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What Is A 1040nr

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What Is A 1040nr

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

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education.

  • A tax credit reduces the amount of income tax you may have to pay.
  • A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
  • Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
  • An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit. 
  • Education credits are claimed on Form 8863, Education Credits. For details, see IRS Publication 970, Tax Benefits of Education.
 You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for educational credits or deductions, including the American opportunity credit, the lifetime learning credit and the tuition and fees deduction.

Credits


American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit originally modified the existing Hope credit for tax years 2009 and 2010. The American opportunity credit was later extended through 2017, making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the the prior Hope and existing lifetime learning credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

Lifetime Learning Credit

The lifetime learning credit helps parents and students pay for post-secondary education.

For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.

Generally, you can claim the lifetime learning credit if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year.


Deductions


Tuition and Fees Deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

You cannot claim the tuition and fees deduction if any of the following apply:

  • Your filing status is married filing separately.

  • Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.

  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).

  • You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.

  • You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

Qualified Student Loan

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan.
  • Paid or incurred within a reasonable period of time before or after you took out the loan.
  • For education provided during an academic period for an eligible student.

Loans from the following sources are not qualified student loans:

  • A related person.
  • A qualified employer plan.

Qualified Education Expenses

For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:

  • Tuition and fees.
  • Room and board.
  • Books, supplies and equipment.
  • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than the greater of:

  • The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
  • The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Business Deduction for Work-Related Education


If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the lifetime learning credit. You may qualify for these other benefits even if you do not meet the requirements listed above.

To claim a business deduction for work-related education, you must:

  • Be working.
  • Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
  • File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
  • Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.

Qualifying Work-Related Education

You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

  • The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
  • The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

  • Is needed to meet the minimum educational requirements of your present trade or business or
  • Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Education Required by Employer or by Law

Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

  • It is required for you to keep your present salary, status or job.
  • The requirement serves a business purpose of your employer.
  • The education is not part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.

Education to Maintain or Improve Skills

If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.


Savings Plans


529 Plans

States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.

For 2009 and 2010, an ARRA change to tax-free college savings plans and prepaid tuition programs added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, lifetime learning credit or tuition and fees deduction.

Coverdell Education Savings Account

This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and  the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Here are some things to remember about distributions from Coverdell accounts:

  • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.

  • There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible.

  • Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.

  • If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.


Scholarships and Fellowships


A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

A scholarship or fellowship is tax free only if you meet the following conditions:

  • You are a candidate for a degree at an eligible educational institution.
  • You use the scholarship or fellowship to pay qualified education expenses.

Qualified Education Expenses

For purposes of tax-free scholarships and fellowships, these are expenses for:

  • Tuition and fees required to enroll at or attend an eligible educational institution.
  • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses. 

Expenses that Don’t Qualify

Qualified education expenses do not include the cost of:

  • Room and board.
  • Travel.
  • Research.
  • Clerical help.
  • Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

For more information, see Pub. 970.


Exclusions from Income


You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the lifetime learning credit.

Employer-Provided Educational Assistance


If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.

Educational Assistance Program

To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

Educational Assistance Benefits

Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.

  • Meals, lodging, or transportation.
  • Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
  • Courses involving sports, games, or hobbies unless they:
    • Have a reasonable relationship to the business of your employer, or
    • Are required as part of a degree program.

Benefits over $5,250

If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.

Working Condition Fringe Benefit 

However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.


Related Items:

 

Page Last Reviewed or Updated: 24-Jan-2014

The What Is A 1040nr

What is a 1040nr Index A Abandonment of home, Abandonment. What is a 1040nr Absence, temporary, Temporary absence. What is a 1040nr Abstract fees, Settlement fees or closing costs. What is a 1040nr Address, change of, Reminders Adjusted basis, Adjusted Basis, Adjusted Basis Definition of, Determining Basis Worksheet 1 to figure, Determining Basis, Worksheet 1. What is a 1040nr Adjusted Basis of Home Sold—Illustrated Example 1 for Peter and Betty Clark, Worksheet 1. What is a 1040nr Adjusted Basis of Home Sold—Illustrated Example 3 for Emily White, Worksheet 1 Instructions. What is a 1040nr Adjusted Basis of Home Sold Adoption Adjusted basis of home for credit claimed, Decreases to Basis Advertising fees, Selling expenses. What is a 1040nr Amount realized, Amount Realized Appraisal fees, Settlement fees or closing costs. What is a 1040nr Architect's fees, Construction. What is a 1040nr Armed forces Ownership and use tests, Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. What is a 1040nr Assistance (see Tax help) B Back interest, Settlement fees or closing costs. What is a 1040nr Basis Adjusted basis (see Adjusted basis) Determination of, Determining Basis, Adjusted Basis Other than cost, Basis Other Than Cost Building permit fees, Construction. What is a 1040nr Business use of home, Business Use or Rental of Home, Use test met for business part (with no business use in year of sale). What is a 1040nr C Casualties Amounts spent after to restore damaged property, Increases to Basis Deductible casualty losses, Decreases to Basis Disaster as cause of, Specific event safe harbors. What is a 1040nr Insurance payments for casualty losses, Decreases to Basis Change of address, Reminders Closing costs, Settlement fees or closing costs. What is a 1040nr Commissions, Selling expenses. What is a 1040nr , Settlement fees or closing costs. What is a 1040nr Community property Basis determination, Community property. What is a 1040nr Condemnation Gain exclusion, Home destroyed or condemned. What is a 1040nr Ownership and use test when previous home condemned, Previous home destroyed or condemned. What is a 1040nr Condominiums As main home, Main Home Basis determination, Condominium. What is a 1040nr Construction costs, Construction. What is a 1040nr Built by you, Built by you. What is a 1040nr Cooperative apartments As main home, Main Home Basis determination, Cooperative apartment. What is a 1040nr Ownership and use tests, Cooperative apartment. What is a 1040nr Cost as basis, Cost As Basis Credit reports Cost of obtaining, Settlement fees or closing costs. What is a 1040nr D Date of sale, Date of sale. What is a 1040nr Death Sale due to, Specific event safe harbors. What is a 1040nr Spouse's death before sale, ownership and use tests, Sale of main home by surviving spouse. What is a 1040nr Decreases to basis, Decreases to Basis Depreciation After May 6, 1997, Depreciation after May 6, 1997. What is a 1040nr Home used for business or rental purposes, Decreases to Basis Destroyed homes Gain exclusion, Home destroyed or condemned. What is a 1040nr Ownership and use test when previous home destroyed, Previous home destroyed or condemned. What is a 1040nr Disabilities, individuals with Ownership and use test, Exception for individuals with a disability. What is a 1040nr Disasters, Specific event safe harbors. What is a 1040nr Discharge of qualified principal residence indebtedness, Adjusted Basis Divorce Home received from spouse, Home received from spouse. What is a 1040nr Home transferred to spouse, Transfer to spouse. What is a 1040nr Ownership and use tests, Home transferred from spouse. What is a 1040nr Sale due to, Specific event safe harbors. What is a 1040nr Transfers after July 18, 1984, Transfers after July 18, 1984. What is a 1040nr Transfers before July 19, 1984, Transfers before July 19, 1984. What is a 1040nr Use of home after divorce, Use of home after divorce. What is a 1040nr Doctor's recommendation for sale, Doctor's recommendation safe harbor. What is a 1040nr E Easements, Decreases to Basis Employee of the intelligence community, Employee of the intelligence community. What is a 1040nr Employment Change in place of employment, Change in Place of Employment Payment by employer, when job transfer involved, Payment by employer. What is a 1040nr Energy Conservation subsidies, Decreases to Basis Credit, Decreases to Basis Exclusion of gain, Excluding the Gain, Nonqualified Use Reduced maximum exclusion, Reduced Maximum Exclusion Expatriates, Expatriates. What is a 1040nr F Federal mortgage subsidies Recapture of, Recapturing (Paying Back) a Federal Mortgage Subsidy Figuring gain or loss, Figuring Gain or Loss, More information. What is a 1040nr Fire insurance premiums, Settlement fees or closing costs. What is a 1040nr Foreclosure, Foreclosure or repossession. What is a 1040nr Foreign Service, Foreign Service member. What is a 1040nr Ownership and use tests, Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. What is a 1040nr Form 1040 Reporting sale of home, Reporting the Sale Seller-financed mortgages, Seller-financed mortgage. What is a 1040nr Form 1040, Schedule A Real estate taxes, Real estate taxes. What is a 1040nr Form 1040, Schedule D Reporting sale of home, Reporting the Sale Form 1099-S Proceeds from real estate transactions, Date of sale. What is a 1040nr , Form 1099-S. What is a 1040nr , Form 1099-S. What is a 1040nr Form 2119 Sale of home, Adjusted Basis Form 6252 Installment sale income, Installment sale. What is a 1040nr Form 8828 Recapture tax, How to figure and report the recapture. What is a 1040nr Form 8960 Net Investment Income Tax, Net Investment Income Tax (NIIT). What is a 1040nr NIIT, Net Investment Income Tax (NIIT). What is a 1040nr Form 982 Discharge of indebtedness, Adjusted Basis Free tax services, Free help with your tax return. What is a 1040nr Future developments, Future Developments G Gain or loss Basis determination, Determining Basis, Adjusted Basis Exclusion of gain, Excluding the Gain Exclusion of gain, nonqualified use, Nonqualified Use Gain on sale, Gain on sale. What is a 1040nr Loss on sale, Loss on sale. What is a 1040nr Postponed from sale of previous home before May 7, 1997, Decreases to Basis Worksheet 2 to figure, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home—Completed Example 1 for Amy, Worksheet 1. What is a 1040nr Adjusted Basis of Home Sold—Illustrated Example 1 for Peter and Betty Clark, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home—Illustrated Example 2 for Peter and Betty Clark, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home—Illustrated Example 3 for Emily White, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home Gifts Home received as, Home received as gift. What is a 1040nr H Health Sale of home due to, Health Help (see Tax help) Homebuyer credit Recapture, Recapture of the post-2008 first-time homebuyer credit. What is a 1040nr Houseboats As main home, Main Home I Important reminders Change of address, Reminders Home sold with undeducted points, Reminders Improvements Adjusted basis determination, Improvements. What is a 1040nr Charges for, Settlement fees or closing costs. What is a 1040nr Receipts and other records, Adjusted Basis Useful life of more than 1 year, Increases to Basis Increases to basis, Increases to Basis Individual taxpayer identification numbers (ITINs), Individual taxpayer identification number (ITIN). What is a 1040nr Inheritance Home received as, Home acquired from a decedent who died before or after 2010. What is a 1040nr Installment sales, Installment sale. What is a 1040nr Involuntary conversion, Specific event safe harbors. What is a 1040nr ITINs (Individual taxpayer identification numbers), Individual taxpayer identification number (ITIN). What is a 1040nr J Joint owners not married, Joint owners not married. What is a 1040nr Joint returns, Jointly owned home. What is a 1040nr Ownership and use tests, Married Persons L Land Sale of land on which home located, Land. What is a 1040nr Sale of vacant land, Vacant land. What is a 1040nr Legal fees, Selling expenses. What is a 1040nr , Settlement fees or closing costs. What is a 1040nr , Construction. What is a 1040nr Legal separation Sale due to, Specific event safe harbors. What is a 1040nr Like-kind exchange, Sale of home acquired in a like-kind exchange. What is a 1040nr Living expenses, Reasonable basic living expenses. What is a 1040nr Loan assumption fees, Settlement fees or closing costs. What is a 1040nr Loan placement fees, Selling expenses. What is a 1040nr Loss (see Gain or loss) M Main home Defined, Main Home Factors used to determine, Factors used to determine main home. What is a 1040nr Property used partly as, Property used partly as your main home. What is a 1040nr , Property Used Partly for Business or Rental Married taxpayers (see Joint returns) Maximum exclusion, Maximum Exclusion Reduced, Reduced Maximum Exclusion Military (see Armed forces) Missing children, photographs of, Reminders Mobile homes As main home, Main Home More than one home, More than one home. What is a 1040nr Mortgage fees, Settlement fees or closing costs. What is a 1040nr Mortgage insurance premiums, Settlement fees or closing costs. What is a 1040nr Mortgage subsidies Recapturing (paying back) federal mortgage subsidy, Recapturing (Paying Back) a Federal Mortgage Subsidy Mortgages, seller-financed, Seller-financed mortgage. What is a 1040nr Moving expense, Settlement fees or closing costs. What is a 1040nr Multiple births Sale due to, Specific event safe harbors. What is a 1040nr N Nonqualified use, Nonqualified Use Nonresident aliens Spouse as, transfer of home to, Exception. What is a 1040nr O Option to buy home, Option to buy. What is a 1040nr Ownership and use tests, Ownership and Use Tests, Ownership and use tests met at different times. What is a 1040nr P Partly used for business, Property Used Partly for Business or Rental Personal property Selling price of home not to include, Personal property. What is a 1040nr Points, Selling expenses. What is a 1040nr Home sold with undeducted points, Reminders Seller-paid, Seller-paid points. What is a 1040nr Publications (see Tax help) R Real estate taxes, Settlement fees or closing costs. What is a 1040nr , Real estate taxes. What is a 1040nr Deducting in year of sale, Deducting Taxes in the Year of Sale Recapture of federal mortgage subsidy, Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of first-time homebuyer credit, Recapture of First-Time Homebuyer Credit Recording fees, Settlement fees or closing costs. What is a 1040nr Recordkeeping, Adjusted Basis Reduced maximum exclusion, Reduced Maximum Exclusion Worksheet 3, Worksheet 3. What is a 1040nr Reduced Maximum Exclusion Refinancing, Settlement fees or closing costs. What is a 1040nr Relatives Sale of home to, Exception for sales to related persons. What is a 1040nr Remainder interest Sale of, Sale of remainder interest. What is a 1040nr Remodeling, Improvements. What is a 1040nr , Exception. What is a 1040nr (see also Improvements) Rental of home, Business Use or Rental of Home, Use test met for business part (with no business use in year of sale). What is a 1040nr Before closing, by buyer, Settlement fees or closing costs. What is a 1040nr Partial use, Property Used Partly for Business or Rental Repairs, Settlement fees or closing costs. What is a 1040nr , Improvements. What is a 1040nr , Repairs. What is a 1040nr (see also Improvements) Reporting the sale, Reporting the Sale, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home—Illustrated Example 3 for Emily White Repossession, Foreclosure or repossession. What is a 1040nr Right-of-ways, Decreases to Basis S Safe harbors Distance safe harbor, Distance safe harbor. What is a 1040nr Doctor's recommendation for sale, Doctor's recommendation safe harbor. What is a 1040nr Unforeseeable events, Specific event safe harbors. What is a 1040nr Sales commissions, Selling expenses. What is a 1040nr , Settlement fees or closing costs. What is a 1040nr Sales to related persons, Exception for sales to related persons. What is a 1040nr Self-employed persons Change in status causing inability to pay basic expenses, Specific event safe harbors. What is a 1040nr Seller-financed mortgages, Seller-financed mortgage. What is a 1040nr Seller-paid points, Seller-paid points. What is a 1040nr Selling expenses, Selling expenses. What is a 1040nr Selling price, Selling Price Separate returns, Separate returns. What is a 1040nr Settlement fees, Settlement fees or closing costs. What is a 1040nr Spouse Death of (see Surviving spouse) Divorce, transfers subsequent to (see Divorce) Survey fees, Settlement fees or closing costs. What is a 1040nr Surviving spouse Basis determination, Surviving spouse. What is a 1040nr Ownership and use tests, Sale of main home by surviving spouse. What is a 1040nr T Tax help, How To Get Tax Help Temporary absence, Temporary absence. What is a 1040nr Temporary housing, Temporary housing. What is a 1040nr Title insurance, Settlement fees or closing costs. What is a 1040nr Title search fees, Settlement fees or closing costs. What is a 1040nr Trading homes, Trading (exchanging) homes. What is a 1040nr , Home received as trade. What is a 1040nr Transfer taxes, Settlement fees or closing costs. What is a 1040nr , Transfer taxes. What is a 1040nr Transfer to spouse, Transfer to spouse. What is a 1040nr After July 18, 1984, Transfers after July 18, 1984. What is a 1040nr Before July 19, 1984, Transfers before July 19, 1984. What is a 1040nr TTY/TDD information, How To Get Tax Help U Unemployment, Specific event safe harbors. What is a 1040nr Unforeseen circumstances, Unforeseen Circumstances Uniformed services (see Armed forces) Use tests, Ownership and Use Tests, Ownership and use tests met at different times. What is a 1040nr Utilities Charges for installing, Settlement fees or closing costs. What is a 1040nr Charges related to occupancy of house before closing, Settlement fees or closing costs. What is a 1040nr Energy conservation subsidy, Decreases to Basis Meter and connection charges for construction, Construction. What is a 1040nr V Vacant land Sale of, Vacant land. What is a 1040nr W Worksheets, Worksheets. What is a 1040nr Adjusted basis (Worksheet 1), Determining Basis, Worksheet 1. What is a 1040nr Adjusted Basis of Home Sold—Illustrated Example 1 for Peter and Betty Clark, Worksheet 1. What is a 1040nr Adjusted Basis of Home Sold—Illustrated Example 3 for Emily White, Worksheet 1 Instructions. What is a 1040nr Adjusted Basis of Home Sold Gain (or loss), exclusion, and taxable gain (Worksheet 2), Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home—Completed Example 1 for Amy, Worksheet 1. What is a 1040nr Adjusted Basis of Home Sold—Illustrated Example 1 for Peter and Betty Clark, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home—Illustrated Example 2 for Peter and Betty Clark, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home—Illustrated Example 3 for Emily White, Worksheet 2. What is a 1040nr Taxable Gain on Sale of Home Recordkeeping and, Adjusted Basis Reduced maximum exclusion (Worksheet 3), Worksheet 3. What is a 1040nr Reduced Maximum Exclusion Prev  Up     Home   More Online Publications