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Vita taxes Publication 503 - Introductory Material Table of Contents Future Developments Reminders IntroductionOrdering forms and publications. Vita taxes Tax questions. Vita taxes Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 503, such as legislation enacted after it was published, go to www. Vita taxes irs. Vita taxes gov/pub503. Vita taxes Reminders Taxpayer identification number needed for each qualifying person. Vita taxes  You must include on line 2 of Form 2441, Child and Dependent Care Expenses, the name and taxpayer identification number (generally the social security number) of each qualifying person. Vita taxes See Taxpayer identification number under Qualifying Person Test, later. Vita taxes You may have to pay employment taxes. Vita taxes  If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer who has to pay employment taxes. Vita taxes Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. Vita taxes See Employment Taxes for Household Employers, later. Vita taxes Photographs of missing children. Vita taxes  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Vita taxes Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Vita taxes You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Vita taxes Introduction This publication explains the tests you must meet to claim the credit for child and dependent care expenses. Vita taxes It explains how to figure and claim the credit. Vita taxes You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. Vita taxes The credit can be up to 35% of your expenses. Vita taxes To qualify, you must pay these expenses so you can work or look for work. Vita taxes This publication also discusses some of the employment tax rules for household employers. Vita taxes Dependent care benefits. Vita taxes   If you received any dependent care benefits from your employer during the year, you may be able to exclude from your income all or part of them. Vita taxes You must complete Form 2441, Part III, before you can figure the amount of your credit. Vita taxes See Dependent Care Benefits under How To Figure the Credit, later. Vita taxes Comments and suggestions. Vita taxes   We welcome your comments about this publication and your suggestions for future editions. Vita taxes   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Vita taxes NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Vita taxes Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Vita taxes   You can send your comments from www. Vita taxes irs. Vita taxes gov/formspubs/. Vita taxes Click on “More Information” and then on “Comment on Tax Forms and Publications. Vita taxes ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Vita taxes Ordering forms and publications. Vita taxes   Visit www. Vita taxes irs. Vita taxes gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Vita taxes Internal Revenue Service 1201 N. Vita taxes Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Vita taxes   If you have a tax question, check the information available on IRS. Vita taxes gov or call 1-800-829-1040. Vita taxes We cannot answer tax questions sent to either of the above addresses. Vita taxes Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 926 Household Employer's Tax Guide Form (and Instructions) 2441 Child and Dependent Care Expenses Schedule H (Form 1040) Household Employment Taxes W-10 Dependent Care Provider's Identification and Certification See How To Get Tax Help , near the end of this publication, for information about getting these publications and forms. Vita taxes Prev  Up  Next   Home   More Online Publications
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Vita taxes 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. Vita taxes S. Vita taxes 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. Vita taxes S. Vita taxes 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. Vita taxes S. Vita taxes 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. Vita taxes Employee business expenses. Vita taxes 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. Vita taxes You can change your choice for each year's taxes. Vita taxes To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. Vita taxes S. Vita taxes tax return. Vita taxes However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. Vita taxes See How To Figure the Credit , later. Vita taxes To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. Vita taxes Figure your tax both ways—claiming the credit and claiming the deduction. Vita taxes Then fill out your return the way that benefits you more. Vita taxes See Why Choose the Credit, later. Vita taxes 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. Vita taxes If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. Vita taxes You cannot deduct any of them. Vita taxes Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. Vita taxes You cannot take a credit for any of them. Vita taxes See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. Vita taxes There are exceptions to this general rule, which are described next. Vita taxes Exceptions for foreign taxes not allowed as a credit. Vita taxes   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. Vita taxes Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. Vita taxes S. Vita taxes tax purposes. Vita taxes For more information, see Internal Revenue Code section 901(m). Vita taxes The IRS intends to issue guidance that will explain this provision in greater detail. Vita taxes   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. Vita taxes Foreign taxes that are not income taxes. Vita taxes   In most cases, only foreign income taxes qualify for the foreign tax credit. Vita taxes Other taxes, such as foreign real and personal property taxes, do not qualify. Vita taxes But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. Vita taxes   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. Vita taxes However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). Vita taxes Carrybacks and carryovers. Vita taxes   There is a limit on the credit you can claim in a tax year. Vita taxes 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. Vita taxes If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. Vita taxes That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. Vita taxes   For more information on the limit, see How To Figure the Credit , later. Vita taxes For more information on carrybacks and carryovers, see Carryback and Carryover , later. Vita taxes 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. Vita taxes You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. Vita taxes Example. Vita taxes You paid foreign taxes for the last 13 years and chose to deduct them on your U. Vita taxes S. Vita taxes income tax returns. Vita taxes You were timely in both filing your returns and paying your U. Vita taxes S. Vita taxes tax liability. Vita taxes 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. Vita taxes Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). Vita taxes Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. Vita taxes Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. Vita taxes 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. Vita taxes 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. Vita taxes 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. Vita taxes 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. Vita taxes 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. Vita taxes See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. Vita taxes 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. Vita taxes In most cases, if the foreign tax rate is higher than the U. Vita taxes S. Vita taxes rate, there will be no U. Vita taxes S. Vita taxes tax on the foreign income. Vita taxes If the foreign tax rate is lower than the U. Vita taxes S. Vita taxes rate, U. Vita taxes S. Vita taxes tax on the foreign income will be limited to the difference between the rates. Vita taxes The foreign tax credit can only reduce U. Vita taxes S. Vita taxes taxes on foreign source income; it cannot reduce U. Vita taxes S. Vita taxes taxes on U. Vita taxes S. Vita taxes source income. Vita taxes 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. Vita taxes This is because: A credit reduces your actual U. Vita taxes S. Vita taxes 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. Vita taxes 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. Vita taxes (See Limit on credit under How To Figure the Credit, later. Vita taxes ) Example 1. Vita taxes For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. Vita taxes None of the dividends are qualified dividends. Vita taxes You file a joint return and can claim two $3,900 exemptions. Vita taxes You had to pay $2,000 in foreign income taxes on the dividend income. Vita taxes If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. Vita taxes Your taxable income then is $57,500 and your tax is $7,736. Vita taxes If you take the credit instead, your itemized deductions are only $13,000. Vita taxes Your taxable income then is $59,500 and your tax before the credit is $8,036. Vita taxes After the credit, however, your tax is only $6,036. Vita taxes Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. Vita taxes Example 2. Vita taxes In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. Vita taxes You report on your U. Vita taxes S. Vita taxes return this income as well as $56,000 of U. Vita taxes S. Vita taxes source wages and an allowable $49,000 partnership loss from a U. Vita taxes S. Vita taxes partnership. Vita taxes Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. Vita taxes You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. Vita taxes If you deduct the foreign tax on your U. Vita taxes S. Vita taxes 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. Vita taxes 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. Vita taxes You can take a credit of only $113 because of limits discussed later. Vita taxes Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. Vita taxes If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). Vita taxes 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. Vita taxes 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. Vita taxes “Tax year” refers to the tax year for which your U. Vita taxes S. Vita taxes return is filed, not the tax year for which your foreign return is filed. Vita taxes Accrual method of accounting. Vita taxes   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. Vita taxes 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. Vita taxes   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. Vita taxes Generally, this occurs on the last day of the tax year for which your foreign return is filed. Vita taxes Contesting your foreign tax liability. Vita taxes   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. Vita taxes 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. Vita taxes Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. Vita taxes 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 . Vita taxes You may have to post a bond. Vita taxes   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. Vita taxes   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. Vita taxes Cash method of accounting. Vita taxes   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. Vita taxes 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. Vita taxes Choosing to take credit in the year taxes accrue. Vita taxes   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. Vita taxes You make the choice by checking the box in Part II of Form 1116. Vita taxes 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. Vita taxes   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. Vita taxes You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. Vita taxes   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. Vita taxes Credit based on taxes paid in earlier year. Vita taxes   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. Vita taxes Example. Vita taxes Last year you took the credit based on taxes paid. Vita taxes This year you chose to take the credit based on taxes accrued. Vita taxes During the year you paid foreign income taxes owed for last year. Vita taxes You also accrued foreign income taxes for this year that you did not pay by the end of the year. Vita taxes 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. Vita taxes Foreign Currency and Exchange Rates U. Vita taxes S. Vita taxes income tax is imposed on income expressed in U. Vita taxes S. Vita taxes dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. Vita taxes Therefore, fluctuations in the value of the foreign currency relative to the U. Vita taxes S. Vita taxes dollar may affect the foreign tax credit. Vita taxes Translating foreign currency into U. Vita taxes S. Vita taxes dollars. Vita taxes   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. Vita taxes S. Vita taxes dollars. Vita taxes How and when you do this depends on your functional currency. Vita taxes In most cases, your functional currency is the U. Vita taxes S. Vita taxes dollar unless you are required to use the currency of a foreign country. Vita taxes   You must make all federal income tax determinations in your functional currency. Vita taxes The U. Vita taxes S. Vita taxes dollar is the functional currency for all taxpayers except some qualified business units. Vita taxes A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. Vita taxes Unless you are self-employed, your functional currency is the U. Vita taxes S. Vita taxes dollar. Vita taxes   Even if you are self-employed and have a qualified business unit, your functional currency is the U. Vita taxes S. Vita taxes dollar if any of the following apply. Vita taxes You conduct the business primarily in dollars. Vita taxes The principal place of business is located in the United States. Vita taxes You choose to or are required to use the dollar as your functional currency. Vita taxes 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. Vita taxes   If your functional currency is the U. Vita taxes S. Vita taxes dollar, you must immediately translate into dollars all items of income, expense, etc. Vita taxes , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Vita taxes If there is more than one exchange rate, use the one that most properly reflects your income. Vita taxes In most cases, you can get exchange rates from banks and U. Vita taxes S. Vita taxes Embassies. Vita taxes   If your functional currency is not the U. Vita taxes S. Vita taxes dollar, make all income tax determinations in your functional currency. Vita taxes At the end of the year, translate the results, such as income or loss, into U. Vita taxes S. Vita taxes dollars to report on your income tax return. Vita taxes    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. Vita taxes   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. Vita taxes If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. Vita taxes 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. Vita taxes   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). Vita taxes Exception. Vita taxes   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. Vita taxes This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. Vita taxes The foreign taxes are paid on or after the first day of the tax year to which they relate. Vita taxes The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. Vita taxes The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). Vita taxes (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. Vita taxes )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. Vita taxes Election to use exchange rate on date paid. Vita taxes   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. Vita taxes If any of the accrued taxes are unpaid, you must translate them into U. Vita taxes S. Vita taxes dollars using the exchange rate on the last day of the U. Vita taxes S. Vita taxes tax year to which those taxes relate. Vita taxes 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. Vita taxes S. Vita taxes dollar functional currency. Vita taxes 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. Vita taxes The election is available for tax years beginning after 2004. Vita taxes 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. Vita taxes Make the election by attaching a statement to the applicable tax return. Vita taxes 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. Vita taxes S. Vita taxes dollar functional currency. Vita taxes Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. Vita taxes S. Vita taxes foreign tax credit claimed. Vita taxes 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. Vita taxes If a foreign tax redetermination occurs, a redetermination of your U. Vita taxes S. Vita taxes tax liability is required if any of the following conditions apply. Vita taxes The accrued taxes when paid differ from the amounts claimed as a credit. Vita taxes 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. Vita taxes If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. Vita taxes You will not be allowed a credit for the unpaid taxes until you pay them. Vita taxes When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. Vita taxes S. Vita taxes dollars using the exchange rate as of the date they were paid. Vita taxes The foreign tax credit is allowed for the year to which the foreign tax relates. Vita taxes See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. Vita taxes The foreign taxes you paid are refunded in whole or in part. Vita taxes 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. Vita taxes 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. Vita taxes S. Vita taxes tax year. Vita taxes In this case, you must adjust your U. Vita taxes S. Vita taxes tax in the tax year in which the accrued foreign taxes are paid. Vita taxes 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. Vita taxes S. Vita taxes tax liability for each tax year affected by the redetermination. Vita taxes In most cases, you must file Form 1040X, Amended U. Vita taxes S. Vita taxes Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. Vita taxes S. Vita taxes tax liability for the year or years affected. Vita taxes See Contents of statement , later. Vita taxes 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. Vita taxes There are other exceptions to this requirement. Vita taxes They are discussed later under Due date of notification to IRS . Vita taxes Contents of statement. Vita taxes   The statement must include all of the following. Vita taxes Your name, address, and taxpayer identification number. Vita taxes The tax year or years that are affected by the foreign tax redetermination. Vita taxes The date or dates the foreign taxes were accrued, if applicable. Vita taxes The date or dates the foreign taxes were paid. Vita taxes The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. Vita taxes 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. Vita taxes   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. Vita taxes   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). Vita taxes Due date of notification to IRS. Vita taxes   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. Vita taxes There is no limit on the time the IRS has to redetermine and assess the correct U. Vita taxes S. Vita taxes tax due. Vita taxes 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. Vita taxes S. Vita taxes taxes. Vita taxes See Time Limit on Refund Claims , later. Vita taxes   Exceptions to this due date are explained in the next two paragraphs. Vita taxes Multiple redeterminations of U. Vita taxes S. Vita taxes tax liability for same tax year. Vita taxes   Where more than one foreign tax redetermination requires a redetermination of U. Vita taxes S. Vita taxes 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. Vita taxes 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. Vita taxes However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. Vita taxes S. Vita taxes tax liability is required may occur after the due date for providing that notification. Vita taxes In this situation, you may have to file more than one Form 1040X for that tax year. Vita taxes Additional U. Vita taxes S. Vita taxes tax due eliminated by foreign tax credit carryback or carryover. Vita taxes   If a foreign tax redetermination requires a redetermination of U. Vita taxes S. Vita taxes tax liability that would otherwise result in an additional amount of U. Vita taxes S. Vita taxes 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. Vita taxes 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. Vita taxes You must file the statement by the due date (with extensions) of that return. Vita taxes 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. Vita taxes S. Vita taxes tax liability is required). Vita taxes Failure-to-notify penalty. Vita taxes   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. Vita taxes   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. Vita taxes S. Vita taxes tax. Vita taxes This penalty cannot be more than 25% of the tax due. Vita taxes Foreign tax refund. Vita taxes   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. Vita taxes S. Vita taxes tax for the time before the date of the refund. Vita taxes   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. Vita taxes 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. Vita taxes Interest also is owed from the time you receive a refund until you pay the additional tax due. Vita taxes Foreign tax imposed on foreign refund. Vita taxes   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. Vita taxes 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. Vita taxes Example. Vita taxes 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. Vita taxes When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. Vita taxes Time Limit on Refund Claims You have 10 years to file a claim for refund of U. Vita taxes S. Vita taxes tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. Vita taxes 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. Vita taxes You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. Vita taxes 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). Vita taxes The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. Vita taxes See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. Vita taxes Who Can Take the Credit? U. Vita taxes S. Vita taxes citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. Vita taxes S. Vita taxes tax on foreign source income may be able to take a foreign tax credit. Vita taxes U. Vita taxes S. Vita taxes Citizens If you are a U. Vita taxes S. Vita taxes citizen, you are taxed by the United States on your worldwide income wherever you live. Vita taxes You are normally entitled to take a credit for foreign taxes you pay or accrue. Vita taxes 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. Vita taxes S. Vita taxes citizens. Vita taxes If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. Vita taxes 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. Vita taxes For information on alien status, see Publication 519. Vita taxes Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. Vita taxes 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. Vita taxes S. Vita taxes possession on income from foreign sources that is effectively connected with a trade or business in the United States. Vita taxes But if you must pay tax to a foreign country or U. Vita taxes S. Vita taxes possession on income from U. Vita taxes S. Vita taxes sources only because you are a citizen or a resident of that country or U. Vita taxes S. Vita taxes possession, do not use that tax in figuring the amount of your credit. Vita taxes For information on alien status and effectively connected income, see Publication 519. Vita taxes 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. Vita taxes The tax must be imposed on you. Vita taxes You must have paid or accrued the tax. Vita taxes The tax must be the legal and actual foreign tax liability. Vita taxes The tax must be an income tax (or a tax in lieu of an income tax). Vita taxes Certain foreign taxes do not qualify for the credit even if the four tests are met. Vita taxes See Foreign Taxes for Which You Cannot Take a Credit, later. Vita taxes 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. Vita taxes S. Vita taxes possession. Vita taxes For example, a tax that is deducted from your wages is considered to be imposed on you. Vita taxes You cannot shift the right to claim the credit by contract or other means. Vita taxes Foreign country. Vita taxes   A foreign country includes any foreign state and its political subdivisions. Vita taxes Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. Vita taxes U. Vita taxes S. Vita taxes possessions. Vita taxes   For foreign tax credit purposes, all qualified taxes paid to U. Vita taxes S. Vita taxes possessions are considered foreign taxes. Vita taxes For this purpose, U. Vita taxes S. Vita taxes possessions include Puerto Rico and American Samoa. Vita taxes   When the term “foreign country” is used in this publication, it includes U. Vita taxes S. Vita taxes possessions unless otherwise stated. Vita taxes 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. Vita taxes S. Vita taxes possession. Vita taxes 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. Vita taxes Joint return. Vita taxes   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. Vita taxes Combined income. Vita taxes   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. Vita taxes 901-2(f)(3)(iii). Vita taxes 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. Vita taxes   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. Vita taxes 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. Vita taxes For more details, see paragraphs (f) and (h) of Regulations section 1. Vita taxes 901-2. Vita taxes For similar rules applicable to prior tax years, see Regulations section 1. Vita taxes 901-2 (revised as of April 1, 2011). Vita taxes Example. Vita taxes You and your spouse reside in Country X, which imposes income tax on your combined incomes. Vita taxes Both of you use the “u” as your functional currency. Vita taxes Country X apportions tax based on income. Vita taxes You had income of 30,000u and your spouse had income of 20,000u. Vita taxes Your filing status on your U. Vita taxes S. Vita taxes income tax return is married filing separately. Vita taxes You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. Vita taxes S income tax return. Vita taxes Your spouse can claim only 40% (20,000u/50,000u). Vita taxes Partner or S corporation shareholder. Vita taxes   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. Vita taxes These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. Vita taxes 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. Vita taxes Beneficiary. Vita taxes   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. Vita taxes This amount will be shown on the Schedule K-1 you receive from the estate or trust. Vita taxes However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. Vita taxes Mutual fund shareholder. Vita taxes   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. Vita taxes 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. Vita taxes If you do not receive this information, you will need to contact the fund. Vita taxes Controlled foreign corporation shareholder. Vita taxes   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. Vita taxes If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. Vita taxes Controlled foreign corporation. Vita taxes   A controlled foreign corporation is a foreign corporation in which U. Vita taxes S. Vita taxes shareholders own more than 50% of the voting power or value of the stock. Vita taxes You are considered a U. Vita taxes S. Vita taxes shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. Vita taxes See Internal Revenue Code sections 951(b) and 958(b) for more information. Vita taxes 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. Vita taxes Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. Vita taxes Foreign tax refund. Vita taxes   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. Vita taxes   For example, the United States has tax treaties with many countries allowing U. Vita taxes S. Vita taxes citizens and residents reductions in the rates of tax of those foreign countries. Vita taxes However, some treaty countries require U. Vita taxes S. Vita taxes 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. Vita taxes 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. Vita taxes Subsidy received. Vita taxes   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. Vita taxes 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. Vita taxes 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. Vita taxes   The term “subsidy” includes any type of benefit. Vita taxes Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. Vita taxes Shareholder receiving refund for corporate tax in integrated system. Vita taxes   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. Vita taxes You may be able to claim a refund of these taxes from the foreign government. Vita taxes You must include the refund (including any amount withheld) in your income in the year received. Vita taxes Any tax withheld from the refund is a qualified foreign tax. Vita taxes Example. Vita taxes You are a shareholder of a French corporation. Vita taxes You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. Vita taxes The French government imposes a 15% withholding tax ($15) on the refund you received. Vita taxes You receive a check for $85. Vita taxes You include $100 in your income. Vita taxes The $15 of tax withheld is a qualified foreign tax. Vita taxes 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. Vita taxes Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. Vita taxes 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. Vita taxes See Taxes in Lieu of Income Taxes , later. Vita taxes 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. Vita taxes A foreign levy is an income tax only if it meets both of the following requirements. Vita taxes It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. Vita taxes The predominant character of the tax is that of an income tax in the U. Vita taxes S. Vita taxes sense. Vita taxes A foreign levy may meet these requirements even if the foreign tax law differs from U. Vita taxes S. Vita taxes tax law. Vita taxes The foreign law may include in income items that U. Vita taxes S. Vita taxes law does not include, or it may allow certain exclusions or deductions that U. Vita taxes S. Vita taxes law does not allow. Vita taxes Specific economic benefit. Vita taxes   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. Vita taxes   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. Vita taxes   However, see the exception discussed later under Pension, unemployment, and disability fund payments . Vita taxes Economic benefits. Vita taxes   Economic benefits include the following. Vita taxes Goods. Vita taxes Services. Vita taxes Fees or other payments. Vita taxes Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. Vita taxes Discharges of contractual obligations. Vita taxes   In most cases, the right or privilege merely to engage in business is not an economic benefit. Vita taxes Dual-capacity taxpayers. Vita taxes   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. Vita taxes ” 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. Vita taxes    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. Vita taxes   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. Vita taxes    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. Vita taxes For more information about these agreements, see Publication 54. Vita taxes Soak-up taxes. Vita taxes   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. Vita taxes 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. Vita taxes This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. Vita taxes Penalties and interest. Vita taxes   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. Vita taxes Taxes not based on income. Vita taxes   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. Vita taxes Taxes based on assets, such as property taxes, do not qualify for the credit. Vita taxes 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. Vita taxes 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. Vita taxes A tax in lieu of an income tax does not have to be based on realized net income. Vita taxes A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. Vita taxes In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. Vita taxes 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. Vita taxes The soak-up tax. Vita taxes 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. Vita taxes Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. Vita taxes 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. Vita taxes S. Vita taxes persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. Vita taxes Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. Vita taxes S. Vita taxes gross income. Vita taxes 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. Vita taxes S. Vita taxes income under the foreign earned income exclusion or the foreign housing exclusion. Vita taxes See Publication 54 for more information on the foreign earned income and housing exclusions. Vita taxes Wages completely excluded. Vita taxes   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. Vita taxes Wages partly excluded. Vita taxes   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. Vita taxes 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. Vita taxes   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. Vita taxes Deductible expenses do not include the foreign housing deduction. Vita taxes   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). Vita taxes If the foreign law taxes foreign earned income and some other income (for example, earned income from U. Vita taxes S. Vita taxes sources or a type of income not subject to U. Vita taxes S. Vita taxes 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. Vita taxes Example. Vita taxes You are a U. Vita taxes S. Vita taxes citizen and a cash basis taxpayer, employed by Company X and living in Country A. Vita taxes 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. Vita taxes To find that part, do the following. Vita taxes First, find the amount of business expenses allocable to excluded wages and therefore not deductible. Vita taxes To do this, multiply the otherwise deductible expenses by a fraction. Vita taxes That fraction is the excluded wages over your foreign earned income. Vita taxes   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. Vita taxes To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). Vita taxes The result is $81,984. Vita taxes 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). Vita taxes Finally, multiply the foreign tax you paid by the resulting fraction. Vita taxes   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. Vita taxes Taxes on Income From Puerto Rico Exempt From U. Vita taxes S. Vita taxes 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. Vita taxes For information on figuring the reduction, see Publication 570. Vita taxes 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. Vita taxes For more information on this exclusion, see Publication 570. Vita taxes Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. Vita taxes However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. Vita taxes 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. Vita taxes However, you can claim an itemized deduction for these taxes. Vita taxes See Choosing To Take Credit or Deduction , earlier. Vita taxes 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. Vita taxes The following countries meet this description for 2013. Vita taxes Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. Vita taxes Cuba. Vita taxes Iran. Vita taxes Libya (but see Note later). Vita taxes North Korea. Vita taxes Sudan. Vita taxes Syria. Vita taxes Waiver of denial of the credit. Vita taxes   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. Vita taxes S. Vita taxes companies in the sanctioned country. Vita taxes 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. Vita taxes Note. Vita taxes Effective December 10, 2004, the President granted a waiver to Libya. Vita taxes Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. Vita taxes Limit on credit. Vita taxes   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. Vita taxes You must fill out a separate Form 1116 for this income. Vita taxes This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. Vita taxes Example. Vita taxes You lived and worked in Iran until August, when you were transferred to Italy. Vita taxes You paid taxes to each country on the income earned in that country. Vita taxes You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. Vita taxes Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. Vita taxes You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. Vita taxes Figuring the credit when a sanction ends. Vita taxes    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. Vita taxes 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. Vita taxes Example. Vita taxes The sanctions against Country X ended on July 31. Vita taxes On August 19, you receive a distribution from a mutual fund of Country X income. Vita taxes The fund paid Country X income tax for you on the distribution. Vita taxes 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. Vita taxes Amounts for the nonsanctioned period. Vita taxes   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. Vita taxes Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. Vita taxes   Number of nonsanctioned days in year  Number of days in year Example. Vita taxes 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. Vita taxes Sanctions against Country X ended on July 11, 2013. Vita taxes You are unable to determine how much of the income or tax is for the nonsanctioned period. Vita taxes 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. Vita taxes You would compute the income for the nonsanctioned period as follows. Vita taxes 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. Vita taxes 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. Vita taxes Further information. Vita taxes   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. Vita taxes This Cumulative Bulletin can be found in many libraries and IRS offices. Vita taxes Table 1. Vita taxes 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. Vita taxes 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. Vita taxes 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). Vita taxes 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. Vita taxes If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. Vita taxes 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. Vita taxes 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. Vita taxes Withholding tax. Vita taxes   For this purpose, withholding tax includes any tax determined on a gross basis. Vita taxes It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Vita taxes Ex-dividend date. Vita taxes   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. Vita taxes Example 1. Vita taxes You bought common stock from a foreign corporation on November 3. Vita taxes You sold the stock on November 19. Vita taxes You received a dividend on this stock because you owned it on the ex-dividend date of November 5. Vita taxes 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). Vita taxes Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. Vita taxes Example 2. Vita taxes The facts are the same as in Example 1 except that you sold the stock on November 14. Vita taxes You held the stock for only 11 days. Vita taxes You are not entitled to the credit. Vita taxes Exception. Vita taxes   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. Vita taxes See section 901(k)(4) of the Internal Revenue Code for more information. Vita taxes 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. Vita taxes 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. Vita taxes Withholding tax. Vita taxes   For this purpose, withholding tax includes any tax determined on a gross basis. Vita taxes It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Vita taxes Exception for dealers. Vita taxes   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. Vita taxes See section 901(I)(2) of the Internal Revenue Code for more information. Vita taxes 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. Vita taxes A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. Vita taxes S. Vita taxes tax purposes but not for foreign tax purposes. Vita taxes For more information, see Internal Revenue Code section 901(m). Vita taxes The IRS intends to issue guidance that will explain this provision in greater detail. Vita taxes 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. Vita taxes 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. Vita taxes For details, see Regulations section 1. Vita taxes 901-3. Vita taxes 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. Vita taxes See the instructions for line 12 in the Form 1116 instructions to figure this reduction. Vita taxes 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. Vita taxes List of boycotting countries. Vita taxes   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. Vita taxes As of November 2013, the following countries are listed. Vita taxes Iraq. Vita taxes Kuwait. Vita taxes Lebanon. Vita taxes Libya. Vita taxes Qatar. Vita taxes Saudi Arabia. Vita taxes Syria. Vita taxes United Arab Emirates. Vita taxes Yemen. Vita taxes    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. Vita taxes   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. Vita taxes The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. Vita taxes Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. Vita taxes Public inspection. Vita taxes   A determination and any related background file is open to public inspection. Vita taxes However, your identity and certain other information will remain confidential. Vita taxes Reporting requirements. Vita taxes   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. Vita taxes 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. Vita taxes A partnership in which you are a partner. Vita taxes A trust you are treated as owning. Vita taxes Form 5713 required. Vita taxes   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. Vita taxes See the Instructions for Form 5713 for information on when and where to file the form. Vita taxes Penalty for failure to file. Vita taxes   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. Vita taxes 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. Vita taxes 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. Vita taxes S. Vita taxes tax liability (Form 1040, line 44) divided by your worldwide taxable income. Vita taxes You may be entitled to carry over to other years taxes reduced under this rule. Vita taxes See Internal Revenue Code section 907(f). Vita taxes Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. Vita taxes Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. Vita taxes Taxes of U. Vita taxes S. Vita taxes 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. Vita taxes 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. Vita taxes See Penalty for not filing Form 5471 or Form 8865 , later. Vita taxes U. Vita taxes S. Vita taxes persons controlling foreign corporations. Vita taxes   If you are a U. Vita taxes S. Vita taxes 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. Vita taxes S. Vita taxes Persons With Respect To Certain Foreign Corporations. Vita taxes 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. Vita taxes U. Vita taxes S. Vita taxes persons controlling foreign partnerships. Vita taxes   If you are a U. Vita taxes S. Vita taxes citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file