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Irs Amended Returns

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Irs Amended Returns

Irs amended returns 2. Irs amended returns   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Irs amended returns How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Irs amended returns Deferral percentage. Irs amended returns Employee compensation. Irs amended returns Compensation of self-employed individuals. Irs amended returns Choice not to treat deferrals as compensation. Irs amended returns Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Irs amended returns Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Irs amended returns S. Irs amended returns Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Irs amended returns Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Irs amended returns A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Irs amended returns SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Irs amended returns A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Irs amended returns Eligible employee. Irs amended returns   An eligible employee is an individual who meets all the following requirements. Irs amended returns Has reached age 21. Irs amended returns Has worked for you in at least 3 of the last 5 years. Irs amended returns Has received at least $550 in compensation from you in 2013. Irs amended returns This amount remains the same in 2014. Irs amended returns    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Irs amended returns Excludable employees. Irs amended returns   The following employees can be excluded from coverage under a SEP. Irs amended returns Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Irs amended returns Nonresident alien employees who have received no U. Irs amended returns S. Irs amended returns source wages, salaries, or other personal services compensation from you. Irs amended returns For more information about nonresident aliens, see Publication 519, U. Irs amended returns S. Irs amended returns Tax Guide for Aliens. Irs amended returns Setting Up a SEP There are three basic steps in setting up a SEP. Irs amended returns You must execute a formal written agreement to provide benefits to all eligible employees. Irs amended returns You must give each eligible employee certain information about the SEP. Irs amended returns A SEP-IRA must be set up by or for each eligible employee. Irs amended returns Many financial institutions will help you set up a SEP. Irs amended returns Formal written agreement. Irs amended returns   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Irs amended returns You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Irs amended returns However, see When not to use Form 5305-SEP, below. Irs amended returns   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Irs amended returns Keep the original form. Irs amended returns Do not file it with the IRS. Irs amended returns Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Irs amended returns See the Form 5305-SEP instructions for details. Irs amended returns If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Irs amended returns When not to use Form 5305-SEP. Irs amended returns   You cannot use Form 5305-SEP if any of the following apply. Irs amended returns You currently maintain any other qualified retirement plan other than another SEP. Irs amended returns You have any eligible employees for whom IRAs have not been set up. Irs amended returns You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Irs amended returns You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Irs amended returns An affiliated service group described in section 414(m). Irs amended returns A controlled group of corporations described in section 414(b). Irs amended returns Trades or businesses under common control described in section 414(c). Irs amended returns You do not pay the cost of the SEP contributions. Irs amended returns Information you must give to employees. Irs amended returns   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Irs amended returns An IRS model SEP is not considered adopted until you give each employee this information. Irs amended returns Setting up the employee's SEP-IRA. Irs amended returns   A SEP-IRA must be set up by or for each eligible employee. Irs amended returns SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Irs amended returns You send SEP contributions to the financial institution where the SEP-IRA is maintained. Irs amended returns Deadline for setting up a SEP. Irs amended returns   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Irs amended returns Credit for startup costs. Irs amended returns   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Irs amended returns For more information, see Credit for startup costs under Reminders, earlier. Irs amended returns How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Irs amended returns If you are self-employed, you can contribute to your own SEP-IRA. Irs amended returns Contributions must be in the form of money (cash, check, or money order). Irs amended returns You cannot contribute property. Irs amended returns However, participants may be able to transfer or roll over certain property from one retirement plan to another. Irs amended returns See Publication 590 for more information about rollovers. Irs amended returns You do not have to make contributions every year. Irs amended returns But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Irs amended returns When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Irs amended returns Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Irs amended returns A SEP-IRA cannot be a Roth IRA. Irs amended returns Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Irs amended returns Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Irs amended returns If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Irs amended returns Participants age 70½ or over must take required minimum distributions. Irs amended returns Time limit for making contributions. Irs amended returns   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Irs amended returns Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Irs amended returns Compensation generally does not include your contributions to the SEP. Irs amended returns The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Irs amended returns Example. Irs amended returns Your employee, Mary Plant, earned $21,000 for 2013. Irs amended returns The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Irs amended returns Contributions for yourself. Irs amended returns   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Irs amended returns However, special rules apply when figuring your maximum deductible contribution. Irs amended returns See Deduction Limit for Self-Employed Individuals , later. Irs amended returns Annual compensation limit. Irs amended returns   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Irs amended returns However, $51,000 is the maximum contribution for an eligible employee. Irs amended returns These limits are $260,000 and $52,000, respectively, in 2014. Irs amended returns Example. Irs amended returns Your employee, Susan Green, earned $210,000 for 2013. Irs amended returns Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Irs amended returns More than one plan. Irs amended returns   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Irs amended returns When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Irs amended returns Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Irs amended returns Tax treatment of excess contributions. Irs amended returns   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Irs amended returns 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Irs amended returns $51,000. Irs amended returns Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Irs amended returns For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Irs amended returns Reporting on Form W-2. Irs amended returns   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Irs amended returns Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Irs amended returns If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Irs amended returns Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Irs amended returns Your contributions (including any excess contributions carryover). Irs amended returns 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Irs amended returns In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Irs amended returns Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Irs amended returns When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Irs amended returns The deduction for the deductible part of your self-employment tax. Irs amended returns The deduction for contributions to your own SEP-IRA. Irs amended returns The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Irs amended returns For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Irs amended returns To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Irs amended returns Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Irs amended returns Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Irs amended returns However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Irs amended returns If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Irs amended returns Excise tax. Irs amended returns   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Irs amended returns For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Irs amended returns When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Irs amended returns If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Irs amended returns If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Irs amended returns Example. Irs amended returns You are a fiscal year taxpayer whose tax year ends June 30. Irs amended returns You maintain a SEP on a calendar year basis. Irs amended returns You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Irs amended returns Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Irs amended returns For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Irs amended returns S. Irs amended returns Return of Partnership Income; and corporations deduct them on Form 1120, U. Irs amended returns S. Irs amended returns Corporation Income Tax Return, or Form 1120S, U. Irs amended returns S. Irs amended returns Income Tax Return for an S Corporation. Irs amended returns Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Irs amended returns (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Irs amended returns , you receive from the partnership. Irs amended returns ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Irs amended returns Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Irs amended returns (See the Caution, next. Irs amended returns ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Irs amended returns This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Irs amended returns You are not allowed to set up a SARSEP after 1996. Irs amended returns However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Irs amended returns If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Irs amended returns Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Irs amended returns At least 50% of your employees eligible to participate choose to make elective deferrals. Irs amended returns You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Irs amended returns The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Irs amended returns SARSEP ADP test. Irs amended returns   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Irs amended returns A highly compensated employee is defined in chapter 1. Irs amended returns Deferral percentage. Irs amended returns   The deferral percentage for an employee for a year is figured as follows. Irs amended returns   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Irs amended returns Employee compensation. Irs amended returns   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Irs amended returns Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Irs amended returns See Compensation in chapter 1. Irs amended returns Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Irs amended returns Compensation of self-employed individuals. Irs amended returns   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Irs amended returns   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Irs amended returns Choice not to treat deferrals as compensation. Irs amended returns   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Irs amended returns Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Irs amended returns 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Irs amended returns $17,500. Irs amended returns The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Irs amended returns Cash or deferred arrangement (section 401(k) plan). Irs amended returns Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Irs amended returns SIMPLE IRA plan. Irs amended returns In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Irs amended returns Catch-up contributions. Irs amended returns   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Irs amended returns The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Irs amended returns Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Irs amended returns However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Irs amended returns The catch-up contribution limit. Irs amended returns The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Irs amended returns   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Irs amended returns Overall limit on SEP contributions. Irs amended returns   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Irs amended returns The same rule applies to contributions you make to your own SEP-IRA. Irs amended returns See Contribution Limits , earlier. Irs amended returns Figuring the elective deferral. Irs amended returns   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Irs amended returns Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Irs amended returns However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Irs amended returns Excess deferrals. Irs amended returns   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Irs amended returns For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Irs amended returns The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Irs amended returns See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Irs amended returns Excess SEP contributions. Irs amended returns   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Irs amended returns You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Irs amended returns If you do not notify them within this time period, you must pay a 10% tax on the excess. Irs amended returns For an explanation of the notification requirements, see Rev. Irs amended returns Proc. Irs amended returns 91-44, 1991-2 C. Irs amended returns B. Irs amended returns 733. Irs amended returns If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Irs amended returns Reporting on Form W-2. Irs amended returns   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Irs amended returns You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Irs amended returns You must also include them in box 12. Irs amended returns Mark the “Retirement plan” checkbox in box 13. Irs amended returns For more information, see the Form W-2 instructions. Irs amended returns Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Irs amended returns Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Irs amended returns Distributions are subject to IRA rules. Irs amended returns Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Irs amended returns For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Irs amended returns Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Irs amended returns Making excess contributions. Irs amended returns Making early withdrawals. Irs amended returns Not making required withdrawals. Irs amended returns For information about these taxes, see chapter 1 in Publication 590. Irs amended returns Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Irs amended returns Prohibited transaction. Irs amended returns   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Irs amended returns In that case, the SEP-IRA will no longer qualify as an IRA. Irs amended returns For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Irs amended returns Effects on employee. Irs amended returns   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Irs amended returns The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Irs amended returns Also, the employee may have to pay the additional tax for making early withdrawals. Irs amended returns Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Irs amended returns See Setting Up a SEP , earlier. Irs amended returns Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Irs amended returns You must also give them notice of any excess contributions. Irs amended returns For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Irs amended returns Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Irs amended returns For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Irs amended returns Prev  Up  Next   Home   More Online Publications
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The Irs Amended Returns

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