Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

2012 Irs Tax Return Forms

Can You File 1040ez OnlineFile Federal Taxes Online For FreeHow Do I Amend My Tax ReturnIrs Tax Forms 1040ezWhere Can You File Your State Taxes For FreeAmmending TaxesH R Block 2011 Free FilingTurbotax 2011 Deluxe1040ez 2013How Do I Amend My Taxes2010 TaxTaxslayerIncome Tax SoftwareHow Do I Amend My Income Tax ReturnAmending Tax ReturnsEfile 1040xForm 1040 V Payment VoucherIrs Free Tax ReturnState Tax Return FormHow To Amend Federal Tax ReturnFree Income Tax PreparationDownload State Tax FormsEfile For Free State And Federal2013 Federal Tax Form 1040ezTax FormsFiling Past TaxesIrs Form 1040x 2012Irs 1040x FormsFile Tax Extension Electronically For FreeWhere To File 2009 Tax ReturnFile Amended Tax Return1040 XFile Federal Taxes Online FreeFree 2012 Tax SoftwareFree File 2012 TaxesIrs Gov Freefile ExtensionFile Taxes 20112011 Free Tax SoftwareEfile 2011 Tax ReturnIrs Amendment Form

2012 Irs Tax Return Forms

2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms Employee business expenses. 2012 irs tax return forms 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. 2012 irs tax return forms You can change your choice for each year's taxes. 2012 irs tax return forms To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. 2012 irs tax return forms S. 2012 irs tax return forms tax return. 2012 irs tax return forms However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. 2012 irs tax return forms See How To Figure the Credit , later. 2012 irs tax return forms To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. 2012 irs tax return forms Figure your tax both ways—claiming the credit and claiming the deduction. 2012 irs tax return forms Then fill out your return the way that benefits you more. 2012 irs tax return forms See Why Choose the Credit, later. 2012 irs tax return forms 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. 2012 irs tax return forms If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. 2012 irs tax return forms You cannot deduct any of them. 2012 irs tax return forms Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. 2012 irs tax return forms You cannot take a credit for any of them. 2012 irs tax return forms See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. 2012 irs tax return forms There are exceptions to this general rule, which are described next. 2012 irs tax return forms Exceptions for foreign taxes not allowed as a credit. 2012 irs tax return forms   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. 2012 irs tax return forms Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. 2012 irs tax return forms S. 2012 irs tax return forms tax purposes. 2012 irs tax return forms For more information, see Internal Revenue Code section 901(m). 2012 irs tax return forms The IRS intends to issue guidance that will explain this provision in greater detail. 2012 irs tax return forms   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. 2012 irs tax return forms Foreign taxes that are not income taxes. 2012 irs tax return forms   In most cases, only foreign income taxes qualify for the foreign tax credit. 2012 irs tax return forms Other taxes, such as foreign real and personal property taxes, do not qualify. 2012 irs tax return forms But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. 2012 irs tax return forms   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. 2012 irs tax return forms However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). 2012 irs tax return forms Carrybacks and carryovers. 2012 irs tax return forms   There is a limit on the credit you can claim in a tax year. 2012 irs tax return forms 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. 2012 irs tax return forms If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. 2012 irs tax return forms That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. 2012 irs tax return forms   For more information on the limit, see How To Figure the Credit , later. 2012 irs tax return forms For more information on carrybacks and carryovers, see Carryback and Carryover , later. 2012 irs tax return forms 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. 2012 irs tax return forms You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. 2012 irs tax return forms Example. 2012 irs tax return forms You paid foreign taxes for the last 13 years and chose to deduct them on your U. 2012 irs tax return forms S. 2012 irs tax return forms income tax returns. 2012 irs tax return forms You were timely in both filing your returns and paying your U. 2012 irs tax return forms S. 2012 irs tax return forms tax liability. 2012 irs tax return forms 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. 2012 irs tax return forms Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). 2012 irs tax return forms Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. 2012 irs tax return forms Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. 2012 irs tax return forms 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. 2012 irs tax return forms In most cases, if the foreign tax rate is higher than the U. 2012 irs tax return forms S. 2012 irs tax return forms rate, there will be no U. 2012 irs tax return forms S. 2012 irs tax return forms tax on the foreign income. 2012 irs tax return forms If the foreign tax rate is lower than the U. 2012 irs tax return forms S. 2012 irs tax return forms rate, U. 2012 irs tax return forms S. 2012 irs tax return forms tax on the foreign income will be limited to the difference between the rates. 2012 irs tax return forms The foreign tax credit can only reduce U. 2012 irs tax return forms S. 2012 irs tax return forms taxes on foreign source income; it cannot reduce U. 2012 irs tax return forms S. 2012 irs tax return forms taxes on U. 2012 irs tax return forms S. 2012 irs tax return forms source income. 2012 irs tax return forms 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. 2012 irs tax return forms This is because: A credit reduces your actual U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms (See Limit on credit under How To Figure the Credit, later. 2012 irs tax return forms ) Example 1. 2012 irs tax return forms For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. 2012 irs tax return forms None of the dividends are qualified dividends. 2012 irs tax return forms You file a joint return and can claim two $3,900 exemptions. 2012 irs tax return forms You had to pay $2,000 in foreign income taxes on the dividend income. 2012 irs tax return forms If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. 2012 irs tax return forms Your taxable income then is $57,500 and your tax is $7,736. 2012 irs tax return forms If you take the credit instead, your itemized deductions are only $13,000. 2012 irs tax return forms Your taxable income then is $59,500 and your tax before the credit is $8,036. 2012 irs tax return forms After the credit, however, your tax is only $6,036. 2012 irs tax return forms Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. 2012 irs tax return forms Example 2. 2012 irs tax return forms In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. 2012 irs tax return forms You report on your U. 2012 irs tax return forms S. 2012 irs tax return forms return this income as well as $56,000 of U. 2012 irs tax return forms S. 2012 irs tax return forms source wages and an allowable $49,000 partnership loss from a U. 2012 irs tax return forms S. 2012 irs tax return forms partnership. 2012 irs tax return forms Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. 2012 irs tax return forms You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. 2012 irs tax return forms If you deduct the foreign tax on your U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms You can take a credit of only $113 because of limits discussed later. 2012 irs tax return forms Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. 2012 irs tax return forms If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms “Tax year” refers to the tax year for which your U. 2012 irs tax return forms S. 2012 irs tax return forms return is filed, not the tax year for which your foreign return is filed. 2012 irs tax return forms Accrual method of accounting. 2012 irs tax return forms   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. 2012 irs tax return forms 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. 2012 irs tax return forms   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. 2012 irs tax return forms Generally, this occurs on the last day of the tax year for which your foreign return is filed. 2012 irs tax return forms Contesting your foreign tax liability. 2012 irs tax return forms   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. 2012 irs tax return forms 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. 2012 irs tax return forms Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. 2012 irs tax return forms 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 . 2012 irs tax return forms You may have to post a bond. 2012 irs tax return forms   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. 2012 irs tax return forms   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. 2012 irs tax return forms Cash method of accounting. 2012 irs tax return forms   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. 2012 irs tax return forms 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. 2012 irs tax return forms Choosing to take credit in the year taxes accrue. 2012 irs tax return forms   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. 2012 irs tax return forms You make the choice by checking the box in Part II of Form 1116. 2012 irs tax return forms 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. 2012 irs tax return forms   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. 2012 irs tax return forms You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. 2012 irs tax return forms   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. 2012 irs tax return forms Credit based on taxes paid in earlier year. 2012 irs tax return forms   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. 2012 irs tax return forms Example. 2012 irs tax return forms Last year you took the credit based on taxes paid. 2012 irs tax return forms This year you chose to take the credit based on taxes accrued. 2012 irs tax return forms During the year you paid foreign income taxes owed for last year. 2012 irs tax return forms You also accrued foreign income taxes for this year that you did not pay by the end of the year. 2012 irs tax return forms 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. 2012 irs tax return forms Foreign Currency and Exchange Rates U. 2012 irs tax return forms S. 2012 irs tax return forms income tax is imposed on income expressed in U. 2012 irs tax return forms S. 2012 irs tax return forms dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. 2012 irs tax return forms Therefore, fluctuations in the value of the foreign currency relative to the U. 2012 irs tax return forms S. 2012 irs tax return forms dollar may affect the foreign tax credit. 2012 irs tax return forms Translating foreign currency into U. 2012 irs tax return forms S. 2012 irs tax return forms dollars. 2012 irs tax return forms   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. 2012 irs tax return forms S. 2012 irs tax return forms dollars. 2012 irs tax return forms How and when you do this depends on your functional currency. 2012 irs tax return forms In most cases, your functional currency is the U. 2012 irs tax return forms S. 2012 irs tax return forms dollar unless you are required to use the currency of a foreign country. 2012 irs tax return forms   You must make all federal income tax determinations in your functional currency. 2012 irs tax return forms The U. 2012 irs tax return forms S. 2012 irs tax return forms dollar is the functional currency for all taxpayers except some qualified business units. 2012 irs tax return forms A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. 2012 irs tax return forms Unless you are self-employed, your functional currency is the U. 2012 irs tax return forms S. 2012 irs tax return forms dollar. 2012 irs tax return forms   Even if you are self-employed and have a qualified business unit, your functional currency is the U. 2012 irs tax return forms S. 2012 irs tax return forms dollar if any of the following apply. 2012 irs tax return forms You conduct the business primarily in dollars. 2012 irs tax return forms The principal place of business is located in the United States. 2012 irs tax return forms You choose to or are required to use the dollar as your functional currency. 2012 irs tax return forms 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. 2012 irs tax return forms   If your functional currency is the U. 2012 irs tax return forms S. 2012 irs tax return forms dollar, you must immediately translate into dollars all items of income, expense, etc. 2012 irs tax return forms , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. 2012 irs tax return forms If there is more than one exchange rate, use the one that most properly reflects your income. 2012 irs tax return forms In most cases, you can get exchange rates from banks and U. 2012 irs tax return forms S. 2012 irs tax return forms Embassies. 2012 irs tax return forms   If your functional currency is not the U. 2012 irs tax return forms S. 2012 irs tax return forms dollar, make all income tax determinations in your functional currency. 2012 irs tax return forms At the end of the year, translate the results, such as income or loss, into U. 2012 irs tax return forms S. 2012 irs tax return forms dollars to report on your income tax return. 2012 irs tax return forms    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. 2012 irs tax return forms   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. 2012 irs tax return forms If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. 2012 irs tax return forms 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. 2012 irs tax return forms   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). 2012 irs tax return forms Exception. 2012 irs tax return forms   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. 2012 irs tax return forms This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. 2012 irs tax return forms The foreign taxes are paid on or after the first day of the tax year to which they relate. 2012 irs tax return forms The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. 2012 irs tax return forms The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). 2012 irs tax return forms (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. 2012 irs tax return forms )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. 2012 irs tax return forms Election to use exchange rate on date paid. 2012 irs tax return forms   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. 2012 irs tax return forms If any of the accrued taxes are unpaid, you must translate them into U. 2012 irs tax return forms S. 2012 irs tax return forms dollars using the exchange rate on the last day of the U. 2012 irs tax return forms S. 2012 irs tax return forms tax year to which those taxes relate. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms dollar functional currency. 2012 irs tax return forms 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. 2012 irs tax return forms The election is available for tax years beginning after 2004. 2012 irs tax return forms 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. 2012 irs tax return forms Make the election by attaching a statement to the applicable tax return. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms dollar functional currency. 2012 irs tax return forms Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. 2012 irs tax return forms S. 2012 irs tax return forms foreign tax credit claimed. 2012 irs tax return forms 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. 2012 irs tax return forms If a foreign tax redetermination occurs, a redetermination of your U. 2012 irs tax return forms S. 2012 irs tax return forms tax liability is required if any of the following conditions apply. 2012 irs tax return forms The accrued taxes when paid differ from the amounts claimed as a credit. 2012 irs tax return forms 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. 2012 irs tax return forms If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. 2012 irs tax return forms You will not be allowed a credit for the unpaid taxes until you pay them. 2012 irs tax return forms When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. 2012 irs tax return forms S. 2012 irs tax return forms dollars using the exchange rate as of the date they were paid. 2012 irs tax return forms The foreign tax credit is allowed for the year to which the foreign tax relates. 2012 irs tax return forms See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. 2012 irs tax return forms The foreign taxes you paid are refunded in whole or in part. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms tax year. 2012 irs tax return forms In this case, you must adjust your U. 2012 irs tax return forms S. 2012 irs tax return forms tax in the tax year in which the accrued foreign taxes are paid. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms tax liability for each tax year affected by the redetermination. 2012 irs tax return forms In most cases, you must file Form 1040X, Amended U. 2012 irs tax return forms S. 2012 irs tax return forms Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. 2012 irs tax return forms S. 2012 irs tax return forms tax liability for the year or years affected. 2012 irs tax return forms See Contents of statement , later. 2012 irs tax return forms 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. 2012 irs tax return forms There are other exceptions to this requirement. 2012 irs tax return forms They are discussed later under Due date of notification to IRS . 2012 irs tax return forms Contents of statement. 2012 irs tax return forms   The statement must include all of the following. 2012 irs tax return forms Your name, address, and taxpayer identification number. 2012 irs tax return forms The tax year or years that are affected by the foreign tax redetermination. 2012 irs tax return forms The date or dates the foreign taxes were accrued, if applicable. 2012 irs tax return forms The date or dates the foreign taxes were paid. 2012 irs tax return forms The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. 2012 irs tax return forms 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. 2012 irs tax return forms   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. 2012 irs tax return forms   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). 2012 irs tax return forms Due date of notification to IRS. 2012 irs tax return forms   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. 2012 irs tax return forms There is no limit on the time the IRS has to redetermine and assess the correct U. 2012 irs tax return forms S. 2012 irs tax return forms tax due. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms taxes. 2012 irs tax return forms See Time Limit on Refund Claims , later. 2012 irs tax return forms   Exceptions to this due date are explained in the next two paragraphs. 2012 irs tax return forms Multiple redeterminations of U. 2012 irs tax return forms S. 2012 irs tax return forms tax liability for same tax year. 2012 irs tax return forms   Where more than one foreign tax redetermination requires a redetermination of U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. 2012 irs tax return forms S. 2012 irs tax return forms tax liability is required may occur after the due date for providing that notification. 2012 irs tax return forms In this situation, you may have to file more than one Form 1040X for that tax year. 2012 irs tax return forms Additional U. 2012 irs tax return forms S. 2012 irs tax return forms tax due eliminated by foreign tax credit carryback or carryover. 2012 irs tax return forms   If a foreign tax redetermination requires a redetermination of U. 2012 irs tax return forms S. 2012 irs tax return forms tax liability that would otherwise result in an additional amount of U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms You must file the statement by the due date (with extensions) of that return. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms tax liability is required). 2012 irs tax return forms Failure-to-notify penalty. 2012 irs tax return forms   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. 2012 irs tax return forms   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. 2012 irs tax return forms S. 2012 irs tax return forms tax. 2012 irs tax return forms This penalty cannot be more than 25% of the tax due. 2012 irs tax return forms Foreign tax refund. 2012 irs tax return forms   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. 2012 irs tax return forms S. 2012 irs tax return forms tax for the time before the date of the refund. 2012 irs tax return forms   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. 2012 irs tax return forms 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. 2012 irs tax return forms Interest also is owed from the time you receive a refund until you pay the additional tax due. 2012 irs tax return forms Foreign tax imposed on foreign refund. 2012 irs tax return forms   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. 2012 irs tax return forms 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. 2012 irs tax return forms Example. 2012 irs tax return forms 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. 2012 irs tax return forms When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. 2012 irs tax return forms Time Limit on Refund Claims You have 10 years to file a claim for refund of U. 2012 irs tax return forms S. 2012 irs tax return forms tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. 2012 irs tax return forms 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. 2012 irs tax return forms You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. 2012 irs tax return forms 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). 2012 irs tax return forms The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. 2012 irs tax return forms See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. 2012 irs tax return forms Who Can Take the Credit? U. 2012 irs tax return forms S. 2012 irs tax return forms citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. 2012 irs tax return forms S. 2012 irs tax return forms tax on foreign source income may be able to take a foreign tax credit. 2012 irs tax return forms U. 2012 irs tax return forms S. 2012 irs tax return forms Citizens If you are a U. 2012 irs tax return forms S. 2012 irs tax return forms citizen, you are taxed by the United States on your worldwide income wherever you live. 2012 irs tax return forms You are normally entitled to take a credit for foreign taxes you pay or accrue. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms citizens. 2012 irs tax return forms If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. 2012 irs tax return forms 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. 2012 irs tax return forms For information on alien status, see Publication 519. 2012 irs tax return forms Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms possession on income from foreign sources that is effectively connected with a trade or business in the United States. 2012 irs tax return forms But if you must pay tax to a foreign country or U. 2012 irs tax return forms S. 2012 irs tax return forms possession on income from U. 2012 irs tax return forms S. 2012 irs tax return forms sources only because you are a citizen or a resident of that country or U. 2012 irs tax return forms S. 2012 irs tax return forms possession, do not use that tax in figuring the amount of your credit. 2012 irs tax return forms For information on alien status and effectively connected income, see Publication 519. 2012 irs tax return forms 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. 2012 irs tax return forms The tax must be imposed on you. 2012 irs tax return forms You must have paid or accrued the tax. 2012 irs tax return forms The tax must be the legal and actual foreign tax liability. 2012 irs tax return forms The tax must be an income tax (or a tax in lieu of an income tax). 2012 irs tax return forms Certain foreign taxes do not qualify for the credit even if the four tests are met. 2012 irs tax return forms See Foreign Taxes for Which You Cannot Take a Credit, later. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms possession. 2012 irs tax return forms For example, a tax that is deducted from your wages is considered to be imposed on you. 2012 irs tax return forms You cannot shift the right to claim the credit by contract or other means. 2012 irs tax return forms Foreign country. 2012 irs tax return forms   A foreign country includes any foreign state and its political subdivisions. 2012 irs tax return forms Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. 2012 irs tax return forms U. 2012 irs tax return forms S. 2012 irs tax return forms possessions. 2012 irs tax return forms   For foreign tax credit purposes, all qualified taxes paid to U. 2012 irs tax return forms S. 2012 irs tax return forms possessions are considered foreign taxes. 2012 irs tax return forms For this purpose, U. 2012 irs tax return forms S. 2012 irs tax return forms possessions include Puerto Rico and American Samoa. 2012 irs tax return forms   When the term “foreign country” is used in this publication, it includes U. 2012 irs tax return forms S. 2012 irs tax return forms possessions unless otherwise stated. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms possession. 2012 irs tax return forms 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. 2012 irs tax return forms Joint return. 2012 irs tax return forms   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. 2012 irs tax return forms Combined income. 2012 irs tax return forms   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. 2012 irs tax return forms 901-2(f)(3)(iii). 2012 irs tax return forms 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. 2012 irs tax return forms   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. 2012 irs tax return forms 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. 2012 irs tax return forms For more details, see paragraphs (f) and (h) of Regulations section 1. 2012 irs tax return forms 901-2. 2012 irs tax return forms For similar rules applicable to prior tax years, see Regulations section 1. 2012 irs tax return forms 901-2 (revised as of April 1, 2011). 2012 irs tax return forms Example. 2012 irs tax return forms You and your spouse reside in Country X, which imposes income tax on your combined incomes. 2012 irs tax return forms Both of you use the “u” as your functional currency. 2012 irs tax return forms Country X apportions tax based on income. 2012 irs tax return forms You had income of 30,000u and your spouse had income of 20,000u. 2012 irs tax return forms Your filing status on your U. 2012 irs tax return forms S. 2012 irs tax return forms income tax return is married filing separately. 2012 irs tax return forms You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. 2012 irs tax return forms S income tax return. 2012 irs tax return forms Your spouse can claim only 40% (20,000u/50,000u). 2012 irs tax return forms Partner or S corporation shareholder. 2012 irs tax return forms   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. 2012 irs tax return forms These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. 2012 irs tax return forms 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. 2012 irs tax return forms Beneficiary. 2012 irs tax return forms   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. 2012 irs tax return forms This amount will be shown on the Schedule K-1 you receive from the estate or trust. 2012 irs tax return forms However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. 2012 irs tax return forms Mutual fund shareholder. 2012 irs tax return forms   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. 2012 irs tax return forms 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. 2012 irs tax return forms If you do not receive this information, you will need to contact the fund. 2012 irs tax return forms Controlled foreign corporation shareholder. 2012 irs tax return forms   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. 2012 irs tax return forms If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. 2012 irs tax return forms Controlled foreign corporation. 2012 irs tax return forms   A controlled foreign corporation is a foreign corporation in which U. 2012 irs tax return forms S. 2012 irs tax return forms shareholders own more than 50% of the voting power or value of the stock. 2012 irs tax return forms You are considered a U. 2012 irs tax return forms S. 2012 irs tax return forms shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. 2012 irs tax return forms See Internal Revenue Code sections 951(b) and 958(b) for more information. 2012 irs tax return forms 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. 2012 irs tax return forms Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. 2012 irs tax return forms Foreign tax refund. 2012 irs tax return forms   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. 2012 irs tax return forms   For example, the United States has tax treaties with many countries allowing U. 2012 irs tax return forms S. 2012 irs tax return forms citizens and residents reductions in the rates of tax of those foreign countries. 2012 irs tax return forms However, some treaty countries require U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms Subsidy received. 2012 irs tax return forms   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms   The term “subsidy” includes any type of benefit. 2012 irs tax return forms Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2012 irs tax return forms Shareholder receiving refund for corporate tax in integrated system. 2012 irs tax return forms   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. 2012 irs tax return forms You may be able to claim a refund of these taxes from the foreign government. 2012 irs tax return forms You must include the refund (including any amount withheld) in your income in the year received. 2012 irs tax return forms Any tax withheld from the refund is a qualified foreign tax. 2012 irs tax return forms Example. 2012 irs tax return forms You are a shareholder of a French corporation. 2012 irs tax return forms You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. 2012 irs tax return forms The French government imposes a 15% withholding tax ($15) on the refund you received. 2012 irs tax return forms You receive a check for $85. 2012 irs tax return forms You include $100 in your income. 2012 irs tax return forms The $15 of tax withheld is a qualified foreign tax. 2012 irs tax return forms 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. 2012 irs tax return forms Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. 2012 irs tax return forms 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. 2012 irs tax return forms See Taxes in Lieu of Income Taxes , later. 2012 irs tax return forms 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. 2012 irs tax return forms A foreign levy is an income tax only if it meets both of the following requirements. 2012 irs tax return forms It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. 2012 irs tax return forms The predominant character of the tax is that of an income tax in the U. 2012 irs tax return forms S. 2012 irs tax return forms sense. 2012 irs tax return forms A foreign levy may meet these requirements even if the foreign tax law differs from U. 2012 irs tax return forms S. 2012 irs tax return forms tax law. 2012 irs tax return forms The foreign law may include in income items that U. 2012 irs tax return forms S. 2012 irs tax return forms law does not include, or it may allow certain exclusions or deductions that U. 2012 irs tax return forms S. 2012 irs tax return forms law does not allow. 2012 irs tax return forms Specific economic benefit. 2012 irs tax return forms   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. 2012 irs tax return forms   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. 2012 irs tax return forms   However, see the exception discussed later under Pension, unemployment, and disability fund payments . 2012 irs tax return forms Economic benefits. 2012 irs tax return forms   Economic benefits include the following. 2012 irs tax return forms Goods. 2012 irs tax return forms Services. 2012 irs tax return forms Fees or other payments. 2012 irs tax return forms Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. 2012 irs tax return forms Discharges of contractual obligations. 2012 irs tax return forms   In most cases, the right or privilege merely to engage in business is not an economic benefit. 2012 irs tax return forms Dual-capacity taxpayers. 2012 irs tax return forms   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. 2012 irs tax return forms ” 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. 2012 irs tax return forms    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. 2012 irs tax return forms   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. 2012 irs tax return forms    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. 2012 irs tax return forms For more information about these agreements, see Publication 54. 2012 irs tax return forms Soak-up taxes. 2012 irs tax return forms   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. 2012 irs tax return forms 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. 2012 irs tax return forms This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. 2012 irs tax return forms Penalties and interest. 2012 irs tax return forms   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. 2012 irs tax return forms Taxes not based on income. 2012 irs tax return forms   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. 2012 irs tax return forms Taxes based on assets, such as property taxes, do not qualify for the credit. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms A tax in lieu of an income tax does not have to be based on realized net income. 2012 irs tax return forms A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. 2012 irs tax return forms In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. 2012 irs tax return forms 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. 2012 irs tax return forms The soak-up tax. 2012 irs tax return forms 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. 2012 irs tax return forms Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. 2012 irs tax return forms Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. 2012 irs tax return forms S. 2012 irs tax return forms gross income. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms income under the foreign earned income exclusion or the foreign housing exclusion. 2012 irs tax return forms See Publication 54 for more information on the foreign earned income and housing exclusions. 2012 irs tax return forms Wages completely excluded. 2012 irs tax return forms   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. 2012 irs tax return forms Wages partly excluded. 2012 irs tax return forms   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. 2012 irs tax return forms 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. 2012 irs tax return forms   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. 2012 irs tax return forms Deductible expenses do not include the foreign housing deduction. 2012 irs tax return forms   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). 2012 irs tax return forms If the foreign law taxes foreign earned income and some other income (for example, earned income from U. 2012 irs tax return forms S. 2012 irs tax return forms sources or a type of income not subject to U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms Example. 2012 irs tax return forms You are a U. 2012 irs tax return forms S. 2012 irs tax return forms citizen and a cash basis taxpayer, employed by Company X and living in Country A. 2012 irs tax return forms 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. 2012 irs tax return forms To find that part, do the following. 2012 irs tax return forms First, find the amount of business expenses allocable to excluded wages and therefore not deductible. 2012 irs tax return forms To do this, multiply the otherwise deductible expenses by a fraction. 2012 irs tax return forms That fraction is the excluded wages over your foreign earned income. 2012 irs tax return forms   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. 2012 irs tax return forms To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). 2012 irs tax return forms The result is $81,984. 2012 irs tax return forms 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). 2012 irs tax return forms Finally, multiply the foreign tax you paid by the resulting fraction. 2012 irs tax return forms   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. 2012 irs tax return forms Taxes on Income From Puerto Rico Exempt From U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms For information on figuring the reduction, see Publication 570. 2012 irs tax return forms 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. 2012 irs tax return forms For more information on this exclusion, see Publication 570. 2012 irs tax return forms Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. 2012 irs tax return forms However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. 2012 irs tax return forms 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. 2012 irs tax return forms However, you can claim an itemized deduction for these taxes. 2012 irs tax return forms See Choosing To Take Credit or Deduction , earlier. 2012 irs tax return forms 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. 2012 irs tax return forms The following countries meet this description for 2013. 2012 irs tax return forms Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. 2012 irs tax return forms Cuba. 2012 irs tax return forms Iran. 2012 irs tax return forms Libya (but see Note later). 2012 irs tax return forms North Korea. 2012 irs tax return forms Sudan. 2012 irs tax return forms Syria. 2012 irs tax return forms Waiver of denial of the credit. 2012 irs tax return forms   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. 2012 irs tax return forms S. 2012 irs tax return forms companies in the sanctioned country. 2012 irs tax return forms 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. 2012 irs tax return forms Note. 2012 irs tax return forms Effective December 10, 2004, the President granted a waiver to Libya. 2012 irs tax return forms Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. 2012 irs tax return forms Limit on credit. 2012 irs tax return forms   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. 2012 irs tax return forms You must fill out a separate Form 1116 for this income. 2012 irs tax return forms This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. 2012 irs tax return forms Example. 2012 irs tax return forms You lived and worked in Iran until August, when you were transferred to Italy. 2012 irs tax return forms You paid taxes to each country on the income earned in that country. 2012 irs tax return forms You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. 2012 irs tax return forms Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. 2012 irs tax return forms You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. 2012 irs tax return forms Figuring the credit when a sanction ends. 2012 irs tax return forms    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. 2012 irs tax return forms 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. 2012 irs tax return forms Example. 2012 irs tax return forms The sanctions against Country X ended on July 31. 2012 irs tax return forms On August 19, you receive a distribution from a mutual fund of Country X income. 2012 irs tax return forms The fund paid Country X income tax for you on the distribution. 2012 irs tax return forms 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. 2012 irs tax return forms Amounts for the nonsanctioned period. 2012 irs tax return forms   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. 2012 irs tax return forms Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. 2012 irs tax return forms   Number of nonsanctioned days in year  Number of days in year Example. 2012 irs tax return forms 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. 2012 irs tax return forms Sanctions against Country X ended on July 11, 2013. 2012 irs tax return forms You are unable to determine how much of the income or tax is for the nonsanctioned period. 2012 irs tax return forms 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. 2012 irs tax return forms You would compute the income for the nonsanctioned period as follows. 2012 irs tax return forms 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. 2012 irs tax return forms 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. 2012 irs tax return forms Further information. 2012 irs tax return forms   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. 2012 irs tax return forms This Cumulative Bulletin can be found in many libraries and IRS offices. 2012 irs tax return forms Table 1. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms 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). 2012 irs tax return forms 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. 2012 irs tax return forms If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms Withholding tax. 2012 irs tax return forms   For this purpose, withholding tax includes any tax determined on a gross basis. 2012 irs tax return forms It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 2012 irs tax return forms Ex-dividend date. 2012 irs tax return forms   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. 2012 irs tax return forms Example 1. 2012 irs tax return forms You bought common stock from a foreign corporation on November 3. 2012 irs tax return forms You sold the stock on November 19. 2012 irs tax return forms You received a dividend on this stock because you owned it on the ex-dividend date of November 5. 2012 irs tax return forms 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). 2012 irs tax return forms Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. 2012 irs tax return forms Example 2. 2012 irs tax return forms The facts are the same as in Example 1 except that you sold the stock on November 14. 2012 irs tax return forms You held the stock for only 11 days. 2012 irs tax return forms You are not entitled to the credit. 2012 irs tax return forms Exception. 2012 irs tax return forms   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. 2012 irs tax return forms See section 901(k)(4) of the Internal Revenue Code for more information. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms Withholding tax. 2012 irs tax return forms   For this purpose, withholding tax includes any tax determined on a gross basis. 2012 irs tax return forms It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 2012 irs tax return forms Exception for dealers. 2012 irs tax return forms   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. 2012 irs tax return forms See section 901(I)(2) of the Internal Revenue Code for more information. 2012 irs tax return forms 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. 2012 irs tax return forms A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. 2012 irs tax return forms S. 2012 irs tax return forms tax purposes but not for foreign tax purposes. 2012 irs tax return forms For more information, see Internal Revenue Code section 901(m). 2012 irs tax return forms The IRS intends to issue guidance that will explain this provision in greater detail. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms For details, see Regulations section 1. 2012 irs tax return forms 901-3. 2012 irs tax return forms 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. 2012 irs tax return forms See the instructions for line 12 in the Form 1116 instructions to figure this reduction. 2012 irs tax return forms 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. 2012 irs tax return forms List of boycotting countries. 2012 irs tax return forms   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. 2012 irs tax return forms As of November 2013, the following countries are listed. 2012 irs tax return forms Iraq. 2012 irs tax return forms Kuwait. 2012 irs tax return forms Lebanon. 2012 irs tax return forms Libya. 2012 irs tax return forms Qatar. 2012 irs tax return forms Saudi Arabia. 2012 irs tax return forms Syria. 2012 irs tax return forms United Arab Emirates. 2012 irs tax return forms Yemen. 2012 irs tax return forms    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. 2012 irs tax return forms   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. 2012 irs tax return forms The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. 2012 irs tax return forms Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. 2012 irs tax return forms Public inspection. 2012 irs tax return forms   A determination and any related background file is open to public inspection. 2012 irs tax return forms However, your identity and certain other information will remain confidential. 2012 irs tax return forms Reporting requirements. 2012 irs tax return forms   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. 2012 irs tax return forms 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. 2012 irs tax return forms A partnership in which you are a partner. 2012 irs tax return forms A trust you are treated as owning. 2012 irs tax return forms Form 5713 required. 2012 irs tax return forms   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. 2012 irs tax return forms See the Instructions for Form 5713 for information on when and where to file the form. 2012 irs tax return forms Penalty for failure to file. 2012 irs tax return forms   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. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms tax liability (Form 1040, line 44) divided by your worldwide taxable income. 2012 irs tax return forms You may be entitled to carry over to other years taxes reduced under this rule. 2012 irs tax return forms See Internal Revenue Code section 907(f). 2012 irs tax return forms Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. 2012 irs tax return forms Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. 2012 irs tax return forms Taxes of U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms 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. 2012 irs tax return forms See Penalty for not filing Form 5471 or Form 8865 , later. 2012 irs tax return forms U. 2012 irs tax return forms S. 2012 irs tax return forms persons controlling foreign corporations. 2012 irs tax return forms   If you are a U. 2012 irs tax return forms S. 2012 irs tax return forms 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. 2012 irs tax return forms S. 2012 irs tax return forms Persons With Respect To Certain Foreign Corporations. 2012 irs tax return forms 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. 2012 irs tax return forms U. 2012 irs tax return forms S. 2012 irs tax return forms persons controlling foreign partnerships. 2012 irs tax return forms   If you are a U. 2012 irs tax return forms S. 2012 irs tax return forms citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file
Español

The 2012 Irs Tax Return Forms

2012 irs tax return forms 4. 2012 irs tax return forms   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. 2012 irs tax return forms Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. 2012 irs tax return forms Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. 2012 irs tax return forms If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. 2012 irs tax return forms You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. 2012 irs tax return forms Special rules apply if you rent your condominium to others. 2012 irs tax return forms You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. 2012 irs tax return forms In addition, you can deduct any dues or assessments paid for maintenance of the common elements. 2012 irs tax return forms You cannot deduct special assessments you pay to a condominium management corporation for improvements. 2012 irs tax return forms However, you may be able to recover your share of the cost of any improvement by taking depreciation. 2012 irs tax return forms Cooperatives If you live in a cooperative, you do not own your apartment. 2012 irs tax return forms Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. 2012 irs tax return forms If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. 2012 irs tax return forms In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. 2012 irs tax return forms Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. 2012 irs tax return forms Figure your depreciation deduction as follows. 2012 irs tax return forms Figure the depreciation for all the depreciable real property owned by the corporation. 2012 irs tax return forms (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 2012 irs tax return forms ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. 2012 irs tax return forms Multiply your cost per share by the total number of outstanding shares. 2012 irs tax return forms Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. 2012 irs tax return forms Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. 2012 irs tax return forms Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. 2012 irs tax return forms Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 2012 irs tax return forms Multiply the result of (2) by the percentage you figured in (3). 2012 irs tax return forms This is your depreciation on the stock. 2012 irs tax return forms Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. 2012 irs tax return forms Payments added to capital account. 2012 irs tax return forms   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. 2012 irs tax return forms For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. 2012 irs tax return forms   Treat as a capital cost the amount you were assessed for capital items. 2012 irs tax return forms This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. 2012 irs tax return forms   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. 2012 irs tax return forms Otherwise, figure your share in the following manner. 2012 irs tax return forms Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 2012 irs tax return forms Multiply the corporation's deductible interest by the number you figured in (1). 2012 irs tax return forms This is your share of the interest. 2012 irs tax return forms Multiply the corporation's deductible taxes by the number you figured in (1). 2012 irs tax return forms This is your share of the taxes. 2012 irs tax return forms Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. 2012 irs tax return forms You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. 2012 irs tax return forms You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 2012 irs tax return forms However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). 2012 irs tax return forms Example. 2012 irs tax return forms Your tax year is the calendar year. 2012 irs tax return forms You moved from your home in May and started renting it out on June 1. 2012 irs tax return forms You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. 2012 irs tax return forms Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. 2012 irs tax return forms When figuring depreciation, treat the property as placed in service on June 1. 2012 irs tax return forms Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. 2012 irs tax return forms Fair market value. 2012 irs tax return forms   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. 2012 irs tax return forms Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. 2012 irs tax return forms Figuring the basis. 2012 irs tax return forms   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. 2012 irs tax return forms For other increases and decreases to basis, see Adjusted Basis in chapter 2. 2012 irs tax return forms Example. 2012 irs tax return forms Several years ago you built your home for $140,000 on a lot that cost you $14,000. 2012 irs tax return forms Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. 2012 irs tax return forms Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. 2012 irs tax return forms Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. 2012 irs tax return forms The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). 2012 irs tax return forms On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. 2012 irs tax return forms The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). 2012 irs tax return forms Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. 2012 irs tax return forms (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 2012 irs tax return forms ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. 2012 irs tax return forms The fair market value of the property on the date you change your apartment to rental use. 2012 irs tax return forms This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. 2012 irs tax return forms The corporation's adjusted basis in the property on that date. 2012 irs tax return forms Do not subtract depreciation when figuring the corporation's adjusted basis. 2012 irs tax return forms If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). 2012 irs tax return forms The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. 2012 irs tax return forms Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. 2012 irs tax return forms Generally, that will be MACRS for any conversion after 1986. 2012 irs tax return forms Treat the property as placed in service on the conversion date. 2012 irs tax return forms Example. 2012 irs tax return forms Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. 2012 irs tax return forms Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. 2012 irs tax return forms 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . 2012 irs tax return forms 01364). 2012 irs tax return forms Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. 2012 irs tax return forms You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). 2012 irs tax return forms You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. 2012 irs tax return forms There is no change in the types of expenses deductible for the personal-use part of your property. 2012 irs tax return forms Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). 2012 irs tax return forms You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. 2012 irs tax return forms You do not have to divide the expenses that belong only to the rental part of your property. 2012 irs tax return forms For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. 2012 irs tax return forms If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. 2012 irs tax return forms You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. 2012 irs tax return forms How to divide expenses. 2012 irs tax return forms   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. 2012 irs tax return forms You can use any reasonable method for dividing the expense. 2012 irs tax return forms It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 2012 irs tax return forms The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. 2012 irs tax return forms Example. 2012 irs tax return forms You rent a room in your house. 2012 irs tax return forms The room is 12 × 15 feet, or 180 square feet. 2012 irs tax return forms Your entire house has 1,800 square feet of floor space. 2012 irs tax return forms You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. 2012 irs tax return forms If your heating bill for the year for the entire house was $600, $60 ($600 × . 2012 irs tax return forms 10) is a rental expense. 2012 irs tax return forms The balance, $540, is a personal expense that you cannot deduct. 2012 irs tax return forms Duplex. 2012 irs tax return forms   A common situation is the duplex where you live in one unit and rent out the other. 2012 irs tax return forms Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. 2012 irs tax return forms Example. 2012 irs tax return forms You own a duplex and live in one half, renting the other half. 2012 irs tax return forms Both units are approximately the same size. 2012 irs tax return forms Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. 2012 irs tax return forms You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). 2012 irs tax return forms Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. 2012 irs tax return forms You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. 2012 irs tax return forms Where to report. 2012 irs tax return forms   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. 2012 irs tax return forms For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. 2012 irs tax return forms   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. 2012 irs tax return forms You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. 2012 irs tax return forms Presumption of profit. 2012 irs tax return forms   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. 2012 irs tax return forms Postponing decision. 2012 irs tax return forms   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. 2012 irs tax return forms You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. 2012 irs tax return forms You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 2012 irs tax return forms More information. 2012 irs tax return forms   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. 2012 irs tax return forms Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. 2012 irs tax return forms Instead of selling the house she had been living in, she decided to change it to rental property. 2012 irs tax return forms Eileen selected a tenant and started renting the house on February 1. 2012 irs tax return forms Eileen charges $750 a month for rent and collects it herself. 2012 irs tax return forms Eileen also received a $750 security deposit from her tenant. 2012 irs tax return forms Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. 2012 irs tax return forms Her rental expenses for the year are as follows. 2012 irs tax return forms   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. 2012 irs tax return forms She can deduct eleven-twelfths of these expenses as rental expenses. 2012 irs tax return forms She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. 2012 irs tax return forms She cannot deduct the balance of the fire insurance because it is a personal expense. 2012 irs tax return forms Eileen bought this house in 1984 for $35,000. 2012 irs tax return forms Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. 2012 irs tax return forms Before changing it to rental property, Eileen added several improvements to the house. 2012 irs tax return forms She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. 2012 irs tax return forms Of this amount, $35,000 was for the land and $117,000 was for the house. 2012 irs tax return forms Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. 2012 irs tax return forms As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. 2012 irs tax return forms She chooses the GDS recovery period of 27. 2012 irs tax return forms 5 years. 2012 irs tax return forms She uses Table 2-2d to find her depreciation percentage. 2012 irs tax return forms Since she placed the property in service in February, the percentage is 3. 2012 irs tax return forms 182%. 2012 irs tax return forms On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. 2012 irs tax return forms The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. 2012 irs tax return forms She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. 2012 irs tax return forms On May 1, Eileen paid $4,000 to have a furnace installed in the house. 2012 irs tax return forms The furnace is residential rental property. 2012 irs tax return forms Because she placed the property in service in May, the percentage from Table 2-2d is 2. 2012 irs tax return forms 273%. 2012 irs tax return forms Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . 2012 irs tax return forms 03182) $1,241   Dishwasher ($425 × . 2012 irs tax return forms 20) 85   Furnace ($4,000 × . 2012 irs tax return forms 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. 2012 irs tax return forms She enters her income, expenses, and depreciation for the house in the column for Property A. 2012 irs tax return forms Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. 2012 irs tax return forms See the Instructions for Form 4562 for more information on preparing the form. 2012 irs tax return forms Prev  Up  Next   Home   More Online Publications