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Federal Free State Tax

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Federal Free State Tax

Federal free state tax 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. Federal free state tax S. Federal free state tax 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. Federal free state tax S. Federal free state tax 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. Federal free state tax S. Federal free state tax 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. Federal free state tax Employee business expenses. Federal free state tax 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. Federal free state tax You can change your choice for each year's taxes. Federal free state tax To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. Federal free state tax S. Federal free state tax tax return. Federal free state tax However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. Federal free state tax See How To Figure the Credit , later. Federal free state tax To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. Federal free state tax Figure your tax both ways—claiming the credit and claiming the deduction. Federal free state tax Then fill out your return the way that benefits you more. Federal free state tax See Why Choose the Credit, later. Federal free state tax 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. Federal free state tax If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. Federal free state tax You cannot deduct any of them. Federal free state tax Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. Federal free state tax You cannot take a credit for any of them. Federal free state tax See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. Federal free state tax There are exceptions to this general rule, which are described next. Federal free state tax Exceptions for foreign taxes not allowed as a credit. Federal free state tax   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. Federal free state tax Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. Federal free state tax S. Federal free state tax tax purposes. Federal free state tax For more information, see Internal Revenue Code section 901(m). Federal free state tax The IRS intends to issue guidance that will explain this provision in greater detail. Federal free state tax   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. Federal free state tax Foreign taxes that are not income taxes. Federal free state tax   In most cases, only foreign income taxes qualify for the foreign tax credit. Federal free state tax Other taxes, such as foreign real and personal property taxes, do not qualify. Federal free state tax But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. Federal free state tax   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. Federal free state tax However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). Federal free state tax Carrybacks and carryovers. Federal free state tax   There is a limit on the credit you can claim in a tax year. Federal free state tax 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. Federal free state tax If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. Federal free state tax That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. Federal free state tax   For more information on the limit, see How To Figure the Credit , later. Federal free state tax For more information on carrybacks and carryovers, see Carryback and Carryover , later. Federal free state tax 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. Federal free state tax You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. Federal free state tax Example. Federal free state tax You paid foreign taxes for the last 13 years and chose to deduct them on your U. Federal free state tax S. Federal free state tax income tax returns. Federal free state tax You were timely in both filing your returns and paying your U. Federal free state tax S. Federal free state tax tax liability. Federal free state tax 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. Federal free state tax Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). Federal free state tax Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. Federal free state tax Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. Federal free state tax 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. Federal free state tax 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. Federal free state tax 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. Federal free state tax 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. Federal free state tax 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. Federal free state tax See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. Federal free state tax 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. Federal free state tax In most cases, if the foreign tax rate is higher than the U. Federal free state tax S. Federal free state tax rate, there will be no U. Federal free state tax S. Federal free state tax tax on the foreign income. Federal free state tax If the foreign tax rate is lower than the U. Federal free state tax S. Federal free state tax rate, U. Federal free state tax S. Federal free state tax tax on the foreign income will be limited to the difference between the rates. Federal free state tax The foreign tax credit can only reduce U. Federal free state tax S. Federal free state tax taxes on foreign source income; it cannot reduce U. Federal free state tax S. Federal free state tax taxes on U. Federal free state tax S. Federal free state tax source income. Federal free state tax 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. Federal free state tax This is because: A credit reduces your actual U. Federal free state tax S. Federal free state tax 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. Federal free state tax 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. Federal free state tax (See Limit on credit under How To Figure the Credit, later. Federal free state tax ) Example 1. Federal free state tax For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. Federal free state tax None of the dividends are qualified dividends. Federal free state tax You file a joint return and can claim two $3,900 exemptions. Federal free state tax You had to pay $2,000 in foreign income taxes on the dividend income. Federal free state tax If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. Federal free state tax Your taxable income then is $57,500 and your tax is $7,736. Federal free state tax If you take the credit instead, your itemized deductions are only $13,000. Federal free state tax Your taxable income then is $59,500 and your tax before the credit is $8,036. Federal free state tax After the credit, however, your tax is only $6,036. Federal free state tax Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. Federal free state tax Example 2. Federal free state tax In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. Federal free state tax You report on your U. Federal free state tax S. Federal free state tax return this income as well as $56,000 of U. Federal free state tax S. Federal free state tax source wages and an allowable $49,000 partnership loss from a U. Federal free state tax S. Federal free state tax partnership. Federal free state tax Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. Federal free state tax You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. Federal free state tax If you deduct the foreign tax on your U. Federal free state tax S. Federal free state tax 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. Federal free state tax 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. Federal free state tax You can take a credit of only $113 because of limits discussed later. Federal free state tax Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. Federal free state tax If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). Federal free state tax 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. Federal free state tax 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. Federal free state tax “Tax year” refers to the tax year for which your U. Federal free state tax S. Federal free state tax return is filed, not the tax year for which your foreign return is filed. Federal free state tax Accrual method of accounting. Federal free state tax   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. Federal free state tax 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. Federal free state tax   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. Federal free state tax Generally, this occurs on the last day of the tax year for which your foreign return is filed. Federal free state tax Contesting your foreign tax liability. Federal free state tax   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. Federal free state tax 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. Federal free state tax Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. Federal free state tax 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 . Federal free state tax You may have to post a bond. Federal free state tax   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. Federal free state tax   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. Federal free state tax Cash method of accounting. Federal free state tax   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. Federal free state tax 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. Federal free state tax Choosing to take credit in the year taxes accrue. Federal free state tax   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. Federal free state tax You make the choice by checking the box in Part II of Form 1116. Federal free state tax 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. Federal free state tax   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. Federal free state tax You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. Federal free state tax   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. Federal free state tax Credit based on taxes paid in earlier year. Federal free state tax   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. Federal free state tax Example. Federal free state tax Last year you took the credit based on taxes paid. Federal free state tax This year you chose to take the credit based on taxes accrued. Federal free state tax During the year you paid foreign income taxes owed for last year. Federal free state tax You also accrued foreign income taxes for this year that you did not pay by the end of the year. Federal free state tax 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. Federal free state tax Foreign Currency and Exchange Rates U. Federal free state tax S. Federal free state tax income tax is imposed on income expressed in U. Federal free state tax S. Federal free state tax dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. Federal free state tax Therefore, fluctuations in the value of the foreign currency relative to the U. Federal free state tax S. Federal free state tax dollar may affect the foreign tax credit. Federal free state tax Translating foreign currency into U. Federal free state tax S. Federal free state tax dollars. Federal free state tax   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. Federal free state tax S. Federal free state tax dollars. Federal free state tax How and when you do this depends on your functional currency. Federal free state tax In most cases, your functional currency is the U. Federal free state tax S. Federal free state tax dollar unless you are required to use the currency of a foreign country. Federal free state tax   You must make all federal income tax determinations in your functional currency. Federal free state tax The U. Federal free state tax S. Federal free state tax dollar is the functional currency for all taxpayers except some qualified business units. Federal free state tax A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. Federal free state tax Unless you are self-employed, your functional currency is the U. Federal free state tax S. Federal free state tax dollar. Federal free state tax   Even if you are self-employed and have a qualified business unit, your functional currency is the U. Federal free state tax S. Federal free state tax dollar if any of the following apply. Federal free state tax You conduct the business primarily in dollars. Federal free state tax The principal place of business is located in the United States. Federal free state tax You choose to or are required to use the dollar as your functional currency. Federal free state tax 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. Federal free state tax   If your functional currency is the U. Federal free state tax S. Federal free state tax dollar, you must immediately translate into dollars all items of income, expense, etc. Federal free state tax , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Federal free state tax If there is more than one exchange rate, use the one that most properly reflects your income. Federal free state tax In most cases, you can get exchange rates from banks and U. Federal free state tax S. Federal free state tax Embassies. Federal free state tax   If your functional currency is not the U. Federal free state tax S. Federal free state tax dollar, make all income tax determinations in your functional currency. Federal free state tax At the end of the year, translate the results, such as income or loss, into U. Federal free state tax S. Federal free state tax dollars to report on your income tax return. Federal free state tax    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. Federal free state tax   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. Federal free state tax If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. Federal free state tax 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. Federal free state tax   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). Federal free state tax Exception. Federal free state tax   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. Federal free state tax This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. Federal free state tax The foreign taxes are paid on or after the first day of the tax year to which they relate. Federal free state tax The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. Federal free state tax The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). Federal free state tax (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. Federal free state tax )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. Federal free state tax Election to use exchange rate on date paid. Federal free state tax   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. Federal free state tax If any of the accrued taxes are unpaid, you must translate them into U. Federal free state tax S. Federal free state tax dollars using the exchange rate on the last day of the U. Federal free state tax S. Federal free state tax tax year to which those taxes relate. Federal free state tax 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. Federal free state tax S. Federal free state tax dollar functional currency. Federal free state tax 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. Federal free state tax The election is available for tax years beginning after 2004. Federal free state tax 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. Federal free state tax Make the election by attaching a statement to the applicable tax return. Federal free state tax 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. Federal free state tax S. Federal free state tax dollar functional currency. Federal free state tax Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. Federal free state tax S. Federal free state tax foreign tax credit claimed. Federal free state tax 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. Federal free state tax If a foreign tax redetermination occurs, a redetermination of your U. Federal free state tax S. Federal free state tax tax liability is required if any of the following conditions apply. Federal free state tax The accrued taxes when paid differ from the amounts claimed as a credit. Federal free state tax 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. Federal free state tax If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. Federal free state tax You will not be allowed a credit for the unpaid taxes until you pay them. Federal free state tax When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. Federal free state tax S. Federal free state tax dollars using the exchange rate as of the date they were paid. Federal free state tax The foreign tax credit is allowed for the year to which the foreign tax relates. Federal free state tax See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. Federal free state tax The foreign taxes you paid are refunded in whole or in part. Federal free state tax 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. Federal free state tax 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. Federal free state tax S. Federal free state tax tax year. Federal free state tax In this case, you must adjust your U. Federal free state tax S. Federal free state tax tax in the tax year in which the accrued foreign taxes are paid. Federal free state tax 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. Federal free state tax S. Federal free state tax tax liability for each tax year affected by the redetermination. Federal free state tax In most cases, you must file Form 1040X, Amended U. Federal free state tax S. Federal free state tax Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. Federal free state tax S. Federal free state tax tax liability for the year or years affected. Federal free state tax See Contents of statement , later. Federal free state tax 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. Federal free state tax There are other exceptions to this requirement. Federal free state tax They are discussed later under Due date of notification to IRS . Federal free state tax Contents of statement. Federal free state tax   The statement must include all of the following. Federal free state tax Your name, address, and taxpayer identification number. Federal free state tax The tax year or years that are affected by the foreign tax redetermination. Federal free state tax The date or dates the foreign taxes were accrued, if applicable. Federal free state tax The date or dates the foreign taxes were paid. Federal free state tax The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. Federal free state tax 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. Federal free state tax   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. Federal free state tax   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). Federal free state tax Due date of notification to IRS. Federal free state tax   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. Federal free state tax There is no limit on the time the IRS has to redetermine and assess the correct U. Federal free state tax S. Federal free state tax tax due. Federal free state tax 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. Federal free state tax S. Federal free state tax taxes. Federal free state tax See Time Limit on Refund Claims , later. Federal free state tax   Exceptions to this due date are explained in the next two paragraphs. Federal free state tax Multiple redeterminations of U. Federal free state tax S. Federal free state tax tax liability for same tax year. Federal free state tax   Where more than one foreign tax redetermination requires a redetermination of U. Federal free state tax S. Federal free state tax 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. Federal free state tax 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. Federal free state tax However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. Federal free state tax S. Federal free state tax tax liability is required may occur after the due date for providing that notification. Federal free state tax In this situation, you may have to file more than one Form 1040X for that tax year. Federal free state tax Additional U. Federal free state tax S. Federal free state tax tax due eliminated by foreign tax credit carryback or carryover. Federal free state tax   If a foreign tax redetermination requires a redetermination of U. Federal free state tax S. Federal free state tax tax liability that would otherwise result in an additional amount of U. Federal free state tax S. Federal free state tax 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. Federal free state tax 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. Federal free state tax You must file the statement by the due date (with extensions) of that return. Federal free state tax 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. Federal free state tax S. Federal free state tax tax liability is required). Federal free state tax Failure-to-notify penalty. Federal free state tax   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. Federal free state tax   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. Federal free state tax S. Federal free state tax tax. Federal free state tax This penalty cannot be more than 25% of the tax due. Federal free state tax Foreign tax refund. Federal free state tax   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. Federal free state tax S. Federal free state tax tax for the time before the date of the refund. Federal free state tax   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. Federal free state tax 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. Federal free state tax Interest also is owed from the time you receive a refund until you pay the additional tax due. Federal free state tax Foreign tax imposed on foreign refund. Federal free state tax   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. Federal free state tax 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. Federal free state tax Example. Federal free state tax 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. Federal free state tax When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. Federal free state tax Time Limit on Refund Claims You have 10 years to file a claim for refund of U. Federal free state tax S. Federal free state tax tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. Federal free state tax 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. Federal free state tax You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. Federal free state tax 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). Federal free state tax The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. Federal free state tax See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. Federal free state tax Who Can Take the Credit? U. Federal free state tax S. Federal free state tax citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. Federal free state tax S. Federal free state tax tax on foreign source income may be able to take a foreign tax credit. Federal free state tax U. Federal free state tax S. Federal free state tax Citizens If you are a U. Federal free state tax S. Federal free state tax citizen, you are taxed by the United States on your worldwide income wherever you live. Federal free state tax You are normally entitled to take a credit for foreign taxes you pay or accrue. Federal free state tax 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. Federal free state tax S. Federal free state tax citizens. Federal free state tax If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. Federal free state tax 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. Federal free state tax For information on alien status, see Publication 519. Federal free state tax Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. Federal free state tax 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. Federal free state tax S. Federal free state tax possession on income from foreign sources that is effectively connected with a trade or business in the United States. Federal free state tax But if you must pay tax to a foreign country or U. Federal free state tax S. Federal free state tax possession on income from U. Federal free state tax S. Federal free state tax sources only because you are a citizen or a resident of that country or U. Federal free state tax S. Federal free state tax possession, do not use that tax in figuring the amount of your credit. Federal free state tax For information on alien status and effectively connected income, see Publication 519. Federal free state tax 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. Federal free state tax The tax must be imposed on you. Federal free state tax You must have paid or accrued the tax. Federal free state tax The tax must be the legal and actual foreign tax liability. Federal free state tax The tax must be an income tax (or a tax in lieu of an income tax). Federal free state tax Certain foreign taxes do not qualify for the credit even if the four tests are met. Federal free state tax See Foreign Taxes for Which You Cannot Take a Credit, later. Federal free state tax 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. Federal free state tax S. Federal free state tax possession. Federal free state tax For example, a tax that is deducted from your wages is considered to be imposed on you. Federal free state tax You cannot shift the right to claim the credit by contract or other means. Federal free state tax Foreign country. Federal free state tax   A foreign country includes any foreign state and its political subdivisions. Federal free state tax Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. Federal free state tax U. Federal free state tax S. Federal free state tax possessions. Federal free state tax   For foreign tax credit purposes, all qualified taxes paid to U. Federal free state tax S. Federal free state tax possessions are considered foreign taxes. Federal free state tax For this purpose, U. Federal free state tax S. Federal free state tax possessions include Puerto Rico and American Samoa. Federal free state tax   When the term “foreign country” is used in this publication, it includes U. Federal free state tax S. Federal free state tax possessions unless otherwise stated. Federal free state tax 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. Federal free state tax S. Federal free state tax possession. Federal free state tax 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. Federal free state tax Joint return. Federal free state tax   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. Federal free state tax Combined income. Federal free state tax   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. Federal free state tax 901-2(f)(3)(iii). Federal free state tax 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. Federal free state tax   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. Federal free state tax 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. Federal free state tax For more details, see paragraphs (f) and (h) of Regulations section 1. Federal free state tax 901-2. Federal free state tax For similar rules applicable to prior tax years, see Regulations section 1. Federal free state tax 901-2 (revised as of April 1, 2011). Federal free state tax Example. Federal free state tax You and your spouse reside in Country X, which imposes income tax on your combined incomes. Federal free state tax Both of you use the “u” as your functional currency. Federal free state tax Country X apportions tax based on income. Federal free state tax You had income of 30,000u and your spouse had income of 20,000u. Federal free state tax Your filing status on your U. Federal free state tax S. Federal free state tax income tax return is married filing separately. Federal free state tax You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. Federal free state tax S income tax return. Federal free state tax Your spouse can claim only 40% (20,000u/50,000u). Federal free state tax Partner or S corporation shareholder. Federal free state tax   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. Federal free state tax These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. Federal free state tax 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. Federal free state tax Beneficiary. Federal free state tax   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. Federal free state tax This amount will be shown on the Schedule K-1 you receive from the estate or trust. Federal free state tax However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. Federal free state tax Mutual fund shareholder. Federal free state tax   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. Federal free state tax 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. Federal free state tax If you do not receive this information, you will need to contact the fund. Federal free state tax Controlled foreign corporation shareholder. Federal free state tax   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. Federal free state tax If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. Federal free state tax Controlled foreign corporation. Federal free state tax   A controlled foreign corporation is a foreign corporation in which U. Federal free state tax S. Federal free state tax shareholders own more than 50% of the voting power or value of the stock. Federal free state tax You are considered a U. Federal free state tax S. Federal free state tax shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. Federal free state tax See Internal Revenue Code sections 951(b) and 958(b) for more information. Federal free state tax 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. Federal free state tax Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. Federal free state tax Foreign tax refund. Federal free state tax   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. Federal free state tax   For example, the United States has tax treaties with many countries allowing U. Federal free state tax S. Federal free state tax citizens and residents reductions in the rates of tax of those foreign countries. Federal free state tax However, some treaty countries require U. Federal free state tax S. Federal free state tax 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. Federal free state tax 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. Federal free state tax Subsidy received. Federal free state tax   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. Federal free state tax 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. Federal free state tax 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. Federal free state tax   The term “subsidy” includes any type of benefit. Federal free state tax Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. Federal free state tax Shareholder receiving refund for corporate tax in integrated system. Federal free state tax   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. Federal free state tax You may be able to claim a refund of these taxes from the foreign government. Federal free state tax You must include the refund (including any amount withheld) in your income in the year received. Federal free state tax Any tax withheld from the refund is a qualified foreign tax. Federal free state tax Example. Federal free state tax You are a shareholder of a French corporation. Federal free state tax You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. Federal free state tax The French government imposes a 15% withholding tax ($15) on the refund you received. Federal free state tax You receive a check for $85. Federal free state tax You include $100 in your income. Federal free state tax The $15 of tax withheld is a qualified foreign tax. Federal free state tax 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. Federal free state tax Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. Federal free state tax 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. Federal free state tax See Taxes in Lieu of Income Taxes , later. Federal free state tax 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. Federal free state tax A foreign levy is an income tax only if it meets both of the following requirements. Federal free state tax It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. Federal free state tax The predominant character of the tax is that of an income tax in the U. Federal free state tax S. Federal free state tax sense. Federal free state tax A foreign levy may meet these requirements even if the foreign tax law differs from U. Federal free state tax S. Federal free state tax tax law. Federal free state tax The foreign law may include in income items that U. Federal free state tax S. Federal free state tax law does not include, or it may allow certain exclusions or deductions that U. Federal free state tax S. Federal free state tax law does not allow. Federal free state tax Specific economic benefit. Federal free state tax   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. Federal free state tax   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. Federal free state tax   However, see the exception discussed later under Pension, unemployment, and disability fund payments . Federal free state tax Economic benefits. Federal free state tax   Economic benefits include the following. Federal free state tax Goods. Federal free state tax Services. Federal free state tax Fees or other payments. Federal free state tax Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. Federal free state tax Discharges of contractual obligations. Federal free state tax   In most cases, the right or privilege merely to engage in business is not an economic benefit. Federal free state tax Dual-capacity taxpayers. Federal free state tax   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. Federal free state tax ” 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. Federal free state tax    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. Federal free state tax   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. Federal free state tax    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. Federal free state tax For more information about these agreements, see Publication 54. Federal free state tax Soak-up taxes. Federal free state tax   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. Federal free state tax 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. Federal free state tax This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. Federal free state tax Penalties and interest. Federal free state tax   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. Federal free state tax Taxes not based on income. Federal free state tax   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. Federal free state tax Taxes based on assets, such as property taxes, do not qualify for the credit. Federal free state tax 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. Federal free state tax 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. Federal free state tax A tax in lieu of an income tax does not have to be based on realized net income. Federal free state tax A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. Federal free state tax In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. Federal free state tax 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. Federal free state tax The soak-up tax. Federal free state tax 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. Federal free state tax Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. Federal free state tax 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. Federal free state tax S. Federal free state tax persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. Federal free state tax Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. Federal free state tax S. Federal free state tax gross income. Federal free state tax 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. Federal free state tax S. Federal free state tax income under the foreign earned income exclusion or the foreign housing exclusion. Federal free state tax See Publication 54 for more information on the foreign earned income and housing exclusions. Federal free state tax Wages completely excluded. Federal free state tax   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. Federal free state tax Wages partly excluded. Federal free state tax   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. Federal free state tax 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. Federal free state tax   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. Federal free state tax Deductible expenses do not include the foreign housing deduction. Federal free state tax   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). Federal free state tax If the foreign law taxes foreign earned income and some other income (for example, earned income from U. Federal free state tax S. Federal free state tax sources or a type of income not subject to U. Federal free state tax S. Federal free state tax 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. Federal free state tax Example. Federal free state tax You are a U. Federal free state tax S. Federal free state tax citizen and a cash basis taxpayer, employed by Company X and living in Country A. Federal free state tax 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. Federal free state tax To find that part, do the following. Federal free state tax First, find the amount of business expenses allocable to excluded wages and therefore not deductible. Federal free state tax To do this, multiply the otherwise deductible expenses by a fraction. Federal free state tax That fraction is the excluded wages over your foreign earned income. Federal free state tax   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. Federal free state tax To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). Federal free state tax The result is $81,984. Federal free state tax 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). Federal free state tax Finally, multiply the foreign tax you paid by the resulting fraction. Federal free state tax   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. Federal free state tax Taxes on Income From Puerto Rico Exempt From U. Federal free state tax S. Federal free state tax 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. Federal free state tax For information on figuring the reduction, see Publication 570. Federal free state tax 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. Federal free state tax For more information on this exclusion, see Publication 570. Federal free state tax Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. Federal free state tax However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. Federal free state tax 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. Federal free state tax However, you can claim an itemized deduction for these taxes. Federal free state tax See Choosing To Take Credit or Deduction , earlier. Federal free state tax 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. Federal free state tax The following countries meet this description for 2013. Federal free state tax Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. Federal free state tax Cuba. Federal free state tax Iran. Federal free state tax Libya (but see Note later). Federal free state tax North Korea. Federal free state tax Sudan. Federal free state tax Syria. Federal free state tax Waiver of denial of the credit. Federal free state tax   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. Federal free state tax S. Federal free state tax companies in the sanctioned country. Federal free state tax 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. Federal free state tax Note. Federal free state tax Effective December 10, 2004, the President granted a waiver to Libya. Federal free state tax Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. Federal free state tax Limit on credit. Federal free state tax   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. Federal free state tax You must fill out a separate Form 1116 for this income. Federal free state tax This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. Federal free state tax Example. Federal free state tax You lived and worked in Iran until August, when you were transferred to Italy. Federal free state tax You paid taxes to each country on the income earned in that country. Federal free state tax You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. Federal free state tax Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. Federal free state tax You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. Federal free state tax Figuring the credit when a sanction ends. Federal free state tax    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. Federal free state tax 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. Federal free state tax Example. Federal free state tax The sanctions against Country X ended on July 31. Federal free state tax On August 19, you receive a distribution from a mutual fund of Country X income. Federal free state tax The fund paid Country X income tax for you on the distribution. Federal free state tax 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. Federal free state tax Amounts for the nonsanctioned period. Federal free state tax   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. Federal free state tax Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. Federal free state tax   Number of nonsanctioned days in year  Number of days in year Example. Federal free state tax 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. Federal free state tax Sanctions against Country X ended on July 11, 2013. Federal free state tax You are unable to determine how much of the income or tax is for the nonsanctioned period. Federal free state tax 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. Federal free state tax You would compute the income for the nonsanctioned period as follows. Federal free state tax 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. Federal free state tax 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. Federal free state tax Further information. Federal free state tax   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. Federal free state tax This Cumulative Bulletin can be found in many libraries and IRS offices. Federal free state tax Table 1. Federal free state tax 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. Federal free state tax 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. Federal free state tax 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). Federal free state tax 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. Federal free state tax If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. Federal free state tax 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. Federal free state tax 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. Federal free state tax Withholding tax. Federal free state tax   For this purpose, withholding tax includes any tax determined on a gross basis. Federal free state tax It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Federal free state tax Ex-dividend date. Federal free state tax   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. Federal free state tax Example 1. Federal free state tax You bought common stock from a foreign corporation on November 3. Federal free state tax You sold the stock on November 19. Federal free state tax You received a dividend on this stock because you owned it on the ex-dividend date of November 5. Federal free state tax 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). Federal free state tax Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. Federal free state tax Example 2. Federal free state tax The facts are the same as in Example 1 except that you sold the stock on November 14. Federal free state tax You held the stock for only 11 days. Federal free state tax You are not entitled to the credit. Federal free state tax Exception. Federal free state tax   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. Federal free state tax See section 901(k)(4) of the Internal Revenue Code for more information. Federal free state tax 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. Federal free state tax 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. Federal free state tax Withholding tax. Federal free state tax   For this purpose, withholding tax includes any tax determined on a gross basis. Federal free state tax It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Federal free state tax Exception for dealers. Federal free state tax   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. Federal free state tax See section 901(I)(2) of the Internal Revenue Code for more information. Federal free state tax 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. Federal free state tax A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. Federal free state tax S. Federal free state tax tax purposes but not for foreign tax purposes. Federal free state tax For more information, see Internal Revenue Code section 901(m). Federal free state tax The IRS intends to issue guidance that will explain this provision in greater detail. Federal free state tax 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. Federal free state tax 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. Federal free state tax For details, see Regulations section 1. Federal free state tax 901-3. Federal free state tax 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. Federal free state tax See the instructions for line 12 in the Form 1116 instructions to figure this reduction. Federal free state tax 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. Federal free state tax List of boycotting countries. Federal free state tax   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. Federal free state tax As of November 2013, the following countries are listed. Federal free state tax Iraq. Federal free state tax Kuwait. Federal free state tax Lebanon. Federal free state tax Libya. Federal free state tax Qatar. Federal free state tax Saudi Arabia. Federal free state tax Syria. Federal free state tax United Arab Emirates. Federal free state tax Yemen. Federal free state tax    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. Federal free state tax   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. Federal free state tax The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. Federal free state tax Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. Federal free state tax Public inspection. Federal free state tax   A determination and any related background file is open to public inspection. Federal free state tax However, your identity and certain other information will remain confidential. Federal free state tax Reporting requirements. Federal free state tax   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. Federal free state tax 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. Federal free state tax A partnership in which you are a partner. Federal free state tax A trust you are treated as owning. Federal free state tax Form 5713 required. Federal free state tax   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. Federal free state tax See the Instructions for Form 5713 for information on when and where to file the form. Federal free state tax Penalty for failure to file. Federal free state tax   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. Federal free state tax 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. Federal free state tax 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. Federal free state tax S. Federal free state tax tax liability (Form 1040, line 44) divided by your worldwide taxable income. Federal free state tax You may be entitled to carry over to other years taxes reduced under this rule. Federal free state tax See Internal Revenue Code section 907(f). Federal free state tax Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. Federal free state tax Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. Federal free state tax Taxes of U. Federal free state tax S. Federal free state tax 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. Federal free state tax 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. Federal free state tax See Penalty for not filing Form 5471 or Form 8865 , later. Federal free state tax U. Federal free state tax S. Federal free state tax persons controlling foreign corporations. Federal free state tax   If you are a U. Federal free state tax S. Federal free state tax 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. Federal free state tax S. Federal free state tax Persons With Respect To Certain Foreign Corporations. Federal free state tax 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. Federal free state tax U. Federal free state tax S. Federal free state tax persons controlling foreign partnerships. Federal free state tax   If you are a U. Federal free state tax S. Federal free state tax 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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Understanding Your CP108 Notice

You are receiving this notice because you made a payment of $XXXXX on XXXXX, and we can’t determine the correct form or tax year to apply it to.


What you need to do

  • If the payment was applied correctly, then there is nothing you need to do.  There is no need to contact the IRS in these situations.
  • If the payment was not applied correctly, contact the IRS and advise them where the payment should be applied.  Contact us at the toll-free number on the top right corner of your notice or write us at the address on the notice.
  • Correct the copy of your tax return that you kept for your records.

You may want to


Answers to Common Questions

Q. What do I say when I call the IRS?

A. Mention that you received a CP 108 notice and you need to review your account with a customer service representative. Be sure to have a copy of your notice and your tax return before you call.

Q. What should I do if I disagree with the changes you made?

A. If you disagree, contact us at the toll-free number listed on the top right corner of your notice.

Q. What if I need to make another correction to my account?

A. You'll need to file an amended tax return.

Q. What if I have tried to get answers and after contacting IRS several times have not been successful?

A. Call Taxpayer Advocate at 1-877-777-4778 or for TTY/TDD 1-800-829-4059.

 


Tips for next year

If you paid electronically, ensure that you enter a valid tax period end date.  Review Appendix A of the EFTPS Payment Instruction Booklet to determine the proper tax form code.

In addition, review the instructions for determining the correct tax period end date (e.g., for quarterly returns, Forms 720, Forms 941, etc., March 31, June 30, September 30, December 31). Enter as the MM in the YYMM format as:

Quarter Format
1st quarter March 31 31-03
2nd quarter June 30 30-06
3rd quarter September 30-09
4th quarter December 31-12

 

 

 

Page Last Reviewed or Updated: 10-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Federal Free State Tax

Federal free state tax 9. Federal free state tax   Education Exception to Additional Tax on Early IRA Distributions Table of Contents Introduction Who Is Eligible Figuring the Amount Not Subject to the 10% Tax Reporting Early Distributions Introduction Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. Federal free state tax This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. Federal free state tax The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. Federal free state tax See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs. Federal free state tax However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. Federal free state tax You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. Federal free state tax Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. Federal free state tax If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax. Federal free state tax Who Is Eligible You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for: yourself, your spouse, or your or your spouse's child, foster child, adopted child, or descendant of any of them. Federal free state tax Qualified education expenses. Federal free state tax   For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Federal free state tax They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Federal free state tax   In addition, if the student is at least a half-time student, room and board are qualified education expenses. Federal free state tax   The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Federal free state tax The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Federal free state tax The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Federal free state tax You will need to contact the eligible educational institution for qualified room and board costs. Federal free state tax Eligible educational institution. Federal free state tax   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. Federal free state tax S. Federal free state tax Department of Education. Federal free state tax It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Federal free state tax The educational institution should be able to tell you if it is an eligible educational institution. Federal free state tax   Certain educational institutions located outside the United States also participate in the U. Federal free state tax S. Federal free state tax Department of Education's Federal Student Aid (FSA) programs. Federal free state tax Half-time student. Federal free state tax   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled. Federal free state tax Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. Federal free state tax You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes: Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7, Coverdell Education Savings Account), The tax-free part 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), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Federal free state tax Do not reduce the qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance given to either the student or the individual making the withdrawal, or A withdrawal from personal savings (including savings from a qualified tuition program (QTP)). Federal free state tax If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax. Federal free state tax Example 1. Federal free state tax In 2013, Erin (age 32) took a year off from teaching to attend graduate school full-time. Federal free state tax She paid $5,800 of qualified education expenses from the following sources. Federal free state tax   Employer-provided educational assistance  (tax free) $5,000     Early distribution from IRA (includes $500 taxable earnings) 3,200           Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses. Federal free state tax   Total qualified education expenses $5,800     Minus: Tax-free educational assistance −5,000     Equals: Adjusted qualified  education expenses (AQEE) $ 800   Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), she does not have to pay the 10% additional tax on any part of this distribution. Federal free state tax However, she must include the $500 taxable earnings in her gross income subject to income tax. Federal free state tax Example 2. Federal free state tax Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. Federal free state tax This must be included in her income subject to income tax. Federal free state tax The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. Federal free state tax Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). Federal free state tax She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution. Federal free state tax Reporting Early Distributions By January 31, 2014, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Federal free state tax The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax. Federal free state tax If you received an early distribution from your IRA, you must report the taxable earnings on Form 1040, line 15b (Form 1040NR, line 16b). Federal free state tax Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. Federal free state tax See the Instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR. Federal free state tax There are many other situations in which Form 5329 is required. Federal free state tax If, during 2013, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 58 (Form 1040) or line 56 (Form 1040NR) to determine if you must file Form 5329. Federal free state tax Prev  Up  Next   Home   More Online Publications