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File taxes online free 2011 23. File taxes online free 2011   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. File taxes online free 2011 Mortgage proceeds used for business or investment. File taxes online free 2011 Introduction This chapter discusses what interest expenses you can deduct. File taxes online free 2011 Interest is the amount you pay for the use of borrowed money. File taxes online free 2011 The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). File taxes online free 2011 Home mortgage interest, including certain points and mortgage insurance premiums. File taxes online free 2011 Investment interest. File taxes online free 2011 This chapter explains these deductions. File taxes online free 2011 It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. File taxes online free 2011 Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. File taxes online free 2011 Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). File taxes online free 2011 The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. File taxes online free 2011 You can deduct home mortgage interest if all the following conditions are met. File taxes online free 2011 You file Form 1040 and itemize deductions on Schedule A (Form 1040). File taxes online free 2011 The mortgage is a secured debt on a qualified home in which you have an ownership interest. File taxes online free 2011 (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. File taxes online free 2011 The term “qualified home” means your main home or second home. File taxes online free 2011 For details, see Publication 936. File taxes online free 2011 )  Both you and the lender must intend that the loan be repaid. File taxes online free 2011 Amount Deductible In most cases, you can deduct all of your home mortgage interest. File taxes online free 2011 How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. File taxes online free 2011 Fully deductible interest. File taxes online free 2011   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. File taxes online free 2011 (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. File taxes online free 2011 )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). File taxes online free 2011 Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). File taxes online free 2011 Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). File taxes online free 2011 The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. File taxes online free 2011   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. File taxes online free 2011    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. File taxes online free 2011 Figure 23-A. File taxes online free 2011 Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. File taxes online free 2011 Figure 23-A. File taxes online free 2011 Is My Interest Fully Deductible? Limits on deduction. File taxes online free 2011   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. File taxes online free 2011 If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. File taxes online free 2011 Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. File taxes online free 2011 It also describes certain special situations that may affect your deduction. File taxes online free 2011 Late payment charge on mortgage payment. File taxes online free 2011   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. File taxes online free 2011 Mortgage prepayment penalty. File taxes online free 2011   If you pay off your home mortgage early, you may have to pay a penalty. File taxes online free 2011 You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. File taxes online free 2011 Sale of home. File taxes online free 2011   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. File taxes online free 2011 Example. File taxes online free 2011 John and Peggy Harris sold their home on May 7. File taxes online free 2011 Through April 30, they made home mortgage interest payments of $1,220. File taxes online free 2011 The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. File taxes online free 2011 Their mortgage interest deduction is $1,270 ($1,220 + $50). File taxes online free 2011 Prepaid interest. File taxes online free 2011   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. File taxes online free 2011 You can deduct in each year only the interest that qualifies as home mortgage interest for that year. File taxes online free 2011 However, there is an exception that applies to points, discussed later. File taxes online free 2011 Mortgage interest credit. File taxes online free 2011   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. File taxes online free 2011 Figure the credit on Form 8396, Mortgage Interest Credit. File taxes online free 2011 If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. File taxes online free 2011   For more information on the credit, see chapter 37. File taxes online free 2011 Ministers' and military housing allowance. File taxes online free 2011   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. File taxes online free 2011 Hardest Hit Fund and Emergency Homeowners' Loan Programs. File taxes online free 2011   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. File taxes online free 2011 You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. File taxes online free 2011 You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. File taxes online free 2011 If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). File taxes online free 2011 However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. File taxes online free 2011 Mortgage assistance payments under section 235 of the National Housing Act. File taxes online free 2011   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. File taxes online free 2011 You cannot deduct the interest that is paid for you. File taxes online free 2011 No other effect on taxes. File taxes online free 2011   Do not include these mortgage assistance payments in your income. File taxes online free 2011 Also, do not use these payments to reduce other deductions, such as real estate taxes. File taxes online free 2011 Divorced or separated individuals. File taxes online free 2011   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. File taxes online free 2011 See the discussion of Payments for jointly-owned home in chapter 18. File taxes online free 2011 Redeemable ground rents. File taxes online free 2011   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. File taxes online free 2011   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. File taxes online free 2011 For more information, see Publication 936. File taxes online free 2011 Nonredeemable ground rents. File taxes online free 2011   Payments on a nonredeemable ground rent are not mortgage interest. File taxes online free 2011 You can deduct them as rent if they are a business expense or if they are for rental property. File taxes online free 2011 Reverse mortgages. File taxes online free 2011   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. File taxes online free 2011 With a reverse mortgage, you retain title to your home. File taxes online free 2011 Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. File taxes online free 2011 Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. File taxes online free 2011 Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. File taxes online free 2011 Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. File taxes online free 2011 Rental payments. File taxes online free 2011   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. File taxes online free 2011 This is true even if the settlement papers call them interest. File taxes online free 2011 You cannot deduct these payments as home mortgage interest. File taxes online free 2011 Mortgage proceeds invested in tax-exempt securities. File taxes online free 2011   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. File taxes online free 2011 “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. File taxes online free 2011 Refunds of interest. File taxes online free 2011   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. File taxes online free 2011 If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. File taxes online free 2011 However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. File taxes online free 2011 This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. File taxes online free 2011    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. File taxes online free 2011 For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. File taxes online free 2011   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. File taxes online free 2011 Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. File taxes online free 2011 Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. File taxes online free 2011 A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. File taxes online free 2011 See Points paid by the seller , later. File taxes online free 2011 General Rule You generally cannot deduct the full amount of points in the year paid. File taxes online free 2011 Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. File taxes online free 2011 See Deduction Allowed Ratably , next. File taxes online free 2011 For exceptions to the general rule, see Deduction Allowed in Year Paid , later. File taxes online free 2011 Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. File taxes online free 2011 You use the cash method of accounting. File taxes online free 2011 This means you report income in the year you receive it and deduct expenses in the year you pay them. File taxes online free 2011 Most individuals use this method. File taxes online free 2011 Your loan is secured by a home. File taxes online free 2011 (The home does not need to be your main home. File taxes online free 2011 ) Your loan period is not more than 30 years. File taxes online free 2011 If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. File taxes online free 2011 Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. File taxes online free 2011 Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. File taxes online free 2011 (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. File taxes online free 2011 ) Your loan is secured by your main home. File taxes online free 2011 (Your main home is the one you ordinarily live in most of the time. File taxes online free 2011 ) Paying points is an established business practice in the area where the loan was made. File taxes online free 2011 The points paid were not more than the points generally charged in that area. File taxes online free 2011 You use the cash method of accounting. File taxes online free 2011 This means you report income in the year you receive it and deduct expenses in the year you pay them. File taxes online free 2011 (If you want more information about this method, see Accounting Methods in chapter 1. File taxes online free 2011 ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. File taxes online free 2011 The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. File taxes online free 2011 The funds you provided are not required to have been applied to the points. File taxes online free 2011 They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. File taxes online free 2011 You cannot have borrowed these funds from your lender or mortgage broker. File taxes online free 2011 You use your loan to buy or build your main home. File taxes online free 2011 The points were computed as a percentage of the principal amount of the mortgage. File taxes online free 2011 The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. File taxes online free 2011 The points may be shown as paid from either your funds or the seller's. File taxes online free 2011 Figure 23-B. File taxes online free 2011 Are My Points Fully Deductible This Year? Please click here for the text description of the image. File taxes online free 2011 Figure 23-B. File taxes online free 2011 Are My Points Fully Deductible This Year? Note. File taxes online free 2011 If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. File taxes online free 2011 Home improvement loan. File taxes online free 2011   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. File taxes online free 2011 Second home. File taxes online free 2011 You cannot fully deduct in the year paid points you pay on loans secured by your second home. File taxes online free 2011 You can deduct these points only over the life of the loan. File taxes online free 2011 Refinancing. File taxes online free 2011   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. File taxes online free 2011 This is true even if the new mortgage is secured by your main home. File taxes online free 2011   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. File taxes online free 2011 You can deduct the rest of the points over the life of the loan. File taxes online free 2011 Example 1. File taxes online free 2011 In 1998, Bill Fields got a mortgage to buy a home. File taxes online free 2011 In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. File taxes online free 2011 The mortgage is secured by his home. File taxes online free 2011 To get the new loan, he had to pay three points ($3,000). File taxes online free 2011 Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. File taxes online free 2011 Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. File taxes online free 2011 The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. File taxes online free 2011 Bill's first payment on the new loan was due July 1. File taxes online free 2011 He made six payments on the loan in 2013 and is a cash basis taxpayer. File taxes online free 2011 Bill used the funds from the new mortgage to repay his existing mortgage. File taxes online free 2011 Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. File taxes online free 2011 He cannot deduct all of the points in 2013. File taxes online free 2011 He can deduct two points ($2,000) ratably over the life of the loan. File taxes online free 2011 He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. File taxes online free 2011 The other point ($1,000) was a fee for services and is not deductible. File taxes online free 2011 Example 2. File taxes online free 2011 The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. File taxes online free 2011 Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. File taxes online free 2011 His deduction is $500 ($2,000 × 25%). File taxes online free 2011 Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. File taxes online free 2011 This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. File taxes online free 2011 The total amount Bill deducts in 2013 is $550 ($500 + $50). File taxes online free 2011 Special Situations This section describes certain special situations that may affect your deduction of points. File taxes online free 2011 Original issue discount. File taxes online free 2011   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. File taxes online free 2011 This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. File taxes online free 2011 Amounts charged for services. File taxes online free 2011   Amounts charged by the lender for specific services connected to the loan are not interest. File taxes online free 2011 Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. File taxes online free 2011 You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. File taxes online free 2011 Points paid by the seller. File taxes online free 2011   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. File taxes online free 2011 Treatment by seller. File taxes online free 2011   The seller cannot deduct these fees as interest. File taxes online free 2011 But they are a selling expense that reduces the amount realized by the seller. File taxes online free 2011 See chapter 15 for information on selling your home. File taxes online free 2011 Treatment by buyer. File taxes online free 2011    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. File taxes online free 2011 If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. File taxes online free 2011 If any of those tests are not met, the buyer deducts the points over the life of the loan. File taxes online free 2011   For information about basis, see chapter 13. File taxes online free 2011 Funds provided are less than points. File taxes online free 2011   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. File taxes online free 2011 In addition, you can deduct any points paid by the seller. File taxes online free 2011 Example 1. File taxes online free 2011 When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). File taxes online free 2011 You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. File taxes online free 2011 Of the $1,000 charged for points, you can deduct $750 in the year paid. File taxes online free 2011 You spread the remaining $250 over the life of the mortgage. File taxes online free 2011 Example 2. File taxes online free 2011 The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. File taxes online free 2011 In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). File taxes online free 2011 You spread the remaining $250 over the life of the mortgage. File taxes online free 2011 You must reduce the basis of your home by the $1,000 paid by the seller. File taxes online free 2011 Excess points. File taxes online free 2011   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. File taxes online free 2011 You must spread any additional points over the life of the mortgage. File taxes online free 2011 Mortgage ending early. File taxes online free 2011   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. File taxes online free 2011 However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. File taxes online free 2011 Instead, deduct the remaining balance over the term of the new loan. File taxes online free 2011    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. File taxes online free 2011 Example. File taxes online free 2011 Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. File taxes online free 2011 He deducts $200 points per year. File taxes online free 2011 Through 2012, Dan has deducted $2,200 of the points. File taxes online free 2011 Dan prepaid his mortgage in full in 2013. File taxes online free 2011 He can deduct the remaining $800 of points in 2013. File taxes online free 2011 Limits on deduction. File taxes online free 2011   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . File taxes online free 2011 See Publication 936 for details. File taxes online free 2011 Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. File taxes online free 2011 The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. File taxes online free 2011 Qualified mortgage insurance. File taxes online free 2011   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). File taxes online free 2011   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. File taxes online free 2011 If provided by the Rural Housing Service, it is commonly known as a guarantee fee. File taxes online free 2011 These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. File taxes online free 2011 Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. File taxes online free 2011 Special rules for prepaid mortgage insurance. File taxes online free 2011   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. File taxes online free 2011 You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. File taxes online free 2011 No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. File taxes online free 2011 This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. File taxes online free 2011 See the Example below. File taxes online free 2011 Example. File taxes online free 2011 Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. File taxes online free 2011 Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. File taxes online free 2011 Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. File taxes online free 2011 Ryan's adjusted gross income (AGI) for 2012 is $76,000. File taxes online free 2011 Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. File taxes online free 2011 For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. File taxes online free 2011 In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). File taxes online free 2011 Limit on deduction. File taxes online free 2011   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. File taxes online free 2011 See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. File taxes online free 2011 If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. File taxes online free 2011 Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. File taxes online free 2011 You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. File taxes online free 2011 A governmental unit is a person for purposes of furnishing the statement. File taxes online free 2011 The statement for each year should be sent to you by January 31 of the following year. File taxes online free 2011 A copy of this form will also be sent to the IRS. File taxes online free 2011 The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. File taxes online free 2011 However, it should not show any interest that was paid for you by a government agency. File taxes online free 2011 As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. File taxes online free 2011 However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. File taxes online free 2011 See Points , earlier, to determine whether you can deduct points not shown on Form 1098. File taxes online free 2011 Prepaid interest on Form 1098. File taxes online free 2011   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. File taxes online free 2011 However, you cannot deduct the prepaid amount for January 2014 in 2013. File taxes online free 2011 (See Prepaid interest , earlier. File taxes online free 2011 ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. File taxes online free 2011 You will include the interest for January 2014 with the other interest you pay for 2014. File taxes online free 2011 See How To Report , later. File taxes online free 2011 Refunded interest. File taxes online free 2011   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. File taxes online free 2011 See Refunds of interest , earlier. File taxes online free 2011 Mortgage insurance premiums. File taxes online free 2011   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. File taxes online free 2011 See Mortgage Insurance Premiums, earlier. File taxes online free 2011 Investment Interest This section discusses interest expenses you may be able to deduct as an investor. File taxes online free 2011 If you borrow money to buy property you hold for investment, the interest you pay is investment interest. File taxes online free 2011 You can deduct investment interest subject to the limit discussed later. File taxes online free 2011 However, you cannot deduct interest you incurred to produce tax-exempt income. File taxes online free 2011 Nor can you deduct interest expenses on straddles. File taxes online free 2011 Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. File taxes online free 2011 Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. File taxes online free 2011 It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). File taxes online free 2011 Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). File taxes online free 2011 Partners, shareholders, and beneficiaries. File taxes online free 2011   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. File taxes online free 2011 Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. File taxes online free 2011 Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. File taxes online free 2011 The allocation is not affected by the use of property that secures the debt. File taxes online free 2011 Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. File taxes online free 2011 You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. File taxes online free 2011 The interest carried over is treated as investment interest paid or accrued in that next year. File taxes online free 2011 You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. File taxes online free 2011 Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. File taxes online free 2011 Investment income. File taxes online free 2011    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). File taxes online free 2011 Investment income does not include Alaska Permanent Fund dividends. File taxes online free 2011 It also does not include qualified dividends or net capital gain unless you choose to include them. File taxes online free 2011 Choosing to include qualified dividends. File taxes online free 2011   Investment income generally does not include qualified dividends, discussed in chapter 8. File taxes online free 2011 However, you can choose to include all or part of your qualified dividends in investment income. File taxes online free 2011   You make this choice by completing Form 4952, line 4g, according to its instructions. File taxes online free 2011   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. File taxes online free 2011 Choosing to include net capital gain. File taxes online free 2011   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). File taxes online free 2011 However, you can choose to include all or part of your net capital gain in investment income. File taxes online free 2011    You make this choice by completing Form 4952, line 4g, according to its instructions. File taxes online free 2011   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. File taxes online free 2011    Before making either choice, consider the overall effect on your tax liability. File taxes online free 2011 Compare your tax if you make one or both of these choices with your tax if you do not. File taxes online free 2011 Investment income of child reported on parent's return. File taxes online free 2011    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. File taxes online free 2011 If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. File taxes online free 2011 Child's qualified dividends. File taxes online free 2011   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. File taxes online free 2011 However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. File taxes online free 2011   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). File taxes online free 2011 Child's Alaska Permanent Fund dividends. File taxes online free 2011   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. File taxes online free 2011 To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. File taxes online free 2011 Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. File taxes online free 2011 Subtract the result from the amount on Form 8814, line 12. File taxes online free 2011 Child's capital gain distributions. File taxes online free 2011    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. File taxes online free 2011 However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. File taxes online free 2011   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). File taxes online free 2011 Investment expenses. File taxes online free 2011   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. File taxes online free 2011 Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. File taxes online free 2011 Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. File taxes online free 2011 Losses from passive activities. File taxes online free 2011   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). File taxes online free 2011 See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. File taxes online free 2011 Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. File taxes online free 2011 Exception to use of Form 4952. File taxes online free 2011   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. File taxes online free 2011 Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. File taxes online free 2011 You do not have any other deductible investment expenses. File taxes online free 2011 You have no carryover of investment interest expense from 2012. File taxes online free 2011 If you meet all of these tests, you can deduct all of your investment interest. File taxes online free 2011 More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. File taxes online free 2011 Items You Cannot Deduct Some interest payments are not deductible. File taxes online free 2011 Certain expenses similar to interest also are not deductible. File taxes online free 2011 Nondeductible expenses include the following items. File taxes online free 2011 Personal interest (discussed later). File taxes online free 2011 Service charges (however, see Other Expenses (Line 23) in chapter 28). File taxes online free 2011 Annual fees for credit cards. File taxes online free 2011 Loan fees. File taxes online free 2011 Credit investigation fees. File taxes online free 2011 Interest to purchase or carry tax-exempt securities. File taxes online free 2011 Penalties. File taxes online free 2011   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. File taxes online free 2011 Personal Interest Personal interest is not deductible. File taxes online free 2011 Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. File taxes online free 2011 It includes the following items. File taxes online free 2011 Interest on car loans (unless you use the car for business). File taxes online free 2011 Interest on federal, state, or local income tax. File taxes online free 2011 Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. File taxes online free 2011 Late payment charges by a public utility. File taxes online free 2011 You may be able to deduct interest you pay on a qualified student loan. File taxes online free 2011 For details, see Publication 970, Tax Benefits for Education. File taxes online free 2011 Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. File taxes online free 2011 However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. File taxes online free 2011 You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. File taxes online free 2011 You do this by tracing disbursements of the debt proceeds to specific uses. File taxes online free 2011 For details on how to do this, see chapter 4 of Publication 535. File taxes online free 2011 How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. File taxes online free 2011 Where you deduct your interest expense generally depends on how you use the loan proceeds. File taxes online free 2011 See Table 23-1 for a summary of where to deduct your interest expense. File taxes online free 2011 Home mortgage interest and points. File taxes online free 2011   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. File taxes online free 2011 If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. File taxes online free 2011 Attach a statement explaining the difference and print “See attached” next to line 10. File taxes online free 2011    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. File taxes online free 2011 If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. File taxes online free 2011 The seller must give you this number and you must give the seller your TIN. File taxes online free 2011 A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. File taxes online free 2011 Failure to meet any of these requirements may result in a $50 penalty for each failure. File taxes online free 2011 The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. File taxes online free 2011 See Social Security Number (SSN) in chapter 1 for more information about TINs. File taxes online free 2011    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. File taxes online free 2011   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. File taxes online free 2011 More than one borrower. File taxes online free 2011   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. File taxes online free 2011 Show how much of the interest each of you paid, and give the name and address of the person who received the form. File taxes online free 2011 Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. File taxes online free 2011 Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. File taxes online free 2011   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. File taxes online free 2011 You should let each of the other borrowers know what his or her share is. File taxes online free 2011 Mortgage proceeds used for business or investment. File taxes online free 2011    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. File taxes online free 2011 It shows where to deduct the part of your excess interest that is for those activities. File taxes online free 2011 Investment interest. File taxes online free 2011    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. File taxes online free 2011 Amortization of bond premium. File taxes online free 2011   There are various ways to treat the premium you pay to buy taxable bonds. File taxes online free 2011 See Bond Premium Amortization in Publication 550. File taxes online free 2011 Income-producing rental or royalty interest. File taxes online free 2011   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). File taxes online free 2011 Example. File taxes online free 2011 You rent out part of your home and borrow money to make repairs. File taxes online free 2011 You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). File taxes online free 2011 Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. File taxes online free 2011 Table 23-1. File taxes online free 2011 Where To Deduct Your Interest Expense IF you have . File taxes online free 2011 . File taxes online free 2011 . File taxes online free 2011 THEN deduct it on . File taxes online free 2011 . File taxes online free 2011 . File taxes online free 2011 AND for more information go to . File taxes online free 2011 . File taxes online free 2011 . File taxes online free 2011 deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. File taxes online free 2011 deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. File taxes online free 2011 deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. File taxes online free 2011 deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. File taxes online free 2011 deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. File taxes online free 2011 deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. File taxes online free 2011 deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. File taxes online free 2011 deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. File taxes online free 2011 deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. File taxes online free 2011 personal interest not deductible. File taxes online free 2011 Prev  Up  Next   Home   More Online Publications
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File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 Employee business expenses. File taxes online free 2011 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. File taxes online free 2011 You can change your choice for each year's taxes. File taxes online free 2011 To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. File taxes online free 2011 S. File taxes online free 2011 tax return. File taxes online free 2011 However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. File taxes online free 2011 See How To Figure the Credit , later. File taxes online free 2011 To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. File taxes online free 2011 Figure your tax both ways—claiming the credit and claiming the deduction. File taxes online free 2011 Then fill out your return the way that benefits you more. File taxes online free 2011 See Why Choose the Credit, later. File taxes online free 2011 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. File taxes online free 2011 If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. File taxes online free 2011 You cannot deduct any of them. File taxes online free 2011 Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. File taxes online free 2011 You cannot take a credit for any of them. File taxes online free 2011 See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. File taxes online free 2011 There are exceptions to this general rule, which are described next. File taxes online free 2011 Exceptions for foreign taxes not allowed as a credit. File taxes online free 2011   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. File taxes online free 2011 Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. File taxes online free 2011 S. File taxes online free 2011 tax purposes. File taxes online free 2011 For more information, see Internal Revenue Code section 901(m). File taxes online free 2011 The IRS intends to issue guidance that will explain this provision in greater detail. File taxes online free 2011   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. File taxes online free 2011 Foreign taxes that are not income taxes. File taxes online free 2011   In most cases, only foreign income taxes qualify for the foreign tax credit. File taxes online free 2011 Other taxes, such as foreign real and personal property taxes, do not qualify. File taxes online free 2011 But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. File taxes online free 2011   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. File taxes online free 2011 However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). File taxes online free 2011 Carrybacks and carryovers. File taxes online free 2011   There is a limit on the credit you can claim in a tax year. File taxes online free 2011 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. File taxes online free 2011 If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. File taxes online free 2011 That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. File taxes online free 2011   For more information on the limit, see How To Figure the Credit , later. File taxes online free 2011 For more information on carrybacks and carryovers, see Carryback and Carryover , later. File taxes online free 2011 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. File taxes online free 2011 You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. File taxes online free 2011 Example. File taxes online free 2011 You paid foreign taxes for the last 13 years and chose to deduct them on your U. File taxes online free 2011 S. File taxes online free 2011 income tax returns. File taxes online free 2011 You were timely in both filing your returns and paying your U. File taxes online free 2011 S. File taxes online free 2011 tax liability. File taxes online free 2011 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. File taxes online free 2011 Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). File taxes online free 2011 Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. File taxes online free 2011 Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. File taxes online free 2011 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. File taxes online free 2011 In most cases, if the foreign tax rate is higher than the U. File taxes online free 2011 S. File taxes online free 2011 rate, there will be no U. File taxes online free 2011 S. File taxes online free 2011 tax on the foreign income. File taxes online free 2011 If the foreign tax rate is lower than the U. File taxes online free 2011 S. File taxes online free 2011 rate, U. File taxes online free 2011 S. File taxes online free 2011 tax on the foreign income will be limited to the difference between the rates. File taxes online free 2011 The foreign tax credit can only reduce U. File taxes online free 2011 S. File taxes online free 2011 taxes on foreign source income; it cannot reduce U. File taxes online free 2011 S. File taxes online free 2011 taxes on U. File taxes online free 2011 S. File taxes online free 2011 source income. File taxes online free 2011 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. File taxes online free 2011 This is because: A credit reduces your actual U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 (See Limit on credit under How To Figure the Credit, later. File taxes online free 2011 ) Example 1. File taxes online free 2011 For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. File taxes online free 2011 None of the dividends are qualified dividends. File taxes online free 2011 You file a joint return and can claim two $3,900 exemptions. File taxes online free 2011 You had to pay $2,000 in foreign income taxes on the dividend income. File taxes online free 2011 If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. File taxes online free 2011 Your taxable income then is $57,500 and your tax is $7,736. File taxes online free 2011 If you take the credit instead, your itemized deductions are only $13,000. File taxes online free 2011 Your taxable income then is $59,500 and your tax before the credit is $8,036. File taxes online free 2011 After the credit, however, your tax is only $6,036. File taxes online free 2011 Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. File taxes online free 2011 Example 2. File taxes online free 2011 In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. File taxes online free 2011 You report on your U. File taxes online free 2011 S. File taxes online free 2011 return this income as well as $56,000 of U. File taxes online free 2011 S. File taxes online free 2011 source wages and an allowable $49,000 partnership loss from a U. File taxes online free 2011 S. File taxes online free 2011 partnership. File taxes online free 2011 Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. File taxes online free 2011 You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. File taxes online free 2011 If you deduct the foreign tax on your U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 You can take a credit of only $113 because of limits discussed later. File taxes online free 2011 Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. File taxes online free 2011 If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 “Tax year” refers to the tax year for which your U. File taxes online free 2011 S. File taxes online free 2011 return is filed, not the tax year for which your foreign return is filed. File taxes online free 2011 Accrual method of accounting. File taxes online free 2011   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. File taxes online free 2011 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. File taxes online free 2011   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. File taxes online free 2011 Generally, this occurs on the last day of the tax year for which your foreign return is filed. File taxes online free 2011 Contesting your foreign tax liability. File taxes online free 2011   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. File taxes online free 2011 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. File taxes online free 2011 Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. File taxes online free 2011 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 . File taxes online free 2011 You may have to post a bond. File taxes online free 2011   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. File taxes online free 2011   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. File taxes online free 2011 Cash method of accounting. File taxes online free 2011   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. File taxes online free 2011 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. File taxes online free 2011 Choosing to take credit in the year taxes accrue. File taxes online free 2011   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. File taxes online free 2011 You make the choice by checking the box in Part II of Form 1116. File taxes online free 2011 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. File taxes online free 2011   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. File taxes online free 2011 You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. File taxes online free 2011   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. File taxes online free 2011 Credit based on taxes paid in earlier year. File taxes online free 2011   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. File taxes online free 2011 Example. File taxes online free 2011 Last year you took the credit based on taxes paid. File taxes online free 2011 This year you chose to take the credit based on taxes accrued. File taxes online free 2011 During the year you paid foreign income taxes owed for last year. File taxes online free 2011 You also accrued foreign income taxes for this year that you did not pay by the end of the year. File taxes online free 2011 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. File taxes online free 2011 Foreign Currency and Exchange Rates U. File taxes online free 2011 S. File taxes online free 2011 income tax is imposed on income expressed in U. File taxes online free 2011 S. File taxes online free 2011 dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. File taxes online free 2011 Therefore, fluctuations in the value of the foreign currency relative to the U. File taxes online free 2011 S. File taxes online free 2011 dollar may affect the foreign tax credit. File taxes online free 2011 Translating foreign currency into U. File taxes online free 2011 S. File taxes online free 2011 dollars. File taxes online free 2011   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. File taxes online free 2011 S. File taxes online free 2011 dollars. File taxes online free 2011 How and when you do this depends on your functional currency. File taxes online free 2011 In most cases, your functional currency is the U. File taxes online free 2011 S. File taxes online free 2011 dollar unless you are required to use the currency of a foreign country. File taxes online free 2011   You must make all federal income tax determinations in your functional currency. File taxes online free 2011 The U. File taxes online free 2011 S. File taxes online free 2011 dollar is the functional currency for all taxpayers except some qualified business units. File taxes online free 2011 A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. File taxes online free 2011 Unless you are self-employed, your functional currency is the U. File taxes online free 2011 S. File taxes online free 2011 dollar. File taxes online free 2011   Even if you are self-employed and have a qualified business unit, your functional currency is the U. File taxes online free 2011 S. File taxes online free 2011 dollar if any of the following apply. File taxes online free 2011 You conduct the business primarily in dollars. File taxes online free 2011 The principal place of business is located in the United States. File taxes online free 2011 You choose to or are required to use the dollar as your functional currency. File taxes online free 2011 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. File taxes online free 2011   If your functional currency is the U. File taxes online free 2011 S. File taxes online free 2011 dollar, you must immediately translate into dollars all items of income, expense, etc. File taxes online free 2011 , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. File taxes online free 2011 If there is more than one exchange rate, use the one that most properly reflects your income. File taxes online free 2011 In most cases, you can get exchange rates from banks and U. File taxes online free 2011 S. File taxes online free 2011 Embassies. File taxes online free 2011   If your functional currency is not the U. File taxes online free 2011 S. File taxes online free 2011 dollar, make all income tax determinations in your functional currency. File taxes online free 2011 At the end of the year, translate the results, such as income or loss, into U. File taxes online free 2011 S. File taxes online free 2011 dollars to report on your income tax return. File taxes online free 2011    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. File taxes online free 2011   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. File taxes online free 2011 If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. File taxes online free 2011 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. File taxes online free 2011   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). File taxes online free 2011 Exception. File taxes online free 2011   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. File taxes online free 2011 This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. File taxes online free 2011 The foreign taxes are paid on or after the first day of the tax year to which they relate. File taxes online free 2011 The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. File taxes online free 2011 The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). File taxes online free 2011 (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. File taxes online free 2011 )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. File taxes online free 2011 Election to use exchange rate on date paid. File taxes online free 2011   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. File taxes online free 2011 If any of the accrued taxes are unpaid, you must translate them into U. File taxes online free 2011 S. File taxes online free 2011 dollars using the exchange rate on the last day of the U. File taxes online free 2011 S. File taxes online free 2011 tax year to which those taxes relate. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 dollar functional currency. File taxes online free 2011 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. File taxes online free 2011 The election is available for tax years beginning after 2004. File taxes online free 2011 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. File taxes online free 2011 Make the election by attaching a statement to the applicable tax return. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 dollar functional currency. File taxes online free 2011 Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. File taxes online free 2011 S. File taxes online free 2011 foreign tax credit claimed. File taxes online free 2011 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. File taxes online free 2011 If a foreign tax redetermination occurs, a redetermination of your U. File taxes online free 2011 S. File taxes online free 2011 tax liability is required if any of the following conditions apply. File taxes online free 2011 The accrued taxes when paid differ from the amounts claimed as a credit. File taxes online free 2011 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. File taxes online free 2011 If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. File taxes online free 2011 You will not be allowed a credit for the unpaid taxes until you pay them. File taxes online free 2011 When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. File taxes online free 2011 S. File taxes online free 2011 dollars using the exchange rate as of the date they were paid. File taxes online free 2011 The foreign tax credit is allowed for the year to which the foreign tax relates. File taxes online free 2011 See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. File taxes online free 2011 The foreign taxes you paid are refunded in whole or in part. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 tax year. File taxes online free 2011 In this case, you must adjust your U. File taxes online free 2011 S. File taxes online free 2011 tax in the tax year in which the accrued foreign taxes are paid. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 tax liability for each tax year affected by the redetermination. File taxes online free 2011 In most cases, you must file Form 1040X, Amended U. File taxes online free 2011 S. File taxes online free 2011 Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. File taxes online free 2011 S. File taxes online free 2011 tax liability for the year or years affected. File taxes online free 2011 See Contents of statement , later. File taxes online free 2011 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. File taxes online free 2011 There are other exceptions to this requirement. File taxes online free 2011 They are discussed later under Due date of notification to IRS . File taxes online free 2011 Contents of statement. File taxes online free 2011   The statement must include all of the following. File taxes online free 2011 Your name, address, and taxpayer identification number. File taxes online free 2011 The tax year or years that are affected by the foreign tax redetermination. File taxes online free 2011 The date or dates the foreign taxes were accrued, if applicable. File taxes online free 2011 The date or dates the foreign taxes were paid. File taxes online free 2011 The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. File taxes online free 2011 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. File taxes online free 2011   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. File taxes online free 2011   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). File taxes online free 2011 Due date of notification to IRS. File taxes online free 2011   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. File taxes online free 2011 There is no limit on the time the IRS has to redetermine and assess the correct U. File taxes online free 2011 S. File taxes online free 2011 tax due. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 taxes. File taxes online free 2011 See Time Limit on Refund Claims , later. File taxes online free 2011   Exceptions to this due date are explained in the next two paragraphs. File taxes online free 2011 Multiple redeterminations of U. File taxes online free 2011 S. File taxes online free 2011 tax liability for same tax year. File taxes online free 2011   Where more than one foreign tax redetermination requires a redetermination of U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. File taxes online free 2011 S. File taxes online free 2011 tax liability is required may occur after the due date for providing that notification. File taxes online free 2011 In this situation, you may have to file more than one Form 1040X for that tax year. File taxes online free 2011 Additional U. File taxes online free 2011 S. File taxes online free 2011 tax due eliminated by foreign tax credit carryback or carryover. File taxes online free 2011   If a foreign tax redetermination requires a redetermination of U. File taxes online free 2011 S. File taxes online free 2011 tax liability that would otherwise result in an additional amount of U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 You must file the statement by the due date (with extensions) of that return. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 tax liability is required). File taxes online free 2011 Failure-to-notify penalty. File taxes online free 2011   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. File taxes online free 2011   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. File taxes online free 2011 S. File taxes online free 2011 tax. File taxes online free 2011 This penalty cannot be more than 25% of the tax due. File taxes online free 2011 Foreign tax refund. File taxes online free 2011   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. File taxes online free 2011 S. File taxes online free 2011 tax for the time before the date of the refund. File taxes online free 2011   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. File taxes online free 2011 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. File taxes online free 2011 Interest also is owed from the time you receive a refund until you pay the additional tax due. File taxes online free 2011 Foreign tax imposed on foreign refund. File taxes online free 2011   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. File taxes online free 2011 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. File taxes online free 2011 Example. File taxes online free 2011 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. File taxes online free 2011 When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. File taxes online free 2011 Time Limit on Refund Claims You have 10 years to file a claim for refund of U. File taxes online free 2011 S. File taxes online free 2011 tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. File taxes online free 2011 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. File taxes online free 2011 You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. File taxes online free 2011 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). File taxes online free 2011 The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. File taxes online free 2011 See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. File taxes online free 2011 Who Can Take the Credit? U. File taxes online free 2011 S. File taxes online free 2011 citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. File taxes online free 2011 S. File taxes online free 2011 tax on foreign source income may be able to take a foreign tax credit. File taxes online free 2011 U. File taxes online free 2011 S. File taxes online free 2011 Citizens If you are a U. File taxes online free 2011 S. File taxes online free 2011 citizen, you are taxed by the United States on your worldwide income wherever you live. File taxes online free 2011 You are normally entitled to take a credit for foreign taxes you pay or accrue. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 citizens. File taxes online free 2011 If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. File taxes online free 2011 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. File taxes online free 2011 For information on alien status, see Publication 519. File taxes online free 2011 Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 possession on income from foreign sources that is effectively connected with a trade or business in the United States. File taxes online free 2011 But if you must pay tax to a foreign country or U. File taxes online free 2011 S. File taxes online free 2011 possession on income from U. File taxes online free 2011 S. File taxes online free 2011 sources only because you are a citizen or a resident of that country or U. File taxes online free 2011 S. File taxes online free 2011 possession, do not use that tax in figuring the amount of your credit. File taxes online free 2011 For information on alien status and effectively connected income, see Publication 519. File taxes online free 2011 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. File taxes online free 2011 The tax must be imposed on you. File taxes online free 2011 You must have paid or accrued the tax. File taxes online free 2011 The tax must be the legal and actual foreign tax liability. File taxes online free 2011 The tax must be an income tax (or a tax in lieu of an income tax). File taxes online free 2011 Certain foreign taxes do not qualify for the credit even if the four tests are met. File taxes online free 2011 See Foreign Taxes for Which You Cannot Take a Credit, later. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 possession. File taxes online free 2011 For example, a tax that is deducted from your wages is considered to be imposed on you. File taxes online free 2011 You cannot shift the right to claim the credit by contract or other means. File taxes online free 2011 Foreign country. File taxes online free 2011   A foreign country includes any foreign state and its political subdivisions. File taxes online free 2011 Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. File taxes online free 2011 U. File taxes online free 2011 S. File taxes online free 2011 possessions. File taxes online free 2011   For foreign tax credit purposes, all qualified taxes paid to U. File taxes online free 2011 S. File taxes online free 2011 possessions are considered foreign taxes. File taxes online free 2011 For this purpose, U. File taxes online free 2011 S. File taxes online free 2011 possessions include Puerto Rico and American Samoa. File taxes online free 2011   When the term “foreign country” is used in this publication, it includes U. File taxes online free 2011 S. File taxes online free 2011 possessions unless otherwise stated. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 possession. File taxes online free 2011 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. File taxes online free 2011 Joint return. File taxes online free 2011   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. File taxes online free 2011 Combined income. File taxes online free 2011   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. File taxes online free 2011 901-2(f)(3)(iii). File taxes online free 2011 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. File taxes online free 2011   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. File taxes online free 2011 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. File taxes online free 2011 For more details, see paragraphs (f) and (h) of Regulations section 1. File taxes online free 2011 901-2. File taxes online free 2011 For similar rules applicable to prior tax years, see Regulations section 1. File taxes online free 2011 901-2 (revised as of April 1, 2011). File taxes online free 2011 Example. File taxes online free 2011 You and your spouse reside in Country X, which imposes income tax on your combined incomes. File taxes online free 2011 Both of you use the “u” as your functional currency. File taxes online free 2011 Country X apportions tax based on income. File taxes online free 2011 You had income of 30,000u and your spouse had income of 20,000u. File taxes online free 2011 Your filing status on your U. File taxes online free 2011 S. File taxes online free 2011 income tax return is married filing separately. File taxes online free 2011 You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. File taxes online free 2011 S income tax return. File taxes online free 2011 Your spouse can claim only 40% (20,000u/50,000u). File taxes online free 2011 Partner or S corporation shareholder. File taxes online free 2011   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. File taxes online free 2011 These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. File taxes online free 2011 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. File taxes online free 2011 Beneficiary. File taxes online free 2011   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. File taxes online free 2011 This amount will be shown on the Schedule K-1 you receive from the estate or trust. File taxes online free 2011 However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. File taxes online free 2011 Mutual fund shareholder. File taxes online free 2011   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. File taxes online free 2011 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. File taxes online free 2011 If you do not receive this information, you will need to contact the fund. File taxes online free 2011 Controlled foreign corporation shareholder. File taxes online free 2011   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. File taxes online free 2011 If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. File taxes online free 2011 Controlled foreign corporation. File taxes online free 2011   A controlled foreign corporation is a foreign corporation in which U. File taxes online free 2011 S. File taxes online free 2011 shareholders own more than 50% of the voting power or value of the stock. File taxes online free 2011 You are considered a U. File taxes online free 2011 S. File taxes online free 2011 shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. File taxes online free 2011 See Internal Revenue Code sections 951(b) and 958(b) for more information. File taxes online free 2011 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. File taxes online free 2011 Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. File taxes online free 2011 Foreign tax refund. File taxes online free 2011   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. File taxes online free 2011   For example, the United States has tax treaties with many countries allowing U. File taxes online free 2011 S. File taxes online free 2011 citizens and residents reductions in the rates of tax of those foreign countries. File taxes online free 2011 However, some treaty countries require U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 Subsidy received. File taxes online free 2011   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011   The term “subsidy” includes any type of benefit. File taxes online free 2011 Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. File taxes online free 2011 Shareholder receiving refund for corporate tax in integrated system. File taxes online free 2011   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. File taxes online free 2011 You may be able to claim a refund of these taxes from the foreign government. File taxes online free 2011 You must include the refund (including any amount withheld) in your income in the year received. File taxes online free 2011 Any tax withheld from the refund is a qualified foreign tax. File taxes online free 2011 Example. File taxes online free 2011 You are a shareholder of a French corporation. File taxes online free 2011 You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. File taxes online free 2011 The French government imposes a 15% withholding tax ($15) on the refund you received. File taxes online free 2011 You receive a check for $85. File taxes online free 2011 You include $100 in your income. File taxes online free 2011 The $15 of tax withheld is a qualified foreign tax. File taxes online free 2011 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. File taxes online free 2011 Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. File taxes online free 2011 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. File taxes online free 2011 See Taxes in Lieu of Income Taxes , later. File taxes online free 2011 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. File taxes online free 2011 A foreign levy is an income tax only if it meets both of the following requirements. File taxes online free 2011 It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. File taxes online free 2011 The predominant character of the tax is that of an income tax in the U. File taxes online free 2011 S. File taxes online free 2011 sense. File taxes online free 2011 A foreign levy may meet these requirements even if the foreign tax law differs from U. File taxes online free 2011 S. File taxes online free 2011 tax law. File taxes online free 2011 The foreign law may include in income items that U. File taxes online free 2011 S. File taxes online free 2011 law does not include, or it may allow certain exclusions or deductions that U. File taxes online free 2011 S. File taxes online free 2011 law does not allow. File taxes online free 2011 Specific economic benefit. File taxes online free 2011   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. File taxes online free 2011   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. File taxes online free 2011   However, see the exception discussed later under Pension, unemployment, and disability fund payments . File taxes online free 2011 Economic benefits. File taxes online free 2011   Economic benefits include the following. File taxes online free 2011 Goods. File taxes online free 2011 Services. File taxes online free 2011 Fees or other payments. File taxes online free 2011 Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. File taxes online free 2011 Discharges of contractual obligations. File taxes online free 2011   In most cases, the right or privilege merely to engage in business is not an economic benefit. File taxes online free 2011 Dual-capacity taxpayers. File taxes online free 2011   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. File taxes online free 2011 ” 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. File taxes online free 2011    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. File taxes online free 2011   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. File taxes online free 2011    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. File taxes online free 2011 For more information about these agreements, see Publication 54. File taxes online free 2011 Soak-up taxes. File taxes online free 2011   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. File taxes online free 2011 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. File taxes online free 2011 This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. File taxes online free 2011 Penalties and interest. File taxes online free 2011   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. File taxes online free 2011 Taxes not based on income. File taxes online free 2011   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. File taxes online free 2011 Taxes based on assets, such as property taxes, do not qualify for the credit. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 A tax in lieu of an income tax does not have to be based on realized net income. File taxes online free 2011 A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. File taxes online free 2011 In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. File taxes online free 2011 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. File taxes online free 2011 The soak-up tax. File taxes online free 2011 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. File taxes online free 2011 Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. File taxes online free 2011 Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. File taxes online free 2011 S. File taxes online free 2011 gross income. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 income under the foreign earned income exclusion or the foreign housing exclusion. File taxes online free 2011 See Publication 54 for more information on the foreign earned income and housing exclusions. File taxes online free 2011 Wages completely excluded. File taxes online free 2011   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. File taxes online free 2011 Wages partly excluded. File taxes online free 2011   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. File taxes online free 2011 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. File taxes online free 2011   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. File taxes online free 2011 Deductible expenses do not include the foreign housing deduction. File taxes online free 2011   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). File taxes online free 2011 If the foreign law taxes foreign earned income and some other income (for example, earned income from U. File taxes online free 2011 S. File taxes online free 2011 sources or a type of income not subject to U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 Example. File taxes online free 2011 You are a U. File taxes online free 2011 S. File taxes online free 2011 citizen and a cash basis taxpayer, employed by Company X and living in Country A. File taxes online free 2011 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. File taxes online free 2011 To find that part, do the following. File taxes online free 2011 First, find the amount of business expenses allocable to excluded wages and therefore not deductible. File taxes online free 2011 To do this, multiply the otherwise deductible expenses by a fraction. File taxes online free 2011 That fraction is the excluded wages over your foreign earned income. File taxes online free 2011   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. File taxes online free 2011 To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). File taxes online free 2011 The result is $81,984. File taxes online free 2011 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). File taxes online free 2011 Finally, multiply the foreign tax you paid by the resulting fraction. File taxes online free 2011   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. File taxes online free 2011 Taxes on Income From Puerto Rico Exempt From U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 For information on figuring the reduction, see Publication 570. File taxes online free 2011 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. File taxes online free 2011 For more information on this exclusion, see Publication 570. File taxes online free 2011 Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. File taxes online free 2011 However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. File taxes online free 2011 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. File taxes online free 2011 However, you can claim an itemized deduction for these taxes. File taxes online free 2011 See Choosing To Take Credit or Deduction , earlier. File taxes online free 2011 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. File taxes online free 2011 The following countries meet this description for 2013. File taxes online free 2011 Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. File taxes online free 2011 Cuba. File taxes online free 2011 Iran. File taxes online free 2011 Libya (but see Note later). File taxes online free 2011 North Korea. File taxes online free 2011 Sudan. File taxes online free 2011 Syria. File taxes online free 2011 Waiver of denial of the credit. File taxes online free 2011   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. File taxes online free 2011 S. File taxes online free 2011 companies in the sanctioned country. File taxes online free 2011 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. File taxes online free 2011 Note. File taxes online free 2011 Effective December 10, 2004, the President granted a waiver to Libya. File taxes online free 2011 Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. File taxes online free 2011 Limit on credit. File taxes online free 2011   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. File taxes online free 2011 You must fill out a separate Form 1116 for this income. File taxes online free 2011 This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. File taxes online free 2011 Example. File taxes online free 2011 You lived and worked in Iran until August, when you were transferred to Italy. File taxes online free 2011 You paid taxes to each country on the income earned in that country. File taxes online free 2011 You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. File taxes online free 2011 Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. File taxes online free 2011 You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. File taxes online free 2011 Figuring the credit when a sanction ends. File taxes online free 2011    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. File taxes online free 2011 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. File taxes online free 2011 Example. File taxes online free 2011 The sanctions against Country X ended on July 31. File taxes online free 2011 On August 19, you receive a distribution from a mutual fund of Country X income. File taxes online free 2011 The fund paid Country X income tax for you on the distribution. File taxes online free 2011 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. File taxes online free 2011 Amounts for the nonsanctioned period. File taxes online free 2011   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. File taxes online free 2011 Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. File taxes online free 2011   Number of nonsanctioned days in year  Number of days in year Example. File taxes online free 2011 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. File taxes online free 2011 Sanctions against Country X ended on July 11, 2013. File taxes online free 2011 You are unable to determine how much of the income or tax is for the nonsanctioned period. File taxes online free 2011 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. File taxes online free 2011 You would compute the income for the nonsanctioned period as follows. File taxes online free 2011 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. File taxes online free 2011 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. File taxes online free 2011 Further information. File taxes online free 2011   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. File taxes online free 2011 This Cumulative Bulletin can be found in many libraries and IRS offices. File taxes online free 2011 Table 1. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 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). File taxes online free 2011 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. File taxes online free 2011 If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 Withholding tax. File taxes online free 2011   For this purpose, withholding tax includes any tax determined on a gross basis. File taxes online free 2011 It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. File taxes online free 2011 Ex-dividend date. File taxes online free 2011   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. File taxes online free 2011 Example 1. File taxes online free 2011 You bought common stock from a foreign corporation on November 3. File taxes online free 2011 You sold the stock on November 19. File taxes online free 2011 You received a dividend on this stock because you owned it on the ex-dividend date of November 5. File taxes online free 2011 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). File taxes online free 2011 Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. File taxes online free 2011 Example 2. File taxes online free 2011 The facts are the same as in Example 1 except that you sold the stock on November 14. File taxes online free 2011 You held the stock for only 11 days. File taxes online free 2011 You are not entitled to the credit. File taxes online free 2011 Exception. File taxes online free 2011   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. File taxes online free 2011 See section 901(k)(4) of the Internal Revenue Code for more information. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 Withholding tax. File taxes online free 2011   For this purpose, withholding tax includes any tax determined on a gross basis. File taxes online free 2011 It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. File taxes online free 2011 Exception for dealers. File taxes online free 2011   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. File taxes online free 2011 See section 901(I)(2) of the Internal Revenue Code for more information. File taxes online free 2011 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. File taxes online free 2011 A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. File taxes online free 2011 S. File taxes online free 2011 tax purposes but not for foreign tax purposes. File taxes online free 2011 For more information, see Internal Revenue Code section 901(m). File taxes online free 2011 The IRS intends to issue guidance that will explain this provision in greater detail. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 For details, see Regulations section 1. File taxes online free 2011 901-3. File taxes online free 2011 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. File taxes online free 2011 See the instructions for line 12 in the Form 1116 instructions to figure this reduction. File taxes online free 2011 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. File taxes online free 2011 List of boycotting countries. File taxes online free 2011   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. File taxes online free 2011 As of November 2013, the following countries are listed. File taxes online free 2011 Iraq. File taxes online free 2011 Kuwait. File taxes online free 2011 Lebanon. File taxes online free 2011 Libya. File taxes online free 2011 Qatar. File taxes online free 2011 Saudi Arabia. File taxes online free 2011 Syria. File taxes online free 2011 United Arab Emirates. File taxes online free 2011 Yemen. File taxes online free 2011    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. File taxes online free 2011   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. File taxes online free 2011 The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. File taxes online free 2011 Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. File taxes online free 2011 Public inspection. File taxes online free 2011   A determination and any related background file is open to public inspection. File taxes online free 2011 However, your identity and certain other information will remain confidential. File taxes online free 2011 Reporting requirements. File taxes online free 2011   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. File taxes online free 2011 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. File taxes online free 2011 A partnership in which you are a partner. File taxes online free 2011 A trust you are treated as owning. File taxes online free 2011 Form 5713 required. File taxes online free 2011   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. File taxes online free 2011 See the Instructions for Form 5713 for information on when and where to file the form. File taxes online free 2011 Penalty for failure to file. File taxes online free 2011   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. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 tax liability (Form 1040, line 44) divided by your worldwide taxable income. File taxes online free 2011 You may be entitled to carry over to other years taxes reduced under this rule. File taxes online free 2011 See Internal Revenue Code section 907(f). File taxes online free 2011 Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. File taxes online free 2011 Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. File taxes online free 2011 Taxes of U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 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. File taxes online free 2011 See Penalty for not filing Form 5471 or Form 8865 , later. File taxes online free 2011 U. File taxes online free 2011 S. File taxes online free 2011 persons controlling foreign corporations. File taxes online free 2011   If you are a U. File taxes online free 2011 S. File taxes online free 2011 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. File taxes online free 2011 S. File taxes online free 2011 Persons With Respect To Certain Foreign Corporations. File taxes online free 2011 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. File taxes online free 2011 U. File taxes online free 2011 S. File taxes online free 2011 persons controlling foreign partnerships. File taxes online free 2011   If you are a U. File taxes online free 2011 S. File taxes online free 2011 citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file