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Ez 1040 Form 2012

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Ez 1040 Form 2012

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

Whether you file a Form 1040EZ or a complicated corporate return, you will benefit from knowing your rights as a taxpayer and being familiar with the IRS' obligations to protect them. The goal of the Taxpayer Rights Corner is to be your one-stop shop for taxpayer rights information during every step of your interaction with the IRS.


Know Your Rights

You have rights as a taxpayer when dealing with the IRS.


Your Civil Rights Are Protected

Under no circumstances will the Internal Revenue Service tolerate discrimination by its employees, grantees, contractors, and/or subcontractors. NO ONE shall be excluded from participating in, be denied the benefits of, or be subject to discrimination because of: race, color, sex, national origin, disability, reprisal, or age in programs or activities funded by the Department of Treasury - Internal Revenue Service.


Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an IRS program that provides an independent system to assure that tax problems, which have not been resolved through normal channels, are promptly and fairly handled.


Notices

What should you do if you receive a notice from the IRS?


Your Rights to Representation

Learn more about granting power of attorney.

You are entitled to similar protection of confidentiality with respect to tax advice given by a federally authorized tax practitioner as with an attorney.

Every taxpayer is entitled to have access to representation. The Low Income Tax Clinic grant program is designed to help accredited academic institutions and non-profit organizations provide low to no-cost tax assistance (such as representing the taxpayer during an audit or tax collection effort) and/or tax outreach to taxpayers for whom English is a second language. 

  • Frequently Asked Questions

Examination

We accept most taxpayer's returns as filed. If we inquire about your return or select it for examination, it does not suggest that you are dishonest. The inquiry or examination may or may not result in more tax. To learn about your rights during the examination process, and for information about how audits are conducted;


Appeal Rights

It is your right to appeal any action taken by the IRS to change your account.


Collection Process

Learn about the process IRS may follow to collect overdue taxes, including a summary of your rights and other important information about the collection process.


Innocent Spouse

The Reform Act of 1998, broadened the relief from joint liability available to spouses who file joint returns.


Refund Offset

If you are due a refund but have not paid certain amounts you owe, all or part of your refund may be used to pay all or part of the past-due amount. This includes past-due federal income tax, other federal debts (such as student loans), state income tax, and child and spousal support payments.


Where To Go For 1040 Help?

The IRS sponsors volunteer assistance programs and offers help to taxpayers in many of its offices and other community locations.

Page Last Reviewed or Updated: 14-Mar-2014

The Ez 1040 Form 2012

Ez 1040 form 2012 2. Ez 1040 form 2012   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. Ez 1040 form 2012 Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Ez 1040 form 2012 They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). Ez 1040 form 2012 This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Ez 1040 form 2012 What is the tax benefit of the American opportunity credit. Ez 1040 form 2012   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. Ez 1040 form 2012   A tax credit reduces the amount of income tax you may have to pay. Ez 1040 form 2012 Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Ez 1040 form 2012 Forty percent of the American opportunity credit may be refundable. Ez 1040 form 2012 This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. Ez 1040 form 2012   Your allowable American opportunity credit may be limited by the amount of your income. Ez 1040 form 2012 Also, the nonrefundable part of the credit may be limited by the amount of your tax. Ez 1040 form 2012 Overview of the American opportunity credit. Ez 1040 form 2012   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. Ez 1040 form 2012 The details are discussed in this chapter. Ez 1040 form 2012 Can you claim more than one education credit this year. Ez 1040 form 2012   For each student, you can elect for any year only one of the credits. Ez 1040 form 2012 For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. Ez 1040 form 2012   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. Ez 1040 form 2012 If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. Ez 1040 form 2012 This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Ez 1040 form 2012 Differences between the American opportunity and lifetime learning credits. Ez 1040 form 2012   There are several differences between these two credits. Ez 1040 form 2012 For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. Ez 1040 form 2012 However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Ez 1040 form 2012 The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Ez 1040 form 2012 If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. Ez 1040 form 2012 If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. Ez 1040 form 2012 Table 2-1. Ez 1040 form 2012 Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. Ez 1040 form 2012 Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. Ez 1040 form 2012 You pay qualified education expenses of higher education. Ez 1040 form 2012 You pay the education expenses for an eligible student. Ez 1040 form 2012 The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Ez 1040 form 2012 Student qualifications. Ez 1040 form 2012   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. Ez 1040 form 2012 As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. Ez 1040 form 2012 For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. Ez 1040 form 2012 Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. Ez 1040 form 2012 If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. Ez 1040 form 2012 For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. Ez 1040 form 2012 The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Ez 1040 form 2012 However, the standard may not be lower than any of those established by the U. Ez 1040 form 2012 S. Ez 1040 form 2012 Department of Education under the Higher Education Act of 1965. Ez 1040 form 2012 For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. Ez 1040 form 2012 See Prepaid expenses, later. Ez 1040 form 2012 As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. Ez 1040 form 2012 Example 1. Ez 1040 form 2012 Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. Ez 1040 form 2012 Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. Ez 1040 form 2012 Sharon claimed the American opportunity credit on her 2012 tax return. Ez 1040 form 2012 The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. Ez 1040 form 2012 Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. Ez 1040 form 2012 If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. Ez 1040 form 2012 Example 2. Ez 1040 form 2012 Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. Ez 1040 form 2012 His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. Ez 1040 form 2012 No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. Ez 1040 form 2012 The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. Ez 1040 form 2012 Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. Ez 1040 form 2012 If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. Ez 1040 form 2012 If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. Ez 1040 form 2012 Example 3. Ez 1040 form 2012 Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. Ez 1040 form 2012 Glenda pays her tuition for the 2014 Spring semester in December 2013. Ez 1040 form 2012 Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. Ez 1040 form 2012 If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. Ez 1040 form 2012 You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Ez 1040 form 2012 Note. Ez 1040 form 2012 Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Ez 1040 form 2012 “Qualified education expenses” are defined later under Qualified Education Expenses . Ez 1040 form 2012 “Eligible students” are defined later under Who Is an Eligible Student . Ez 1040 form 2012 A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Ez 1040 form 2012 You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. Ez 1040 form 2012 This image is too large to be displayed in the current screen. Ez 1040 form 2012 Please click the link to view the image. Ez 1040 form 2012 Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. Ez 1040 form 2012 Your filing status is married filing separately. Ez 1040 form 2012 You are listed as a dependent on another person's tax return (such as your parents'). Ez 1040 form 2012 See Who Can Claim a Dependent's Expenses , later. Ez 1040 form 2012 Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). Ez 1040 form 2012 MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Ez 1040 form 2012 You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Ez 1040 form 2012 More information on nonresident aliens can be found in Publication 519, U. Ez 1040 form 2012 S. Ez 1040 form 2012 Tax Guide for Aliens. Ez 1040 form 2012 What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Ez 1040 form 2012 Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. Ez 1040 form 2012 For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. Ez 1040 form 2012 Academic period. Ez 1040 form 2012   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Ez 1040 form 2012 In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Ez 1040 form 2012 Paid with borrowed funds. Ez 1040 form 2012   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Ez 1040 form 2012 Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Ez 1040 form 2012 Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Ez 1040 form 2012 Student withdraws from class(es). Ez 1040 form 2012   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. Ez 1040 form 2012 Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Ez 1040 form 2012 Eligible educational institution. Ez 1040 form 2012   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Ez 1040 form 2012 S. Ez 1040 form 2012 Department of Education. Ez 1040 form 2012 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Ez 1040 form 2012 The educational institution should be able to tell you if it is an eligible educational institution. Ez 1040 form 2012   Certain educational institutions located outside the United States also participate in the U. Ez 1040 form 2012 S. Ez 1040 form 2012 Department of Education's Federal Student Aid (FSA) programs. Ez 1040 form 2012 Related expenses. Ez 1040 form 2012   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. Ez 1040 form 2012   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. Ez 1040 form 2012 Prepaid expenses. Ez 1040 form 2012   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Ez 1040 form 2012 See Academic period, earlier. Ez 1040 form 2012 For example, if you pay $2,000 in December 2013, for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Ez 1040 form 2012    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Ez 1040 form 2012   In the following examples, assume that each student is an eligible student at an eligible educational institution. Ez 1040 form 2012 Example 1. Ez 1040 form 2012 Jefferson is a sophomore in University V's degree program in dentistry. Ez 1040 form 2012 This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Ez 1040 form 2012 Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. Ez 1040 form 2012 Example 2. Ez 1040 form 2012 Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Ez 1040 form 2012 The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Ez 1040 form 2012 William bought his books from a friend; Grace bought hers at College W's bookstore. Ez 1040 form 2012 Both are qualified education expenses for the American opportunity credit. Ez 1040 form 2012 Example 3. Ez 1040 form 2012 When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Ez 1040 form 2012 This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. Ez 1040 form 2012 No portion of the fee covers personal expenses. Ez 1040 form 2012 Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. Ez 1040 form 2012 No Double Benefit Allowed You cannot do any of the following. Ez 1040 form 2012 Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. Ez 1040 form 2012 Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. Ez 1040 form 2012 Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. Ez 1040 form 2012 Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. Ez 1040 form 2012 See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Ez 1040 form 2012 Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Ez 1040 form 2012 See Adjustments to Qualified Education Expenses, next. Ez 1040 form 2012 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Ez 1040 form 2012 The result is the amount of adjusted qualified education expenses for each student. Ez 1040 form 2012 Tax-free educational assistance. Ez 1040 form 2012   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Ez 1040 form 2012 See Academic period, earlier. Ez 1040 form 2012   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Ez 1040 form 2012 This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Ez 1040 form 2012   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. Ez 1040 form 2012 If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. Ez 1040 form 2012   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Ez 1040 form 2012 Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Ez 1040 form 2012 Generally, any scholarship or fellowship is treated as tax free. Ez 1040 form 2012 However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Ez 1040 form 2012 The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Ez 1040 form 2012 The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Ez 1040 form 2012 You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Ez 1040 form 2012 For examples, see Coordination with Pell grants and other scholarships, later. Ez 1040 form 2012 Refunds. Ez 1040 form 2012   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Ez 1040 form 2012 Some tax-free educational assistance received after 2013 may be treated as a refund. Ez 1040 form 2012 See Tax-free educational assistance, earlier. Ez 1040 form 2012 Refunds received in 2013. Ez 1040 form 2012   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Ez 1040 form 2012 Refunds received after 2013 but before your income tax return is filed. Ez 1040 form 2012   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Ez 1040 form 2012 Refunds received after 2013 and after your income tax return is filed. Ez 1040 form 2012   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Ez 1040 form 2012 See Credit recapture, next. Ez 1040 form 2012 Credit recapture. Ez 1040 form 2012    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Ez 1040 form 2012 You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Ez 1040 form 2012 You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). Ez 1040 form 2012 Include that amount as an additional tax for the year the refund or tax-free assistance was received. Ez 1040 form 2012 Example. Ez 1040 form 2012   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. Ez 1040 form 2012 You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. Ez 1040 form 2012 After you filed your return, you received a refund of $4,000. Ez 1040 form 2012 You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. Ez 1040 form 2012 The refigured credit is $2,250. Ez 1040 form 2012 The increase to your tax liability is also $250. Ez 1040 form 2012 Include the difference of $250 as additional tax on your 2014 tax return. Ez 1040 form 2012 See the instructions for your 2014 income tax return to determine where to include this tax. Ez 1040 form 2012 If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Ez 1040 form 2012 Amounts that do not reduce qualified education expenses. Ez 1040 form 2012   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Ez 1040 form 2012   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Ez 1040 form 2012 The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Ez 1040 form 2012 The use of the money is not restricted. Ez 1040 form 2012 Example 1. Ez 1040 form 2012 Joan paid $3,000 for tuition and $5,000 for room and board at University X. Ez 1040 form 2012 The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. Ez 1040 form 2012 To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. Ez 1040 form 2012 The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Ez 1040 form 2012 University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Ez 1040 form 2012 Joan does not report any portion of the scholarship as income on her tax return. Ez 1040 form 2012 In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. Ez 1040 form 2012 The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Ez 1040 form 2012 Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). Ez 1040 form 2012 Example 2. Ez 1040 form 2012 The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Ez 1040 form 2012 Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Ez 1040 form 2012 Joan is treated as having paid $3,000 in qualified education expenses. Ez 1040 form 2012 Coordination with Pell grants and other scholarships. Ez 1040 form 2012   In some cases, you may be able to reduce your tax liability by including scholarships in income. Ez 1040 form 2012 If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Ez 1040 form 2012 The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Ez 1040 form 2012 Example 1—No scholarship. Ez 1040 form 2012 Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. Ez 1040 form 2012 This was his first year of postsecondary education. Ez 1040 form 2012 During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. Ez 1040 form 2012 He and the college meet all the requirements for the American opportunity credit. Ez 1040 form 2012 Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. Ez 1040 form 2012 Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. Ez 1040 form 2012 His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. Ez 1040 form 2012 He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. Ez 1040 form 2012 Example 2—Scholarship excluded from income. Ez 1040 form 2012 The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Ez 1040 form 2012 Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. Ez 1040 form 2012 If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. Ez 1040 form 2012 His adjusted qualified education expenses will be zero and he will not have an education credit. Ez 1040 form 2012 Therefore, Bill's tax after credits would be $2,599. Ez 1040 form 2012 Example 3—Scholarship partially included in income. Ez 1040 form 2012 The facts are the same as in Example 2—Scholarship excluded from income. Ez 1040 form 2012 If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. Ez 1040 form 2012 The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. Ez 1040 form 2012 Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. Ez 1040 form 2012 Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. Ez 1040 form 2012 Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Ez 1040 form 2012 This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Ez 1040 form 2012 Sports, games, hobbies, and noncredit courses. Ez 1040 form 2012   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Ez 1040 form 2012 However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Ez 1040 form 2012 Comprehensive or bundled fees. Ez 1040 form 2012   Some eligible educational institutions combine all of their fees for an academic period into one amount. Ez 1040 form 2012 If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. Ez 1040 form 2012 The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. Ez 1040 form 2012 See Figuring the Credit , later, for more information about Form 1098-T. Ez 1040 form 2012 Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. Ez 1040 form 2012 This is a student who meets all of the following requirements. Ez 1040 form 2012 The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. Ez 1040 form 2012 This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. Ez 1040 form 2012 The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. Ez 1040 form 2012 For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Ez 1040 form 2012 The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. Ez 1040 form 2012 These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. Ez 1040 form 2012 Completion of first 4 years. Ez 1040 form 2012   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. Ez 1040 form 2012 This student generally would not be an eligible student for purposes of the American opportunity credit. Ez 1040 form 2012 Exception. Ez 1040 form 2012   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. Ez 1040 form 2012 Enrolled at least half-time. Ez 1040 form 2012   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Ez 1040 form 2012   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Ez 1040 form 2012 However, the standard may not be lower than any of those established by the U. Ez 1040 form 2012 S. Ez 1040 form 2012 Department of Education under the Higher Education Act of 1965. Ez 1040 form 2012 Please click here for the text description of the image. Ez 1040 form 2012 Figure 2-2 Example 1. Ez 1040 form 2012 Mack graduated from high school in June 2012. Ez 1040 form 2012 In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. Ez 1040 form 2012 For the 2013 fall semester, Mack was enrolled less than half-time. Ez 1040 form 2012 Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). Ez 1040 form 2012 Example 2. Ez 1040 form 2012 After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. Ez 1040 form 2012 College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. Ez 1040 form 2012 Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. Ez 1040 form 2012 Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. Ez 1040 form 2012 Example 3. Ez 1040 form 2012 During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Ez 1040 form 2012 Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Ez 1040 form 2012 Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. Ez 1040 form 2012 Example 4. Ez 1040 form 2012 The facts are the same as in Example 3. Ez 1040 form 2012 During the 2013 spring semester, Larry again attended College X but not as part of a degree program. Ez 1040 form 2012 Larry graduated from high school in June 2013. Ez 1040 form 2012 For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Ez 1040 form 2012 Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. Ez 1040 form 2012 Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. Ez 1040 form 2012 Example 5. Ez 1040 form 2012 Dee graduated from high school in June 2012. Ez 1040 form 2012 In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Ez 1040 form 2012 Dee completed the program in December 2013, and was awarded a certificate. Ez 1040 form 2012 In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Ez 1040 form 2012 Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. Ez 1040 form 2012 Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. Ez 1040 form 2012 For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. Ez 1040 form 2012 You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Ez 1040 form 2012 IF you. Ez 1040 form 2012 . Ez 1040 form 2012 . Ez 1040 form 2012 THEN only. Ez 1040 form 2012 . Ez 1040 form 2012 . Ez 1040 form 2012 claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. Ez 1040 form 2012 The dependent cannot claim the credit. Ez 1040 form 2012 do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. Ez 1040 form 2012 You cannot claim the credit based on this dependent's expenses. Ez 1040 form 2012 Expenses paid by dependent. Ez 1040 form 2012   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Ez 1040 form 2012 Include these expenses when figuring the amount of your American opportunity credit. Ez 1040 form 2012    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Ez 1040 form 2012 Expenses paid by you. Ez 1040 form 2012   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. Ez 1040 form 2012 If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. Ez 1040 form 2012 Expenses paid by others. Ez 1040 form 2012   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Ez 1040 form 2012 In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Ez 1040 form 2012 If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Ez 1040 form 2012 Example. Ez 1040 form 2012 In 2013, Ms. Ez 1040 form 2012 Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Ez 1040 form 2012 For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Ez 1040 form 2012 Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. Ez 1040 form 2012 If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. Ez 1040 form 2012 If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. Ez 1040 form 2012 Tuition reduction. Ez 1040 form 2012    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Ez 1040 form 2012 If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Ez 1040 form 2012 For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Ez 1040 form 2012 Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. Ez 1040 form 2012 The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. Ez 1040 form 2012 You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. Ez 1040 form 2012 However, the credit may be reduced based on your MAGI. Ez 1040 form 2012 See Effect of the Amount of Your Income on the Amount of Your Credit , later. Ez 1040 form 2012 Example. Ez 1040 form 2012 Jack and Kay Ford are married and file a joint tax return. Ez 1040 form 2012 For 2013, they claim an exemption for their dependent daughter on their tax return. Ez 1040 form 2012 Their MAGI is $70,000. Ez 1040 form 2012 Their daughter is in her junior (third) year of studies at the local university. Ez 1040 form 2012 Jack and Kay paid qualified education expenses of $4,300 in 2013. Ez 1040 form 2012 Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Ez 1040 form 2012 Jack and Kay can claim a $2,500 American opportunity credit in 2013. Ez 1040 form 2012 This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Ez 1040 form 2012 Form 1098-T. Ez 1040 form 2012   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. Ez 1040 form 2012 Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Ez 1040 form 2012 An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Ez 1040 form 2012 However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. Ez 1040 form 2012 When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Ez 1040 form 2012   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Ez 1040 form 2012    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. Ez 1040 form 2012 Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Ez 1040 form 2012 You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). Ez 1040 form 2012 Modified adjusted gross income (MAGI). Ez 1040 form 2012   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Ez 1040 form 2012 MAGI when using Form 1040A. Ez 1040 form 2012   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Ez 1040 form 2012 MAGI when using Form 1040. Ez 1040 form 2012   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Ez 1040 form 2012 You can use Worksheet 2-1, next, to figure your MAGI. Ez 1040 form 2012    Worksheet 2-1. Ez 1040 form 2012 MAGI for the American Opportunity Credit 1. Ez 1040 form 2012 Enter your adjusted gross income  (Form 1040, line 38)   1. Ez 1040 form 2012   2. Ez 1040 form 2012 Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Ez 1040 form 2012       3. Ez 1040 form 2012 Enter your foreign housing deduction (Form 2555, line 50)   3. Ez 1040 form 2012       4. Ez 1040 form 2012 Enter the amount of income from Puerto Rico you are excluding   4. Ez 1040 form 2012       5. Ez 1040 form 2012 Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Ez 1040 form 2012       6. Ez 1040 form 2012 Add the amounts on lines 2, 3, 4, and 5   6. Ez 1040 form 2012   7. Ez 1040 form 2012 Add the amounts on lines 1 and 6. Ez 1040 form 2012  This is your modified adjusted  gross income. Ez 1040 form 2012 Enter here and  on Form 8863, line 3   7. Ez 1040 form 2012   Phaseout. Ez 1040 form 2012   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. Ez 1040 form 2012 The same method is shown in the following example. Ez 1040 form 2012 Example. Ez 1040 form 2012 You are filing a joint return and your MAGI is $165,000. Ez 1040 form 2012 In 2013, you paid $5,000 of qualified education expenses. Ez 1040 form 2012 You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). Ez 1040 form 2012 Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. Ez 1040 form 2012 The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. Ez 1040 form 2012 The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). Ez 1040 form 2012 The result is the amount of your phased out (reduced) American opportunity credit ($1,875). Ez 1040 form 2012      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. Ez 1040 form 2012 However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Ez 1040 form 2012 Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. Ez 1040 form 2012 You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. Ez 1040 form 2012 You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). Ez 1040 form 2012 At least one of your parents was alive at the end of 2013. Ez 1040 form 2012 You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. Ez 1040 form 2012 Earned income. Ez 1040 form 2012   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Ez 1040 form 2012 Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. Ez 1040 form 2012 Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Ez 1040 form 2012   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). Ez 1040 form 2012 However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. Ez 1040 form 2012 Support. Ez 1040 form 2012   Your support includes food, shelter, clothing, medical and dental care, education, and the like. Ez 1040 form 2012 Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. Ez 1040 form 2012 If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. Ez 1040 form 2012 However, a scholarship received by you is not considered support if you are a full-time student. Ez 1040 form 2012 See Publication 501 for details. Ez 1040 form 2012 Full-time student. Ez 1040 form 2012   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. Ez 1040 form 2012 Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Ez 1040 form 2012 Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Ez 1040 form 2012 Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. Ez 1040 form 2012 A filled-in Form 8863 is shown at the end of this publication. Ez 1040 form 2012 Note. Ez 1040 form 2012 In Appendix A. Ez 1040 form 2012 at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Ez 1040 form 2012 Prev  Up  Next   Home   More Online Publications