualified Dividends Capital Gains and Losses Allocation of Foreign and U. 1040 easy S. 1040 easy Losses Tax Treaties Carryback and CarryoverTime Limit on Tax Assessment Claim for Refund Taxes All Credited or All Deducted Married Couples How To Claim the CreditForm 1116 Records To Keep Simple Example — Filled-In Form 1116Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Comprehensive Example — Filled-In Form 1116Foreign earned income. 1040 easy Employee business expenses. 1040 easy Forms 1116 Computation of Taxable Income Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Unused Foreign Taxes How To Get Tax HelpLow Income Taxpayer Clinics Choosing To Take Credit or Deduction You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. 1040 easy You can change your choice for each year's taxes. 1040 easy To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. 1040 easy S. 1040 easy tax return. 1040 easy However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. 1040 easy See How To Figure the Credit , later. 1040 easy To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. 1040 easy Figure your tax both ways—claiming the credit and claiming the deduction. 1040 easy Then fill out your return the way that benefits you more. 1040 easy See Why Choose the Credit, later. 1040 easy Choice Applies to All Qualified Foreign Taxes As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes. 1040 easy If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. 1040 easy You cannot deduct any of them. 1040 easy Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. 1040 easy You cannot take a credit for any of them. 1040 easy See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. 1040 easy There are exceptions to this general rule, which are described next. 1040 easy Exceptions for foreign taxes not allowed as a credit. 1040 easy   Even if you claim a credit for other foreign taxes, you can deduct any foreign tax that is not allowed as a credit if: You paid the tax to a country for which a credit is not allowed because it provides support for acts of international terrorism, or because the United States does not have or does not conduct diplomatic relations with it or recognize its government and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act, You paid withholding tax on dividends from foreign corporations whose stock you did not hold for the required period of time, You paid withholding tax on income or gain (other than dividends) from property you did not hold for the required period of time, You paid withholding tax on income or gain to the extent you had to make related payments on positions in substantially similar or related property, You participated in or cooperated with an international boycott, You paid taxes in connection with the purchase or sale of oil or gas, or You paid or accrued taxes on income or gain in connection with a covered asset acquisition. 1040 easy Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. 1040 easy S. 1040 easy tax purposes. 1040 easy For more information, see Internal Revenue Code section 901(m). 1040 easy The IRS intends to issue guidance that will explain this provision in greater detail. 1040 easy   For more information on these items, see Taxes for Which You Can Only Take an Itemized Deduction , later, under Foreign Taxes for Which You Cannot Take a Credit. 1040 easy Foreign taxes that are not income taxes. 1040 easy   In most cases, only foreign income taxes qualify for the foreign tax credit. 1040 easy Other taxes, such as foreign real and personal property taxes, do not qualify. 1040 easy But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. 1040 easy   In most cases, you can deduct these other taxes only if they are expenses incurred in a trade or business or in the production of income. 1040 easy However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). 1040 easy Carrybacks and carryovers. 1040 easy   There is a limit on the credit you can claim in a tax year. 1040 easy If your qualified foreign taxes exceed the credit limit, you may be able to carry over or carry back the excess to another tax year. 1040 easy If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. 1040 easy That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. 1040 easy   For more information on the limit, see How To Figure the Credit , later. 1040 easy For more information on carrybacks and carryovers, see Carryback and Carryover , later. 1040 easy Making or Changing Your Choice You can make or change your choice to claim a deduction or credit at any time during the period within 10 years from the regular due date for filing the return (without regard to any extension of time to file) for the tax year in which the taxes were actually paid or accrued. 1040 easy You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. 1040 easy Example. 1040 easy You paid foreign taxes for the last 13 years and chose to deduct them on your U. 1040 easy S. 1040 easy income tax returns. 1040 easy You were timely in both filing your returns and paying your U. 1040 easy S. 1040 easy tax liability. 1040 easy In February 2013, you file an amended return for tax year 2002 choosing to take a credit for your 2002 foreign taxes because you now realize that the credit is more advantageous than the deduction for that year. 1040 easy Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). 1040 easy Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. 1040 easy Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. 1040 easy If you are unable to claim all of them in those 2 years, you carry them forward to the 10 years following the year in which they arose. 1040 easy Because you originally chose to deduct your foreign taxes and the 10-year period for changing the choice for 2000 and 2001 has passed, you cannot change your choice and carry the unused 2002 foreign taxes back to tax years 2000 and 2001. 1040 easy Because the 10-year periods for changing the choice have not passed for your 2003 through 2012 income tax returns, you can still choose to claim the credit for those years and carry forward any unused 2002 foreign taxes. 1040 easy However, you must reduce the unused 2002 foreign taxes that you carry forward by the amount that would have been allowed as a carryback if you had timely carried back the foreign tax to tax years 2000 and 2001. 1040 easy You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. 1040 easy See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. 1040 easy Why Choose the Credit? The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. 1040 easy In most cases, if the foreign tax rate is higher than the U. 1040 easy S. 1040 easy rate, there will be no U. 1040 easy S. 1040 easy tax on the foreign income. 1040 easy If the foreign tax rate is lower than the U. 1040 easy S. 1040 easy rate, U. 1040 easy S. 1040 easy tax on the foreign income will be limited to the difference between the rates. 1040 easy The foreign tax credit can only reduce U. 1040 easy S. 1040 easy taxes on foreign source income; it cannot reduce U. 1040 easy S. 1040 easy taxes on U. 1040 easy S. 1040 easy source income. 1040 easy Although no one rule covers all situations, in most cases it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. 1040 easy This is because: A credit reduces your actual U. 1040 easy S. 1040 easy income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax, You can choose to take the foreign tax credit even if you do not itemize your deductions. 1040 easy You then are allowed the standard deduction in addition to the credit, and If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year. 1040 easy (See Limit on credit under How To Figure the Credit, later. 1040 easy ) Example 1. 1040 easy For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. 1040 easy None of the dividends are qualified dividends. 1040 easy You file a joint return and can claim two $3,900 exemptions. 1040 easy You had to pay $2,000 in foreign income taxes on the dividend income. 1040 easy If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. 1040 easy Your taxable income then is $57,500 and your tax is $7,736. 1040 easy If you take the credit instead, your itemized deductions are only $13,000. 1040 easy Your taxable income then is $59,500 and your tax before the credit is $8,036. 1040 easy After the credit, however, your tax is only $6,036. 1040 easy Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. 1040 easy Example 2. 1040 easy In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. 1040 easy You report on your U. 1040 easy S. 1040 easy return this income as well as $56,000 of U. 1040 easy S. 1040 easy source wages and an allowable $49,000 partnership loss from a U. 1040 easy S. 1040 easy partnership. 1040 easy Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. 1040 easy You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. 1040 easy If you deduct the foreign tax on your U. 1040 easy S. 1040 easy return, your taxable income is a negative $250 ($5,000 + $56,000 − $49,000 − $1,500 − $6,850 − $3,900) and your tax is $0. 1040 easy If you take the credit instead, your taxable income is $1,250 ($5,000 + $56,000 − $49,000 − $3,900 − $6,850) and your tax before the credit is $126. 1040 easy You can take a credit of only $113 because of limits discussed later. 1040 easy Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. 1040 easy If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). 1040 easy When deciding whether to take the credit or the deduction this year, you will need to consider whether you can benefit from a carryback or carryover of that unused foreign tax. 1040 easy Credit for Taxes Paid or Accrued You can claim the credit for a qualified foreign tax in the tax year in which you pay it or accrue it, depending on your method of accounting. 1040 easy “Tax year” refers to the tax year for which your U. 1040 easy S. 1040 easy return is filed, not the tax year for which your foreign return is filed. 1040 easy Accrual method of accounting. 1040 easy   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. 1040 easy You are using an accrual method of accounting if you report income when you earn it, rather than when you receive it, and you deduct your expenses when you incur them, rather than when you pay them. 1040 easy   In most cases, foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it. 1040 easy Generally, this occurs on the last day of the tax year for which your foreign return is filed. 1040 easy Contesting your foreign tax liability. 1040 easy   If you are contesting your foreign tax liability, you cannot accrue it and take a credit until the amount of foreign tax due is finally determined. 1040 easy However, if you choose to pay the tax liability you are contesting, you can take a credit for the amount you pay before a final determination of foreign tax liability is made. 1040 easy Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. 1040 easy If the amount of foreign taxes taken as a credit differs from the final foreign tax liability, you may have to adjust the credit, as discussed later under Foreign Tax Redetermination . 1040 easy You may have to post a bond. 1040 easy   If you claim a credit for taxes accrued but not paid, you may have to post an income tax bond to guarantee your payment of any tax due in the event the amount of foreign tax paid differs from the amount claimed. 1040 easy   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. 1040 easy Cash method of accounting. 1040 easy   If you use the cash method of accounting, you can choose to take the credit either in the year you pay the tax or in the year you accrue it. 1040 easy You are using the cash method of accounting if you report income in the year you actually or constructively receive it, and deduct expenses in the year you pay them. 1040 easy Choosing to take credit in the year taxes accrue. 1040 easy   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. 1040 easy You make the choice by checking the box in Part II of Form 1116. 1040 easy Once you make that choice, you must follow it in all later years and take a credit for foreign taxes in the year they accrue. 1040 easy   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. 1040 easy You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. 1040 easy   If you make the choice to take the credit when foreign taxes accrue and pay them in a later year, you cannot claim a deduction for any part of the previously accrued taxes. 1040 easy Credit based on taxes paid in earlier year. 1040 easy   If, in earlier years, you took the credit based on taxes paid, and this year you choose to take the credit based on taxes accrued, you may be able to take the credit this year for taxes from more than one year. 1040 easy Example. 1040 easy Last year you took the credit based on taxes paid. 1040 easy This year you chose to take the credit based on taxes accrued. 1040 easy During the year you paid foreign income taxes owed for last year. 1040 easy You also accrued foreign income taxes for this year that you did not pay by the end of the year. 1040 easy You can base the credit on your return for this year on both last year's taxes that you paid and this year's taxes that you accrued. 1040 easy Foreign Currency and Exchange Rates U. 1040 easy S. 1040 easy income tax is imposed on income expressed in U. 1040 easy S. 1040 easy dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. 1040 easy Therefore, fluctuations in the value of the foreign currency relative to the U. 1040 easy S. 1040 easy dollar may affect the foreign tax credit. 1040 easy Translating foreign currency into U. 1040 easy S. 1040 easy dollars. 1040 easy   If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U. 1040 easy S. 1040 easy dollars. 1040 easy How and when you do this depends on your functional currency. 1040 easy In most cases, your functional currency is the U. 1040 easy S. 1040 easy dollar unless you are required to use the currency of a foreign country. 1040 easy   You must make all federal income tax determinations in your functional currency. 1040 easy The U. 1040 easy S. 1040 easy dollar is the functional currency for all taxpayers except some qualified business units. 1040 easy A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. 1040 easy Unless you are self-employed, your functional currency is the U. 1040 easy S. 1040 easy dollar. 1040 easy   Even if you are self-employed and have a qualified business unit, your functional currency is the U. 1040 easy S. 1040 easy dollar if any of the following apply. 1040 easy You conduct the business primarily in dollars. 1040 easy The principal place of business is located in the United States. 1040 easy You choose to or are required to use the dollar as your functional currency. 1040 easy The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted. 1040 easy   If your functional currency is the U. 1040 easy S. 1040 easy dollar, you must immediately translate into dollars all items of income, expense, etc. 1040 easy , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. 1040 easy If there is more than one exchange rate, use the one that most properly reflects your income. 1040 easy In most cases, you can get exchange rates from banks and U. 1040 easy S. 1040 easy Embassies. 1040 easy   If your functional currency is not the U. 1040 easy S. 1040 easy dollar, make all income tax determinations in your functional currency. 1040 easy At the end of the year, translate the results, such as income or loss, into U. 1040 easy S. 1040 easy dollars to report on your income tax return. 1040 easy    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. 1040 easy   Use the rate of exchange in effect on the date you paid the foreign taxes to the foreign country unless you meet the exception discussed next. 1040 easy If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. 1040 easy If you make foreign estimated tax payments, you use the rate of exchange in effect for the date on which you made the estimated tax payment. 1040 easy   The exchange rate rules discussed here apply even if the foreign taxes are paid or accrued with respect to a foreign tax credit splitting event (discussed later). 1040 easy Exception. 1040 easy   If you claim the credit for foreign taxes on an accrual basis, in most cases you must use the average exchange rate for the tax year to which the taxes relate. 1040 easy This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. 1040 easy The foreign taxes are paid on or after the first day of the tax year to which they relate. 1040 easy The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. 1040 easy The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). 1040 easy (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. 1040 easy )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. 1040 easy Election to use exchange rate on date paid. 1040 easy   If you have accrued foreign taxes that you are otherwise required to convert using the average exchange rate, you may elect to use the exchange rate in effect on the date the foreign taxes are paid if the taxes are denominated in a nonfunctional foreign currency. 1040 easy If any of the accrued taxes are unpaid, you must translate them into U. 1040 easy S. 1040 easy dollars using the exchange rate on the last day of the U. 1040 easy S. 1040 easy tax year to which those taxes relate. 1040 easy You may make the election for all nonfunctional currency foreign income taxes or only those nonfunctional currency foreign income taxes that are attributable to qualified business units with a U. 1040 easy S. 1040 easy dollar functional currency. 1040 easy Once made, the election applies to the tax year for which made and all subsequent tax years unless revoked with the consent of the IRS. 1040 easy The election is available for tax years beginning after 2004. 1040 easy It must be made by the due date (including extensions) for filing the tax return for the first tax year to which the election applies. 1040 easy Make the election by attaching a statement to the applicable tax return. 1040 easy The statement must identify whether the election is made for all foreign taxes or only for foreign taxes attributable to qualified business units with a U. 1040 easy S. 1040 easy dollar functional currency. 1040 easy Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. 1040 easy S. 1040 easy foreign tax credit claimed. 1040 easy The year in which to claim the credit remains the year to which the foreign taxes paid or accrued relate, even if the change in foreign tax liability occurs in a later year. 1040 easy If a foreign tax redetermination occurs, a redetermination of your U. 1040 easy S. 1040 easy tax liability is required if any of the following conditions apply. 1040 easy The accrued taxes when paid differ from the amounts claimed as a credit. 1040 easy The accrued taxes you claimed as a credit in one tax year are not paid within 2 years after the end of that tax year. 1040 easy If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. 1040 easy You will not be allowed a credit for the unpaid taxes until you pay them. 1040 easy When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. 1040 easy S. 1040 easy dollars using the exchange rate as of the date they were paid. 1040 easy The foreign tax credit is allowed for the year to which the foreign tax relates. 1040 easy See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. 1040 easy The foreign taxes you paid are refunded in whole or in part. 1040 easy For taxes taken into account when accrued but translated into dollars on the date of payment, the dollar value of the accrued tax differs from the dollar value of the tax paid because of fluctuations in the exchange rate between the date of accrual and the date of payment. 1040 easy However, no redetermination is required if the change in foreign tax liability for each foreign country is solely attributable to exchange rate fluctuations and is less than the smaller of: $10,000, or 2% of the total dollar amount of the foreign tax initially accrued for that foreign country for the U. 1040 easy S. 1040 easy tax year. 1040 easy In this case, you must adjust your U. 1040 easy S. 1040 easy tax in the tax year in which the accrued foreign taxes are paid. 1040 easy Notice to the Internal Revenue Service (IRS) of Redetermination You are required to notify the IRS about a foreign tax credit redetermination that affects your U. 1040 easy S. 1040 easy tax liability for each tax year affected by the redetermination. 1040 easy In most cases, you must file Form 1040X, Amended U. 1040 easy S. 1040 easy Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. 1040 easy S. 1040 easy tax liability for the year or years affected. 1040 easy See Contents of statement , later. 1040 easy You are not required to attach Form 1116 for a tax year affected by a redetermination if: The amount of your creditable taxes paid or accrued during the tax year is not more than $300 ($600 if married filing a joint return) as a result of the foreign tax redetermination, and You meet the requirements listed under Exemption from foreign tax credit limit under How To Figure the Credit, later. 1040 easy There are other exceptions to this requirement. 1040 easy They are discussed later under Due date of notification to IRS . 1040 easy Contents of statement. 1040 easy   The statement must include all of the following. 1040 easy Your name, address, and taxpayer identification number. 1040 easy The tax year or years that are affected by the foreign tax redetermination. 1040 easy The date or dates the foreign taxes were accrued, if applicable. 1040 easy The date or dates the foreign taxes were paid. 1040 easy The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. 1040 easy Information sufficient to determine any interest due from or owing to you, including the amount of any interest paid to you by the foreign government and the dates received. 1040 easy   In the case of any foreign taxes that were not paid before the date two years after the close of the tax year to which those taxes relate, you must provide the amount of those taxes in foreign currency and the exchange rate that was used to translate that amount when originally claimed as a credit. 1040 easy   If any foreign tax was refunded in whole or in part, you must provide the date and amount (in foreign currency) of each refund, the exchange rate that was used to translate each amount when originally claimed as a credit, and the exchange rate for the date the refund was received (for purposes of computing foreign currency gain or loss under Internal Revenue Code section 988). 1040 easy Due date of notification to IRS. 1040 easy   If you pay less foreign tax than you originally claimed a credit for, in most cases you must file a notification by the due date (with extensions) of your original return for your tax year in which the foreign tax redetermination occurred. 1040 easy There is no limit on the time the IRS has to redetermine and assess the correct U. 1040 easy S. 1040 easy tax due. 1040 easy If you pay more foreign tax than you originally claimed a credit for, you have 10 years to file a claim for refund of U. 1040 easy S. 1040 easy taxes. 1040 easy See Time Limit on Refund Claims , later. 1040 easy   Exceptions to this due date are explained in the next two paragraphs. 1040 easy Multiple redeterminations of U. 1040 easy S. 1040 easy tax liability for same tax year. 1040 easy   Where more than one foreign tax redetermination requires a redetermination of U. 1040 easy S. 1040 easy tax liability for the same tax year and those redeterminations occur in the same tax year or within two consecutive tax years, you can file for that tax year one notification (Form 1040X with a Form 1116 and the required statement) that reflects all those tax redeterminations. 1040 easy If you choose to file one notification, the due date for that notification is the due date of the original return (with extensions) for the year in which the first foreign tax redetermination that reduced your foreign tax liability occurred. 1040 easy However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. 1040 easy S. 1040 easy tax liability is required may occur after the due date for providing that notification. 1040 easy In this situation, you may have to file more than one Form 1040X for that tax year. 1040 easy Additional U. 1040 easy S. 1040 easy tax due eliminated by foreign tax credit carryback or carryover. 1040 easy   If a foreign tax redetermination requires a redetermination of U. 1040 easy S. 1040 easy tax liability that would otherwise result in an additional amount of U. 1040 easy S. 1040 easy tax due, but the additional tax is eliminated by a carryback or carryover of an unused foreign tax, you do not have to amend your tax return for the year affected by the redetermination. 1040 easy Instead, you can notify the IRS by attaching a statement to the original return for the tax year in which the foreign tax redetermination occurred. 1040 easy You must file the statement by the due date (with extensions) of that return. 1040 easy The statement must show the amount of the unused foreign taxes paid or accrued and a detailed schedule showing the computation of the carryback or carryover (including the amounts carried back or over to the year for which a redetermination on U. 1040 easy S. 1040 easy tax liability is required). 1040 easy Failure-to-notify penalty. 1040 easy   If you fail to notify the IRS of a foreign tax redetermination and cannot show reasonable cause for the failure, you may have to pay a penalty. 1040 easy   For each month, or part of a month, that the failure continues, you pay a penalty of 5% of the tax due resulting from a redetermination of your U. 1040 easy S. 1040 easy tax. 1040 easy This penalty cannot be more than 25% of the tax due. 1040 easy Foreign tax refund. 1040 easy   If you receive a foreign tax refund without interest from the foreign government, you will not have to pay interest on the amount of tax due resulting from the adjustment to your U. 1040 easy S. 1040 easy tax for the time before the date of the refund. 1040 easy   However, if you receive a foreign tax refund with interest, you must pay interest to the IRS up to the amount of the interest paid to you by the foreign government. 1040 easy The interest you must pay cannot be more than the interest you would have had to pay on taxes that were unpaid for any other reason for the same period. 1040 easy Interest also is owed from the time you receive a refund until you pay the additional tax due. 1040 easy Foreign tax imposed on foreign refund. 1040 easy   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. 1040 easy However, when you refigure the foreign tax credit taken for the original foreign tax, reduce the amount of the refund by the foreign tax paid on the refund. 1040 easy Example. 1040 easy You paid a foreign income tax of $3,000 in 2011, and received a foreign tax refund of $500 in 2013 on which a foreign tax of $100 was imposed. 1040 easy When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. 1040 easy Time Limit on Refund Claims You have 10 years to file a claim for refund of U. 1040 easy S. 1040 easy tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. 1040 easy The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the taxes were actually paid or accrued. 1040 easy You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. 1040 easy The 10-year period applies to claims for refund or credit based on: Fixing math errors in figuring qualified foreign taxes, Reporting qualified foreign taxes not originally reported on the return, or Any other change in the size of the credit (including one caused by correcting the foreign tax credit limit). 1040 easy The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. 1040 easy See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. 1040 easy Who Can Take the Credit? U. 1040 easy S. 1040 easy citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. 1040 easy S. 1040 easy tax on foreign source income may be able to take a foreign tax credit. 1040 easy U. 1040 easy S. 1040 easy Citizens If you are a U. 1040 easy S. 1040 easy citizen, you are taxed by the United States on your worldwide income wherever you live. 1040 easy You are normally entitled to take a credit for foreign taxes you pay or accrue. 1040 easy Resident Aliens If you are a resident alien of the United States, you can take a credit for foreign taxes subject to the same general rules as U. 1040 easy S. 1040 easy citizens. 1040 easy If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. 1040 easy Usually, you can take a credit only for those foreign taxes imposed on income you actually or constructively received while you had resident alien status. 1040 easy For information on alien status, see Publication 519. 1040 easy Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. 1040 easy However, you may be able to take the credit if: You were a bona fide resident of Puerto Rico during your entire tax year, or You pay or accrue tax to a foreign country or U. 1040 easy S. 1040 easy possession on income from foreign sources that is effectively connected with a trade or business in the United States. 1040 easy But if you must pay tax to a foreign country or U. 1040 easy S. 1040 easy possession on income from U. 1040 easy S. 1040 easy sources only because you are a citizen or a resident of that country or U. 1040 easy S. 1040 easy possession, do not use that tax in figuring the amount of your credit. 1040 easy For information on alien status and effectively connected income, see Publication 519. 1040 easy What Foreign Taxes Qualify for the Credit? In most cases, the following four tests must be met for any foreign tax to qualify for the credit. 1040 easy The tax must be imposed on you. 1040 easy You must have paid or accrued the tax. 1040 easy The tax must be the legal and actual foreign tax liability. 1040 easy The tax must be an income tax (or a tax in lieu of an income tax). 1040 easy Certain foreign taxes do not qualify for the credit even if the four tests are met. 1040 easy See Foreign Taxes for Which You Cannot Take a Credit, later. 1040 easy Tax Must Be Imposed on You You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U. 1040 easy S. 1040 easy possession. 1040 easy For example, a tax that is deducted from your wages is considered to be imposed on you. 1040 easy You cannot shift the right to claim the credit by contract or other means. 1040 easy Foreign country. 1040 easy   A foreign country includes any foreign state and its political subdivisions. 1040 easy Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. 1040 easy U. 1040 easy S. 1040 easy possessions. 1040 easy   For foreign tax credit purposes, all qualified taxes paid to U. 1040 easy S. 1040 easy possessions are considered foreign taxes. 1040 easy For this purpose, U. 1040 easy S. 1040 easy possessions include Puerto Rico and American Samoa. 1040 easy   When the term “foreign country” is used in this publication, it includes U. 1040 easy S. 1040 easy possessions unless otherwise stated. 1040 easy You Must Have Paid or Accrued the Tax In most cases, you can claim the credit only if you paid or accrued the foreign tax to a foreign country or U. 1040 easy S. 1040 easy possession. 1040 easy However, the paragraphs that follow describe some instances in which you can claim the credit even if you did not directly pay or accrue the tax yourself. 1040 easy Joint return. 1040 easy   If you file a joint return, you can claim the credit based on the total foreign income taxes paid or accrued by you and your spouse. 1040 easy Combined income. 1040 easy   If foreign tax is imposed on the combined income of two or more persons (for example, spouses), the tax is allocated among, and considered paid by, these persons on a pro rata basis in proportion to each person's portion of the combined income, as determined under foreign law and Regulations section 1. 1040 easy 901-2(f)(3)(iii). 1040 easy Combined income with respect to each foreign tax that is imposed on a combined basis (and combined income subject to tax exemption or preferential tax rates) is computed separately, and the tax on that combined income is allocated separately. 1040 easy   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. 1040 easy However, you can choose to apply the new rules to foreign taxes paid or accrued in tax years beginning after December 31, 2010, and before February 15, 2012. 1040 easy For more details, see paragraphs (f) and (h) of Regulations section 1. 1040 easy 901-2. 1040 easy For similar rules applicable to prior tax years, see Regulations section 1. 1040 easy 901-2 (revised as of April 1, 2011). 1040 easy Example. 1040 easy You and your spouse reside in Country X, which imposes income tax on your combined incomes. 1040 easy Both of you use the “u” as your functional currency. 1040 easy Country X apportions tax based on income. 1040 easy You had income of 30,000u and your spouse had income of 20,000u. 1040 easy Your filing status on your U. 1040 easy S. 1040 easy income tax return is married filing separately. 1040 easy You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. 1040 easy S income tax return. 1040 easy Your spouse can claim only 40% (20,000u/50,000u). 1040 easy Partner or S corporation shareholder. 1040 easy   If you are a member of a partnership, or a shareholder in an S corporation, you can claim the credit based on your proportionate share of the foreign income taxes paid or accrued by the partnership or the S corporation. 1040 easy These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. 1040 easy However, if you are a shareholder in an S corporation that in turn owns stock in a foreign corporation, you cannot claim a credit for your share of foreign taxes paid by the foreign corporation. 1040 easy Beneficiary. 1040 easy   If you are a beneficiary of an estate or trust, you may be able to claim the credit based on your proportionate share of foreign income taxes paid or accrued by the estate or trust. 1040 easy This amount will be shown on the Schedule K-1 you receive from the estate or trust. 1040 easy However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. 1040 easy Mutual fund shareholder. 1040 easy   If you are a shareholder of a mutual fund or other regulated investment company (RIC), you may be able to claim the credit based on your share of foreign income taxes paid by the fund if it chooses to pass the credit on to its shareholders. 1040 easy You should receive from the mutual fund or other RIC a Form 1099-DIV, or similar statement, showing your share of the foreign income, and your share of the foreign taxes paid. 1040 easy If you do not receive this information, you will need to contact the fund. 1040 easy Controlled foreign corporation shareholder. 1040 easy   If you are a shareholder of a controlled foreign corporation and choose to be taxed at corporate rates on the amount you must include in gross income from that corporation, you can claim the credit based on your share of foreign taxes paid or accrued by the controlled foreign corporation. 1040 easy If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. 1040 easy Controlled foreign corporation. 1040 easy   A controlled foreign corporation is a foreign corporation in which U. 1040 easy S. 1040 easy shareholders own more than 50% of the voting power or value of the stock. 1040 easy You are considered a U. 1040 easy S. 1040 easy shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. 1040 easy See Internal Revenue Code sections 951(b) and 958(b) for more information. 1040 easy Tax Must Be the Legal and Actual Foreign Tax Liability The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. 1040 easy Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. 1040 easy Foreign tax refund. 1040 easy   You cannot take a foreign tax credit for income taxes paid to a foreign country if it is reasonably certain the amount would be refunded, credited, rebated, abated, or forgiven if you made a claim. 1040 easy   For example, the United States has tax treaties with many countries allowing U. 1040 easy S. 1040 easy citizens and residents reductions in the rates of tax of those foreign countries. 1040 easy However, some treaty countries require U. 1040 easy S. 1040 easy citizens and residents to pay the tax figured without regard to the lower treaty rates and then claim a refund for the amount by which the tax actually paid is more than the amount of tax figured using the lower treaty rate. 1040 easy The qualified foreign tax is the amount figured using the lower treaty rate and not the amount actually paid, because the excess tax is refundable. 1040 easy Subsidy received. 1040 easy   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. 1040 easy This rule applies even if the subsidy is given to a person related to you, or persons who participated with you in a transaction or a related transaction. 1040 easy A subsidy can be provided by any means but must be determined, directly or indirectly, in relation to the amount of tax, or to the base used to figure the tax. 1040 easy   The term “subsidy” includes any type of benefit. 1040 easy Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 1040 easy Shareholder receiving refund for corporate tax in integrated system. 1040 easy   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. 1040 easy You may be able to claim a refund of these taxes from the foreign government. 1040 easy You must include the refund (including any amount withheld) in your income in the year received. 1040 easy Any tax withheld from the refund is a qualified foreign tax. 1040 easy Example. 1040 easy You are a shareholder of a French corporation. 1040 easy You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. 1040 easy The French government imposes a 15% withholding tax ($15) on the refund you received. 1040 easy You receive a check for $85. 1040 easy You include $100 in your income. 1040 easy The $15 of tax withheld is a qualified foreign tax. 1040 easy Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) In most cases, only income, war profits, and excess profits taxes (income taxes) qualify for the foreign tax credit. 1040 easy Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. 1040 easy Furthermore, foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax. 1040 easy See Taxes in Lieu of Income Taxes , later. 1040 easy Income Tax Simply because the levy is called an income tax by the foreign taxing authority does not make it an income tax for this purpose. 1040 easy A foreign levy is an income tax only if it meets both of the following requirements. 1040 easy It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. 1040 easy The predominant character of the tax is that of an income tax in the U. 1040 easy S. 1040 easy sense. 1040 easy A foreign levy may meet these requirements even if the foreign tax law differs from U. 1040 easy S. 1040 easy tax law. 1040 easy The foreign law may include in income items that U. 1040 easy S. 1040 easy law does not include, or it may allow certain exclusions or deductions that U. 1040 easy S. 1040 easy law does not allow. 1040 easy Specific economic benefit. 1040 easy   In most cases, you get a specific economic benefit if you receive, or are considered to receive, an economic benefit from the foreign country imposing the levy, and: If there is a generally imposed income tax, the economic benefit is not available on substantially the same terms to all persons subject to the income tax, or If there is no generally imposed income tax, the economic benefit is not available on substantially the same terms to the population of the foreign country in general. 1040 easy   You are considered to receive a specific economic benefit if you have a business transaction with a person who receives a specific economic benefit from the foreign country and, under the terms and conditions of the transaction, you receive directly or indirectly all or part of the benefit. 1040 easy   However, see the exception discussed later under Pension, unemployment, and disability fund payments . 1040 easy Economic benefits. 1040 easy   Economic benefits include the following. 1040 easy Goods. 1040 easy Services. 1040 easy Fees or other payments. 1040 easy Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. 1040 easy Discharges of contractual obligations. 1040 easy   In most cases, the right or privilege merely to engage in business is not an economic benefit. 1040 easy Dual-capacity taxpayers. 1040 easy   If you are subject to a foreign country's levy and you also receive a specific economic benefit from that foreign country, you are a “dual-capacity taxpayer. 1040 easy ” As a dual-capacity taxpayer, you cannot claim a credit for any part of the foreign levy, unless you establish that the amount paid under a distinct element of the foreign levy is a tax, rather than a compulsory payment for a direct or indirect specific economic benefit. 1040 easy    For more information on how to establish amounts paid under separate elements of a levy, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Pension, unemployment, and disability fund payments. 1040 easy   A foreign tax imposed on an individual to pay for retirement, old-age, death, survivor, unemployment, illness, or disability benefits, or for substantially similar purposes, is not payment for a specific economic benefit if the amount of the tax does not depend on the age, life expectancy, or similar characteristics of that individual. 1040 easy    No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. 1040 easy For more information about these agreements, see Publication 54. 1040 easy Soak-up taxes. 1040 easy   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. 1040 easy A tax is a soak-up tax to the extent that liability for it depends on the availability of a credit for it against income tax imposed by another country. 1040 easy This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. 1040 easy Penalties and interest. 1040 easy   Amounts paid to a foreign government to satisfy a liability for interest, fines, penalties, or any similar obligation are not taxes and do not qualify for the credit. 1040 easy Taxes not based on income. 1040 easy   Foreign taxes based on gross receipts or the number of units produced, rather than on realized net income, do not qualify unless they are imposed in lieu of an income tax, as discussed next. 1040 easy Taxes based on assets, such as property taxes, do not qualify for the credit. 1040 easy Taxes in Lieu of Income Taxes A tax paid or accrued to a foreign country qualifies for the credit if it is imposed in lieu of an income tax otherwise generally imposed. 1040 easy A foreign levy is a tax in lieu of an income tax only if: It is not payment for a specific economic benefit as discussed earlier, and The tax is imposed in place of, and not in addition to, an income tax otherwise generally imposed. 1040 easy A tax in lieu of an income tax does not have to be based on realized net income. 1040 easy A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. 1040 easy In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. 1040 easy However, if the foreign country imposes a soak-up tax in lieu of an income tax, the amount that does not qualify for foreign tax credit is the lesser of the following amounts. 1040 easy The soak-up tax. 1040 easy The foreign tax you paid that is more than the amount you would have paid if you had been subject to the generally imposed income tax. 1040 easy Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. 1040 easy These are: Taxes on excluded income, Taxes for which you can only take an itemized deduction, Taxes on foreign mineral income, Taxes from international boycott operations, A portion of taxes on combined foreign oil and gas income, Taxes of U. 1040 easy S. 1040 easy persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. 1040 easy Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. 1040 easy S. 1040 easy gross income. 1040 easy Foreign Earned Income and Housing Exclusions You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U. 1040 easy S. 1040 easy income under the foreign earned income exclusion or the foreign housing exclusion. 1040 easy See Publication 54 for more information on the foreign earned income and housing exclusions. 1040 easy Wages completely excluded. 1040 easy   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. 1040 easy Wages partly excluded. 1040 easy   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. 1040 easy You find the amount allocable to your excluded wages by multiplying the foreign tax paid or accrued on foreign earned income received or accrued during the tax year by a fraction. 1040 easy   The numerator of the fraction is your foreign earned income and housing amounts excluded under the foreign earned income and housing exclusions for the tax year minus otherwise deductible expenses definitely related and properly apportioned to that income. 1040 easy Deductible expenses do not include the foreign housing deduction. 1040 easy   The denominator is your total foreign earned income received or accrued during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 1040 easy If the foreign law taxes foreign earned income and some other income (for example, earned income from U. 1040 easy S. 1040 easy sources or a type of income not subject to U. 1040 easy S. 1040 easy tax), and the taxes on the other income cannot be segregated, the denominator of the fraction is the total amount of income subject to the foreign tax minus deductible expenses allocable to that income. 1040 easy Example. 1040 easy You are a U. 1040 easy S. 1040 easy citizen and a cash basis taxpayer, employed by Company X and living in Country A. 1040 easy Your records show the following: Foreign earned income received $125,000 Unreimbursed business travel expenses 20,000 Income tax paid to Country A 30,000 Exclusion of foreign earned  income and housing allowance 97,600     Because you can exclude part of your wages, you cannot claim a credit for part of the foreign taxes. 1040 easy To find that part, do the following. 1040 easy First, find the amount of business expenses allocable to excluded wages and therefore not deductible. 1040 easy To do this, multiply the otherwise deductible expenses by a fraction. 1040 easy That fraction is the excluded wages over your foreign earned income. 1040 easy   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. 1040 easy To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). 1040 easy The result is $81,984. 1040 easy Then, find the denominator of the fraction by subtracting all your deductible expenses from all your foreign earned income ($125,000 − $20,000 = $105,000). 1040 easy Finally, multiply the foreign tax you paid by the resulting fraction. 1040 easy   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. 1040 easy Taxes on Income From Puerto Rico Exempt From U. 1040 easy S. 1040 easy Tax If you have income from Puerto Rican sources that is not taxable, you must reduce your foreign taxes paid or accrued by the taxes allocable to the exempt income. 1040 easy For information on figuring the reduction, see Publication 570. 1040 easy Possession Exclusion If you are a bona fide resident of American Samoa and exclude income from sources in American Samoa, you cannot take a credit for the taxes you pay or accrue on the excluded income. 1040 easy For more information on this exclusion, see Publication 570. 1040 easy Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. 1040 easy However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. 1040 easy Taxes for Which You Can Only Take an Itemized Deduction You cannot claim a foreign tax credit for foreign income taxes paid or accrued under the following circumstances. 1040 easy However, you can claim an itemized deduction for these taxes. 1040 easy See Choosing To Take Credit or Deduction , earlier. 1040 easy Taxes Imposed By Sanctioned Countries (Section 901(j) Income) You cannot claim a foreign tax credit for income taxes paid or accrued to any country if the income giving rise to the tax is for a period (the sanction period) during which: The Secretary of State has designated the country as one that repeatedly provides support for acts of international terrorism, The United States has severed or does not conduct diplomatic relations with the country, or The United States does not recognize the country's government, and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act. 1040 easy The following countries meet this description for 2013. 1040 easy Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. 1040 easy Cuba. 1040 easy Iran. 1040 easy Libya (but see Note later). 1040 easy North Korea. 1040 easy Sudan. 1040 easy Syria. 1040 easy Waiver of denial of the credit. 1040 easy   A waiver can be granted to a sanctioned country if the President of the United States determines that granting the waiver is in the national interest of the United States and will expand trade and investment opportunities for U. 1040 easy S. 1040 easy companies in the sanctioned country. 1040 easy The President must report to Congress his intentions to grant the waiver and his reasons for granting the waiver not less than 30 days before the date on which the waiver is granted. 1040 easy Note. 1040 easy Effective December 10, 2004, the President granted a waiver to Libya. 1040 easy Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. 1040 easy Limit on credit. 1040 easy   In figuring the foreign tax credit limit, discussed later, income from a sanctioned country is a separate category of foreign income unless a Presidential waiver is granted. 1040 easy You must fill out a separate Form 1116 for this income. 1040 easy This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. 1040 easy Example. 1040 easy You lived and worked in Iran until August, when you were transferred to Italy. 1040 easy You paid taxes to each country on the income earned in that country. 1040 easy You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. 1040 easy Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. 1040 easy You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. 1040 easy Figuring the credit when a sanction ends. 1040 easy    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. 1040 easy For any of these countries, you can claim a foreign tax credit for the taxes paid or accrued to that country on the income for the period that begins after the end of the sanction period or the date the Presidential waiver was granted. 1040 easy Example. 1040 easy The sanctions against Country X ended on July 31. 1040 easy On August 19, you receive a distribution from a mutual fund of Country X income. 1040 easy The fund paid Country X income tax for you on the distribution. 1040 easy Because the distribution was made after the sanction ended, you may include the foreign tax paid on the distribution to compute your foreign tax credit. 1040 easy Amounts for the nonsanctioned period. 1040 easy   If a sanction period ends (or a Presidential waiver is granted) during your tax year and you are not able to determine the actual income and taxes for that period, you can allocate amounts to that period based on the number of days in the period that fall in your tax year. 1040 easy Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. 1040 easy   Number of nonsanctioned days in year  Number of days in year Example. 1040 easy You are a calendar year filer and received $20,000 of income from Country X in 2013 on which you paid tax of $4,500. 1040 easy Sanctions against Country X ended on July 11, 2013. 1040 easy You are unable to determine how much of the income or tax is for the nonsanctioned period. 1040 easy Because your tax year starts on January 1, and the Country X sanction ended on July 11, 2013, 173 days of your tax year are in the nonsanctioned period. 1040 easy You would compute the income for the nonsanctioned period as follows. 1040 easy 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. 1040 easy 173 365 × $4,500 = $2,133 To figure your foreign tax credit, you would use $9,479 as the income from Country X and $2,133 as the tax. 1040 easy Further information. 1040 easy   The rules for figuring the foreign tax credit after a country's sanction period ends are more fully explained in Revenue Ruling 92-62, Cumulative Bulletin 1992-2, page 193. 1040 easy This Cumulative Bulletin can be found in many libraries and IRS offices. 1040 easy Table 1. 1040 easy Countries Removed From the Sanction List or Granted Presidential Waiver   Sanction Period Country Starting Date Ending Date Iraq February 1, 1991 June 27, 2004 Libya January 1, 1987 December 9, 2004* *Presidential waiver granted for qualified income taxes arising after December 9, 2004. 1040 easy Taxes Imposed on Certain Dividends You cannot claim a foreign tax credit for withholding tax (defined later ) on dividends paid or accrued if either of the following applies to the dividends. 1040 easy The dividends are on stock you held for less than 16 days during the 31-day period that begins 15 days before the ex-dividend date (defined later). 1040 easy The dividends are for a period or periods totaling more than 366 days on preferred stock you held for less than 46 days during the 91-day period that begins 45 days before the ex-dividend date. 1040 easy If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. 1040 easy When figuring how long you held the stock, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. 1040 easy Regardless of how long you held the stock, you cannot claim the credit to the extent you have an obligation under a short sale or otherwise to make payments related to the dividend for positions in substantially similar or related property. 1040 easy Withholding tax. 1040 easy   For this purpose, withholding tax includes any tax determined on a gross basis. 1040 easy It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 1040 easy Ex-dividend date. 1040 easy   The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. 1040 easy Example 1. 1040 easy You bought common stock from a foreign corporation on November 3. 1040 easy You sold the stock on November 19. 1040 easy You received a dividend on this stock because you owned it on the ex-dividend date of November 5. 1040 easy To claim the credit, you must have held the stock for at least 16 days within the 31-day period that began on October 21 (15 days before the ex-dividend date). 1040 easy Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. 1040 easy Example 2. 1040 easy The facts are the same as in Example 1 except that you sold the stock on November 14. 1040 easy You held the stock for only 11 days. 1040 easy You are not entitled to the credit. 1040 easy Exception. 1040 easy   If you are a securities dealer who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes paid on dividends regardless of how long you held the stock or whether you were obligated to make payments for positions in substantially similar or related property. 1040 easy See section 901(k)(4) of the Internal Revenue Code for more information. 1040 easy Taxes Withheld on Income or Gain (Other Than Dividends) For income or gain (other than dividends) paid or accrued on property, you cannot claim a foreign tax credit for withholding tax (defined later): If you have not held the property for at least 16 days during the 31-day period that begins 15 days before the date on which the right to receive the payment arises, or To the extent you have to make related payments on positions in substantially similar or related property. 1040 easy When figuring how long you held the property, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. 1040 easy Withholding tax. 1040 easy   For this purpose, withholding tax includes any tax determined on a gross basis. 1040 easy It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 1040 easy Exception for dealers. 1040 easy   If you are a dealer in property who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes withheld on income or gain from that property regardless of how long you held it or whether you have to make related payments on positions in substantially similar or related property. 1040 easy See section 901(I)(2) of the Internal Revenue Code for more information. 1040 easy Covered Asset Acquisition ???You cannot take a credit for the disqualified portion of any foreign tax paid or accrued in connection with a covered asset acquisition. 1040 easy A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. 1040 easy S. 1040 easy tax purposes but not for foreign tax purposes. 1040 easy For more information, see Internal Revenue Code section 901(m). 1040 easy The IRS intends to issue guidance that will explain this provision in greater detail. 1040 easy Taxes in Connection With the Purchase or Sale of Oil or Gas You cannot claim a foreign tax credit for taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of purchase or sale. 1040 easy Taxes on Foreign Mineral Income You must reduce any taxes paid or accrued to a foreign country or possession on mineral income from that country or possession if you were allowed a deduction for percentage depletion for any part of the mineral income. 1040 easy For details, see Regulations section 1. 1040 easy 901-3. 1040 easy Taxes From International Boycott Operations If you participate in or cooperate with an international boycott during the tax year, your foreign taxes resulting from boycott activities will reduce the total taxes available for credit. 1040 easy See the instructions for line 12 in the Form 1116 instructions to figure this reduction. 1040 easy In most cases, this rule does not apply to employees with wages who are working and living in boycotting countries, or to retirees with pensions who are living in these countries. 1040 easy List of boycotting countries. 1040 easy   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. 1040 easy As of November 2013, the following countries are listed. 1040 easy Iraq. 1040 easy Kuwait. 1040 easy Lebanon. 1040 easy Libya. 1040 easy Qatar. 1040 easy Saudi Arabia. 1040 easy Syria. 1040 easy United Arab Emirates. 1040 easy Yemen. 1040 easy    For information concerning changes to the list, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Determinations of whether the boycott rule applies. 1040 easy   You may request a determination from the Internal Revenue Service as to whether a particular operation constitutes participation in or cooperation with an international boycott. 1040 easy The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. 1040 easy Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. 1040 easy Public inspection. 1040 easy   A determination and any related background file is open to public inspection. 1040 easy However, your identity and certain other information will remain confidential. 1040 easy Reporting requirements. 1040 easy   You must file a report with the IRS if you or any of the following persons have operations in or related to a boycotting country or with the government, a company, or a national of a boycotting country. 1040 easy A foreign corporation in which you own 10% or more of the voting power of all voting stock but only if you own the stock of the foreign corporation directly or through foreign entities. 1040 easy A partnership in which you are a partner. 1040 easy A trust you are treated as owning. 1040 easy Form 5713 required. 1040 easy   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. 1040 easy See the Instructions for Form 5713 for information on when and where to file the form. 1040 easy Penalty for failure to file. 1040 easy   If you willfully fail to make a report, in addition to other penalties, you may be fined $25,000 or imprisoned for no more than one year, or both. 1040 easy Taxes on Combined Foreign Oil and Gas Income You must reduce your foreign taxes by a portion of any foreign taxes imposed on combined foreign oil and gas income. 1040 easy The amount of the reduction is the amount by which your foreign oil and gas taxes exceed the amount of your combined foreign oil and gas income multiplied by a fraction equal to your pre-credit U. 1040 easy S. 1040 easy tax liability (Form 1040, line 44) divided by your worldwide taxable income. 1040 easy You may be entitled to carry over to other years taxes reduced under this rule. 1040 easy See Internal Revenue Code section 907(f). 1040 easy Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. 1040 easy Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. 1040 easy Taxes of U. 1040 easy S. 1040 easy Persons Controlling Foreign Corporations and Partnerships If you had control of a foreign corporation or a foreign partnership for the annual accounting period of that corporation or partnership that ended with or within your tax year, you may have to file an annual information return. 1040 easy If you do not file the required information return, you may have to reduce the foreign taxes that may be used for the foreign tax credit. 1040 easy See Penalty for not filing Form 5471 or Form 8865 , later. 1040 easy U. 1040 easy S. 1040 easy persons controlling foreign corporations. 1040 easy   If you are a U. 1040 easy S. 1040 easy citizen or resident who had control of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of that corporation, you may have to file an annual information return on Form 5471, Information Return of U. 1040 easy S. 1040 easy Persons With Respect To Certain Foreign Corporations. 1040 easy Under this rule, you generally had control of a foreign corporation if at any time during your tax year you owned: Stock possessing more than 50% of the total combined voting power of all classes of stock entitled to vote, or More than 50% of the total value of shares of all classes of stock of the foreign corporation. 1040 easy U. 1040 easy S. 1040 easy persons controlling foreign partnerships. 1040 easy   If you are a U. 1040 easy S. 1040 easy citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file