AccessibilitySkip to Top NavigationSkip to Main ContentHome  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

General Instructions

Table of Contents

What's New for 2007

Income categories eliminated.   The following categories of income have been eliminated for purposes of computing the foreign tax credit limit. Income that previously fell in these categories is either passive category income or general category income.

  • High withholding tax interest.

  • Financial services income.

  • Shipping income.

  • Dividends from a domestic international sales corporation (DISC) or former DISC.

  • Certain distributions from a foreign sales corporation (FSC) or former FSC.

  High withholding tax interest and shipping income are passive category income or general category income, depending on the circumstances. Financial services income is general category income if you are predominantly engaged in the active conduct of a banking, insurance, financing or similar business. Dividends from a DISC or former DISC and certain distributions from a FSC or former FSC are passive category income.

Carryforward and carryback of unused foreign taxes.   Special rules apply to carrybacks of unused foreign taxes to 2006 and carryforwards of unused taxes to 2007 and later years. See the instructions for line 10.

Recharacterization of overall domestic loss.   If you have an overall domestic loss for any tax year beginning after 2006, you must recharacterize a portion of your U.S. source taxable income in succeeding years as foreign source taxable income for purposes of the foreign tax credit.

  In a tax year you choose to claim the foreign tax credit, the overall domestic loss is the domestic loss for that tax year to the extent it offsets foreign source taxable income for that tax year or for any preceding tax year (in which you chose to claim the foreign tax credit) because of a carryback. If you do not choose to claim the foreign tax credit for a tax year, the overall domestic loss is the domestic loss for that tax year to the extent it offsets foreign source taxable income for any preceding tax year (in which you chose to claim the foreign tax credit) because of a carryback.

  A domestic loss is the amount by which the U.S. source gross income for the tax year is exceeded by the sum of the deductions properly allocated or apportioned to the income (determined without regard to any carryback from a subsequent tax year).

Country-by-country reporting no longer required of mutual fund or other regulated investment company (RIC) shareholders.    If you claim a foreign tax credit in 2007 or later years for your share of the foreign taxes paid by a mutual fund or other RIC, you no longer have to report the income or taxes paid on a country-by-country basis. See the instructions for line g.

Election To Claim the Foreign Tax Credit Without Filing Form 1116

You may be able to claim the foreign tax credit without filing Form 1116. By making this election, the foreign tax credit limitation (lines 14 through 20 of the form) will not apply to you. This election is available only if you meet all of the following conditions.

Tax Help
For more information about, or assistance with figuring, the foreign tax credit, the following IRS resources are available.
IRS Contacts • Call 1-800-829-1040 (in U.S. and Puerto Rico).
  • Call 215-516-2000 (overseas) (not toll free).
  • Contact IRS offices at U.S. embassies in London, Paris, or the U.S. consulate in Frankfurt.
  • Write to Internal Revenue Service, International Section, P.O. Box 920, Bensalem, PA 19020-8518.
Publications • Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
  • Pub. 514, Foreign Tax Credit for Individuals.
  • Pub. 519, U.S. Tax Guide for Aliens.
  • Pub. 570, Tax Guide for Individuals With Income From U.S. Possessions.
  • Pub. 575, Pension and Annuity Income.

  • All of your foreign source gross income was “passive category income” (which includes most interest and dividends) (see page 3). However, for this purpose, passive income also includes (a) income subject to the special rule for high-taxed income described on page 4, and (b) certain export financing interest.

  • All the income and any foreign taxes paid on it were reported to you on a qualified payee statement. Qualified payee statements include Form 1099-DIV, Form 1099-INT, Schedule K-1 (Form 1041), Schedule K-1 (Form 1065), Schedule K-1 (Form 1065-B), Schedule K-1 (Form 1120S), or similar substitute statements.

  • Your total creditable foreign taxes are not more than $300 ($600 if married filing a joint return).

This election is not available to estates or trusts.

If you make this election:

  • You cannot carry over to any other year any foreign taxes paid or accrued in a tax year to which the election applies (but carryovers to and from other years are unaffected). See the instructions for line 10 on page 16.

  • You are still required to take into account the general rules for determining whether a tax is creditable. See Foreign Taxes Eligible for a Credit and Foreign Taxes Not Eligible for a Credit on page 2.

  • You are still required to reduce the taxes available for credit by any amount you would have entered on line 12 of Form 1116. See the instructions for Line 12 on page 16.

To make the election, just enter on the foreign tax credit line of your tax return (for example, Form 1040, line 51) the smaller of (a) your total foreign tax or (b) your regular tax (for example, Form 1040, line 44).

Purpose of Form

Who should file.   File Form 1116 to claim the foreign tax credit if the election above does not apply and:

  • You are an individual, estate, or trust, and

  • You paid or accrued certain foreign taxes to a foreign country or U.S. possession.

  See Foreign Taxes Eligible for a Credit on this page to determine if the taxes you paid or accrued qualify for the credit.

Do not use Form 1116 to figure a credit for taxes paid to the U.S. Virgin Islands. Instead, use Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands.

Nonresident aliens.   If you are a nonresident alien, you generally cannot take the credit. However, you may be able to take the credit if:

  • You were a resident of Puerto Rico during your entire tax year, or

  • You pay or accrue tax to a foreign country or U.S. possession on income from foreign sources that is effectively connected with a trade or business in the United States. But if you must pay tax to a foreign country or U.S. possession on income from U.S. sources only because you are a citizen or a resident of that country or U.S. possession, do not use that tax in figuring the amount of your credit.

  See section 906 for more information on the foreign tax credit allowed to a nonresident alien individual.

Credit or Deduction

Instead of claiming a credit for eligible foreign taxes, you can choose to deduct foreign income taxes. Form 1040 filers choosing to do so would deduct foreign income taxes on Schedule A (Form 1040), Itemized Deductions. Generally, if you take the credit for any eligible foreign taxes, you cannot take any part of that year's foreign taxes as a deduction. However, even if you take the credit for eligible foreign taxes for the year, you can take a deduction for:

  • Foreign taxes not allowed as a credit because of boycott provisions.

  • Taxes paid to certain foreign countries for which a credit has been denied, as described in item (2) under Foreign Taxes Not Eligible for a Credit on this page.

  • Taxes on income or gain that are not creditable because you do not meet the holding period requirement, as described in item (3) or (5) under Foreign Taxes Not Eligible for a Credit on this page.

  • Taxes on income or gain that are not creditable because you have to make related payments, as described in item (4) or (6) under Foreign Taxes Not Eligible for a Credit on this page.

  • Certain taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country, as described in item (8) under Foreign Taxes Not Eligible for a Credit on this page.

If you want to change your election to take a deduction instead of a credit, or a credit instead of a deduction, you must do so within a special 10-year limitation period. See Pub. 514 for more information.

Foreign Taxes Eligible for a Credit

You can take a credit for income, war profits, and excess profits taxes paid or accrued during your tax year to any foreign country or U.S. possession, or any political subdivision (for example, city, state, or province), agency, or instrumentality of the country or possession. This includes taxes paid or accrued in lieu of a foreign or possession income, war profits, or excess profits tax that is otherwise generally imposed. For purposes of the credit, U.S. possessions include Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa.

U.S. citizens living in certain treaty countries may be able to take an additional foreign tax credit for foreign tax imposed on certain items of income from the United States. See Tax Treaties in Pub. 514 for details. If this applies to you, use the worksheet near the back of Pub. 514 to help you figure this additional credit.

Foreign Taxes Not Eligible for a Credit

You cannot take a credit for the following foreign taxes.

  1. Taxes paid to a foreign country that you do not legally owe, including amounts eligible for refund by the foreign country. If you do not exercise your available remedies to reduce the amount of foreign tax to what you legally owe, a credit for the excess amount is not allowed.

    Example.

    Country X withholds $25 of tax from a payment made to you. Under the income tax treaty between the United States and Country X, you owe only $15 and can claim a refund from Country X for the other $10. Only $15 is eligible for the foreign tax credit (whether or not you apply for a refund).

  2. Taxes imposed by and paid to certain foreign countries. These countries are those designated by the Secretary of State as countries that repeatedly provide support for acts of international terrorism, countries with which the United States does not have diplomatic relations, or countries whose governments are not recognized by the United States. Pub. 514 contains a list of these countries.

  3. Foreign taxes withheld on a dividend from a corporation, if you have not held the stock for at least 16 days within the 31-day period that begins 15 days before the ex-dividend date. This required holding period is greater for preferred-stock dividends attributable to periods totaling more than 366 days. See section 901(k)(3) or Pub. 514.

  4. Foreign taxes withheld on a dividend to the extent that you have to make related payments on positions in similar or related property.

    Example.

    You receive a dividend subject to foreign withholding tax. You are obligated to pay someone else an amount equal to all these dividends you receive. You cannot claim a foreign tax credit for the withholding tax on these dividends.

  5. Foreign taxes withheld on income or gain (other than dividends) from property if you have not held the property for at least 16 days within the 31-day period that begins 15 days before the date on which the right to receive the payment arises. See section 901(l) or Pub. 514.

  6. Foreign taxes withheld on income or gain (other than dividends) from property to the extent you have to make related payments on positions in similar or related property.

  7. Payments of foreign tax that are returned to you in the form of a subsidy.

  8. 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 the purchase or sale.

  9. Foreign taxes paid or accrued on income for which you are claiming an exclusion on Form 8873, Extraterritorial Income Exclusion. However, see section 943(d) for an exception for certain withholding taxes.

You cannot take a credit for any interest or penalties you must pay.

Foreign Currency Conversion

Report all amounts in U.S. dollars except where specified otherwise in Part II. If you have to convert from foreign currency, attach a detailed explanation of how you figured the conversion rate.

If you take a credit for taxes paid, the conversion rate is the rate of exchange in effect on the day you paid the foreign taxes (or on the day the tax was withheld). If you receive a refund of foreign taxes paid, the conversion rate is the rate in effect when you paid the taxes, not when you receive the refund.

If you choose to account for foreign income taxes on an accrual basis, you must generally use the average exchange rate for the tax year to which the taxes relate. However, you cannot do so if either of the following apply.

  • The foreign taxes are actually paid more than 2 years after the close of the tax year to which they relate.

  • The foreign taxes are actually paid in a tax year prior to the year to which they relate.

Accrued foreign taxes not eligible for conversion at the yearly average exchange rate must be converted using the exchange rate on the date of payment of the tax.

Election to use exchange rate on date paid.   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 foreign currency. 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. The election is available for tax years beginning after 2004. 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. Make the election by attaching a statement to the applicable tax return.

Special rules for a qualified business unit.    If you have a qualified business unit, see Pub. 514 for special rules for converting foreign income and taxes into U.S. dollars. You may have a qualified business unit if you own and operate a business or are self-employed in a foreign country.

Foreign Tax Credit Redeterminations

If you claim a credit for foreign taxes paid, and you receive a refund of all or part of those taxes in a later year, you must file an amended return reducing the taxes credited by the amount refunded.

If you claim the foreign tax credit based on foreign taxes accrued instead of foreign taxes paid, your credit must be redetermined in any of the following situations.

  1. Your accrued taxes when paid differ from the amount you claimed as a credit.

  2. You do not pay the accrued taxes within 2 years after the close of the tax year to which they relate.

  3. After you pay the accrued taxes, you receive a full or partial refund of them.

For item (2) above, foreign taxes paid more than 2 years after the close of the tax year to which they relate can be taken into account in figuring the foreign tax credit for the year to which they relate. However, the taxes must be converted into dollars at the exchange rate in effect at the time they are paid.

If any of the above situations occurs after you file your return, you must file Form 1040X, Amended U.S. Individual Income Tax Return, or other amended return, to notify the IRS so that your U.S. tax for the year or years affected can be redetermined. Complete and attach to Form 1040X (or other amended return) a revised Form 1116 for the tax year(s) affected. See Pub 514 for more information.

Amended returns for all years affected by foreign tax redeterminations that result in U.S. tax deficiencies and that occurred in the three tax years immediately preceding your first tax year beginning after November 6, 2007, must be filed no later than the due date of your tax return (including extensions) for your second tax year beginning after November 6, 2007.

Caution
If you do not notify the IRS of a foreign tax refund or change in the dollar amount of foreign taxes paid or accrued, you will have to pay a penalty unless you can show that the failure to notify the IRS is due to reasonable cause and not due to willful neglect.

Tax years beginning before 1998.   For the rules relating to redetermining U.S. taxes for years beginning before 1998, see Pub. 514.

Income From Sources Outside the United States

This income generally includes, but is not limited to, the following.

  • Compensation for services performed outside the United States.

  • Interest income from a payer located outside the United States.

  • Dividends from a corporation incorporated outside the United States.

  • Gain on the sale of nondepreciable personal property you sold while maintaining a tax home outside the United States, if you paid a tax of at least 10% of the gain to a foreign country.

Special rules apply in determining the source of income from the sale of inventory; sale of depreciable property used in a trade or business; sale of intangible property such as a patent, copyright, or trademark; ocean activities; and transportation services that begin or end in the United States or a U.S. possession. See Pub. 514 for more information.

Compensation for labor or personal services as an employee.   If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Compensation (other than fringe benefits) is sourced on a time basis. Fringe benefits (such as housing and education) are sourced on a geographical basis. Or you may be able to use an alternative basis to determine the source. If you use an alternative basis, you may have to check the box on line 1b (discussed on page 14). See Pub. 514 for more information.

Categories of Income

Use a separate Form 1116 to figure the credit for each category of foreign source income listed above Part I of Form 1116. The following instructions tell you what kind of income to include in each category. For more information, see Pub. 514, Code section 904, and Regulations sections 1.904-4 and 1.904-5.

a. Passive Category Income

Passive category income consists of passive income and specified passive category income.

Passive category income does not include gain from the sale of inventory or property held primarily for sale to customers in the ordinary course of your trade or business; gain from commodities hedging transactions; and active business gains or losses of producers, processors, merchants, or handlers of commodities. It may also not include dividends, interest, rents, or royalties received from a controlled foreign corporation (CFC) in which you are a U.S. shareholder who owns 10% or more of the total voting power of all classes of the corporation's stock.

Passive income.   Passive income generally includes dividends, interest, royalties, rents, annuities, gain from the sale of property that produces such income or of non-income-producing investment property, and gains from foreign currency or commodities transactions. Capital gains not related to the active conduct of a trade or business are also generally passive income.

  Passive income does not include export financing interest, active business rents and royalties, or high-taxed income (see High-taxed income on page 4).

Specified passive category income.   Dividends from a DISC (domestic international sales corporation ) or former DISC to the extent they are treated as foreign source income, and certain distributions from a former FSC (foreign sales corporation) are specified passive category income.

b. General Category Income

General category income is income that is not passive category income or income described in categories c., d., and e., discussed later. General category income may include:

  • Wages, salary, and overseas allowances of an individual as an employee.

  • Income earned in the active conduct of a trade or business.

  • Gains from the sale of inventory or depreciable property used in a trade or business.

Financial services income.   In general, financial services income is treated as general category income if it is derived by a financial services entity. You are a financial services entity if you are predominantly engaged in the active conduct of a banking, insurance, financing, or similar business for any taxable year. Financial services income of a financial services entity generally includes income derived in the active conduct of a banking, financing, insurance or similar business. Financial services income of a financial services entity also includes passive income and certain incidental income.

  If you qualify as a financial services entity because you treat certain items of income as active financing income under Regulations section 1.904-4(e)(2)(i)(Y), you must show the type and amount of each item on an attachment to Form 1116.

High-taxed income   In some cases, passive income and taxes must be treated as general category income and taxes. Generally, passive income and taxes must be treated as general category income if the foreign taxes you paid on the income (after allocation of expenses) exceed the highest U.S. tax that can be imposed on the income. However, no part of the passive income that is financial services income is treated as high-taxed income. See Regulations section 1.904-4(c) for more information.

c. Section 901(j) Income

No credit is allowed for foreign taxes imposed by and paid or accrued to certain sanctioned countries. However, income derived from each such country is subject to a separate foreign tax credit limitation. Therefore, you must use a separate Form 1116 for income derived from each such country.

These countries are those designated by the Secretary of State as countries that repeatedly provide support for acts of international terrorism, countries with which the United States does not have diplomatic relations, or countries whose governments are not recognized by the United States. Pub. 514 contains a list of these countries.

If you paid taxes to a country that ceased to be a sanctioned country during the tax year, see Pub. 514 for details on how to figure the foreign tax credit for the period that begins after the end of the sanctions.

Presidential waiver.   The President of the United States has the authority to waive the denial of the credit with respect to a sanctioned country if (a) it is in the national interest of the United States and will expand trade and investment opportunities for U.S. companies in such sanctioned country, and (b) the President reports to the Congress, not less than 30 days before the waiver is granted, the intention to grant such a waiver and the reason for such waiver.

  
Tip
 Since no credit is allowed for taxes paid to sanctioned countries, you would generally complete Form 1116 for this category only through line 16.

d. Certain Income Re-sourced by Treaty

If a sourcing rule in an applicable income tax treaty treats any of the specific types of income described below as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.

  • Certain gains (section 865(h)), or

  • Certain income from a U.S.-owned foreign corporation (section 904(h)(10)). See Regulations section 1.904-5(m)(7) for an example.

Important.

You must compute a separate foreign tax credit limitation for any such income for which you claim benefits under a treaty, using a separate Form 1116 for each amount of re-sourced income from a treaty country. Add the amounts from line 21 of each separate Form 1116 and enter the total on line 24 of your summary Form 1116 (that is, the Form 1116 for which you are completing Part IV).

Tip
Other types of income that are re-sourced under the terms of an income tax treaty (for example, compensation for services performed in the United States by a U.S. citizen resident in a foreign country) are not subject to a separate foreign tax credit limitation. However, the specific treaty may provide for other restrictions on the amount of income that is re-sourced or the amount of credit that is allowed with respect to foreign tax paid on re-sourced income. See, for example, article 24, paragraph 1, of the treaty between France and the United States.

e. Lump-Sum Distributions

You can take a foreign tax credit for taxes you paid or accrued on a foreign source lump-sum distribution from a pension plan. Special formulas may be used to figure a separate tax on a qualified lump-sum distribution for the year in which the distribution is received. See Pub. 575 for more information.

If you are able to elect, and do elect, to figure your U.S. tax on a lump-sum distribution using Form 4972, Tax on Lump-Sum Distributions, a separate foreign tax credit limitation applies. Use a separate Form 1116. On this separate Form 1116, check box e above Part I. Skip Part I. Complete Part II showing only foreign taxes that are attributable to the lump-sum distribution. Then, complete the Worksheet for Lump-Sum Distributions on this page to figure the amounts to enter in Part III.

Worksheet for Lump-Sum Distributions

1. Enter the amount from Form 1116, line 8 1.  
2. Enter the sum of the amounts from Form 4972, lines 6 and 12, that are from foreign sources. Also enter this amount
on Form 1116, line 16 		2.  
3. Enter the sum of the amounts from Form 4972, lines 6 and 12, that are from all sources (both U.S. and foreign). Also enter
this amount on Form 1116, line 17 		3.  
4. Divide line 2 by line 3. Enter the result as a decimal (rounded
to at least four places) here and on Form 1116, line 18. If
line 2 is equal to or more than line 3, enter “1” 		4.  
5. Enter the amount from Form 4972, line 30. Also include
this amount on Form 1116, line 19 		5.  
  Caution:Do not include the amount on line 5 above in the
tax you enter on line 19 of any other Form 1116 you
are filing.		    
6. Multiply line 5 by line 4. Enter the result here and on
Form 1116, line 20 		6.  
7. Enter the smaller of line 1 or line 6 here and on Form 1116,
line 21. To the left of line 21, write “LSD” 		7.  

Special Rules

Look-Through Rules

Certain income received or accrued by you as a 10%-or-more U.S. shareholder in a controlled foreign corporation (CFC) is treated as income in one of the separate categories listed under Categories of Income starting on page 3. For example, Subpart F inclusions, dividends, interest, rents, and royalties from a CFC are treated as separate category income to the extent they are attributable to separate category income of the CFC. See Regulations section 1.904-5 for more information.

Reporting Foreign Tax Information From Partnerships and S Corporations

If you received a 2007 Schedule K-1 from a partnership or S corporation that includes foreign tax information, use the rules below to report that information on Form 1116.

General Information for Partners and S Corporation Shareholders

Less-than-10% limited partners and certain less-than-10% S corporation shareholders.   If you are a limited partner or an S corporation shareholder who does not actively participate in the management of the S corporation and you own a less-than-10% interest (by value) in the partnership or S corporation, you generally may assign exclusively to passive category income your distributive share of foreign source income and deductions from that partnership or S corporation. See Regulations section 1.904-5(h)(2) for more details and exceptions.

  
Caution
 This rule takes precedence over the income category rules outlined in the instructions that follow for line 16, codes C and D-F, (or line 14, codes C and D-F) of the Schedule K-1, and the apportionment of deductions rules outlined in the instructions on page 6 for line 16, codes H and I-K, (or line 14 codes H and I-K) of the Schedule K-1.

Reporting amounts on Form 1116.   Include amounts reported to you on Schedule K-1 with any other amounts reportable on Form 1116 using:

  • A separate Form 1116 for each category of income.

  • A separate column in Part I and a separate line in Part II for each country or possession.

Explanation of Certain Line Items on Schedule K-1

Tip
In each instance that follows, the first line reference is to the Schedule K-1 for Form 1065 and the second line reference is to the Schedule K-1 for Form 1120S. (The Schedule K-1 for Form 1065-B includes all foreign tax information in box 9 or in an attachment for box 9.)

Line 16, code B, or line 14, code B—Gross income from all sources.   Combine your distributive share of “gross income from all sources” with all of your other gross income and enter the total on line 3e. “Gross income from all sources” is a constant amount (that is, you will enter the same amount on line 3e of all Forms 1116 that you file).

Line 16, code C, or line 14, code C—Gross income sourced at partner or shareholder level.   This line includes income from the sale of eligible personal property (most personal property other than inventory, depreciable property, and certain intangible property). See Pub. 514 for details.

  
Caution
 Although all income reported to you on this line of the Schedule K-1 has been apportioned to separate categories of income, you must nevertheless first determine (using the rules below) whether the income on this line is U.S. source income or foreign source income. Then, enter only foreign source income in Part I of each of the applicable Forms 1116 (that is, those Forms 1116 for each category of income you received from the partnership or S corporation).

  Use the following rules to source the income reported to you on this line of the Schedule K-1. If you are a U.S. resident (as defined below), the income is U.S. source income. If you are a nonresident (as defined below), the income is foreign source income.

U.S. resident.   A U.S. resident is a U.S. citizen or resident alien who does not have a tax home in a foreign country or a nonresident alien who has a tax home in the United States.

Tax home.   Generally, your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Nonresident.   A nonresident is any person who is not a U.S. resident. U.S. citizens and resident aliens with a foreign tax home will not be treated as nonresidents for a sale of eligible personal property unless a foreign tax of 10% or more was paid or accrued on the gain on the sale (or, in the case of a loss sale, a foreign tax of 10% or more would have been paid had the sale resulted in a gain).

Note.

To help you with these rules, the partnership or S corporation has specifically identified the following.

  • Gains on the sale of eligible personal property for which a foreign tax of 10% or more was paid or accrued.

  • Losses on the sale of eligible personal property for which a foreign tax of 10% or more would have been paid had the sale resulted in a gain.

  Include foreign source income in Part I of the applicable Form 1116 (that is, the Form 1116 for each category of income provided to you for this line of the Schedule K-1). Do not include in Part I of Form 1116 income that you determined (using the above rules) to be U.S. source income.

  
Caution
 If the partnership or S corporation has specifically identified any capital gains or losses or unrecaptured section 1250 gain on this line (Schedule K-1, line 16, code C, or line 14, code C) and you have determined that those gains or losses are foreign source, see Foreign Qualified Dividends and Capital Gains (Losses) on page 6 before entering an amount in Part I of Form 1116.

Line 16, codes D, E, and F, or line 14, codes D, E, and F—Foreign gross income sourced at partnership or S corporation level.   Income reported on this line has already been sourced for you by the partnership or S corporation. The partnership or S corporation has reported this income to you by country and by category of income. Include these amounts in Part I of each of the applicable Forms 1116 (that is, those Forms 1116 for each category of income you received).

Tip
You should disregard any information shown on your Schedule K-1 pertaining to gross income attributable to a foreign branch. It is intended only for corporate partners preparing Form 1118.

Line 16, code G, or line 14, code G—Interest expense.   See the instructions for line 4b on page 15 to allocate and apportion the interest expense shown on this line of Schedule K-1. In applying those instructions, take into account your distributive share of the partnership's or S corporation's gross income (for purposes of the $5,000 threshold) or your pro rata share of the partnership's or S corporation's assets. However, if you were a limited partner or an S corporation shareholder who did not actively participate in the management of the S corporation and your interest in the partnership or S corporation was less than 10%, see the next paragraph. Include interest expense that you allocate to foreign source income on line 4b of the applicable Form 1116. Do not enter in Part I of Form 1116 any interest expense that you allocate to U.S. source income.

Less-than-10% limited partners and certain less-than-10% S corporation shareholders.   If you are a limited partner or an S corporation shareholder (who does not actively participate in the management of the S corporation) and you own (directly or indirectly) a less-than-10% interest (by income) in the partnership or S corporation, you may generally allocate your distributive share of interest expense from that partnership or S corporation to foreign or U.S. source income based on your distributive share of the gross foreign or U.S. source income of that partnership or S corporation. The interest expense you allocate to foreign source income generally may be apportioned exclusively to passive category income. However, see Temporary Regulations section 1.861-9T(e)(4) for exceptions.

Line 16, code H, or line 14, code H—Other expenses.   This line includes expenses (other than interest expense) of the partnership or S corporation that must be allocated and apportioned at the partner or shareholder level (for example, research and experimental expenses).

  Combine your distributive share of these expenses with all of your other like expenses, if any, and then allocate and apportion them using the applicable rules (for example, for research and experimental expenses, the rules under Regulations section 1.861-17(f)).

  Include expenses that you allocate to foreign source income on line 2 of the applicable Form 1116. Expenses that you allocate to U.S. source income should not be entered on any line of Part I of Form 1116.

Line 16, codes I, J, and K, or line 14, codes I, J, and K—Deductions allocated and apportioned at partnership or S corporation level to foreign source income.   The partnership or S corporation has already allocated these expenses to foreign source income and has reported them to you by country and by category of income. Include these amounts on line 2 of each of the applicable Forms 1116 (that is, those Forms 1116 for each category of income you received).

  
taxtip
 You should disregard any information shown on your Schedule K-1 pertaining to definitely allocable deductions attributable to a foreign branch. It is intended only for corporate partners preparing Form 1118.

Line 16, codes L and M, or line 14, codes L and M—Total foreign taxes.   The partnership or S corporation has already allocated and apportioned total foreign taxes for you and has reported them to you by country and by category of income. Include these amounts in Part II of each of the applicable Forms 1116 (that is, those Forms 1116 for each category of income you received).

Line 16, code N, or line 14, code N—Reduction in taxes available for credit.   The partnership or S corporation has already apportioned the reduction in taxes available for credit and has reported it to you by country and by category of income. Include these amounts on line 12 of each of the applicable Forms 1116 (that is, those Forms 1116 for each category of income you received).

Foreign Qualified Dividends and Capital Gains (Losses)

If you have foreign source qualified dividends or foreign source capital gains (including any foreign source capital gain distributions) or losses, you may be required to make certain adjustments to those amounts before taking them into account on line 1a (qualified dividends and gains) or line 5 (losses).

If you completed the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for your tax return, and are not required to file Schedule D, see Qualified Dividends and Capital Gain Tax Worksheet (Individuals), next, to determine the adjustments you may be required to make. If you completed the Qualified Dividends Tax Worksheet in the Instructions for Form 1041, see Qualified Dividends Tax Worksheet (Estates and Trusts), later, to determine the adjustments you may be required to make. If you are required to file Schedule D, see Schedule D Filers, on page 7, to determine the adjustments you may be required to make.

You can elect not to make the adjustments to your qualified dividends and capital gains if you qualify for the adjustment exception. See Adjustment exception under Qualified Dividends and Capital Gain Tax Worksheet (Individuals), Qualified Dividends Tax Worksheet (Estates and Trusts), and Schedule D Filers.

Qualified Dividends and Capital Gain Tax Worksheet (Individuals)

If you completed the Qualified Dividends and Capital Gain Tax Worksheet in your tax return instructions and you do not have to file Schedule D, you may have to adjust the amount of your foreign source qualified dividends and capital gain distributions.

Form 1040 filers.   You must adjust the amount of your foreign source qualified dividends and capital gain distributions if both of the following apply:

  • Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet is greater than zero.

  • Line 17 of the Qualified Dividends and Capital Gain Tax Worksheet is less than line 18 of that worksheet.

Form 1040NR filers.   You must adjust the amount of your foreign source qualified dividends and capital gain distributions if both of the following apply:

  • Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet is greater than zero.

  • Line 15 of the Qualified Dividends and Capital Gain Tax Worksheet is less than line 16 of that worksheet.

Adjustment exception.   If you qualify for the adjustment exception, you can elect not to adjust your foreign source capital gains or qualified dividends. You make this election by not adjusting these items. If you make this election, you must elect not to adjust any of your foreign source qualified dividends or capital gain distributions.

Adjustment exception for Form 1040 filers.    You qualify for the adjustment exception if you meet both of the following requirements.

  1. Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet does not exceed:

    1. $195,850 if married filing jointly or qualifying widow(er),

    2. $97,925 if married filing separately,

    3. $160,850 if single, or

    4. $178,350 if head of household.

  2. The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000. For this purpose, ignore any capital gain distributions or qualified dividends you elected to include on Form 4952, line 4g.

Adjustment exception for Form 1040NR filers.   If you file Form 1040NR, you qualify for the adjustment exception if you meet both of the following requirements.

  1. Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet does not exceed:

    1. $195,850 if you checked filing status box 6,

    2. $97,925 if you checked filing status box 3, 4, or 5, or

    3. $160,850 if you checked filing status box 1 or 2.

  2. The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000.

How to make adjustments.   To adjust your foreign source qualified dividends or capital gain distributions, multiply your foreign source qualified dividends or capital gain distributions in each separate category by 0.4286 if the foreign source qualified dividends or capital gain distributions are taxed at a rate of 15%. To adjust foreign source qualified dividends or capital gain distributions that are taxed at a rate of 5%, multiply those foreign source qualified dividends or capital gain distributions in each separate category by .1429. Include the results on line 1a of the applicable Form 1116.

  
caution
 Do not adjust the amount of any foreign source qualified dividends or capital gain distributions that you elected to include on Form 4952, line 4g.

No adjustments required.   If you are not required to adjust the amount of your foreign source qualified dividends or capital gain distributions, or you qualify for the adjustment exception and elect not to adjust these items, include the amount of your foreign source qualified dividends and capital gain distributions in each separate category (without adjustment) on line 1a of the applicable Form 1116.

Qualified Dividends Tax Worksheet (Estates and Trusts)

If you completed the Qualified Dividends Tax Worksheet in the Instructions for Form 1041, you must adjust the amount of your foreign source qualified dividends if:

  • Line 5 of the Qualified Dividends Tax Worksheet is greater than zero, and

  • Line 15 of the Qualified Dividends Tax Worksheet is less than line 16 of that worksheet.

Adjustment exception.   If you qualify for the adjustment exception, you can elect not to adjust your foreign source qualified dividends. You make this election by not adjusting these dividends. If you make this election, you must elect not to adjust any of your foreign source qualified dividends. You qualify for the adjustment exception if:

  1. Line 5 of the Qualified Dividends Tax Worksheet does not exceed $7,650, and

  2. The amount of foreign source qualified dividends reported on Form 1041, line 2b(2), is less than $20,000. For this purpose, ignore any qualified dividends you elected to include on Form 4952, line 4g.

How to make adjustment.   To adjust your foreign source qualified dividends, multiply your foreign source qualified dividends in each separate category by 0.4286 if the foreign source qualified dividends are taxed at a rate of 15%. To adjust foreign source qualified dividends that are taxed at a rate of 5%, multiply those foreign source qualified dividends in each separate category by .1429. Include the results on line 1a of the applicable Form 1116.

Caution
Do not adjust the amount of any foreign source qualified dividends that you elected to include on Form 4952, line 4g.

No adjustment required.   If you are not required to make adjustments to your foreign source qualified dividends (or you qualify for the adjustment exception and you elected not to adjust these dividends), include your foreign source qualified dividends on line 1a of the applicable Form 1116 without adjustment.

Schedule D Filers

Note.

Throughout these instructions, references to Schedule D (Form 1041) are for estates and trusts only.

Adjustments to foreign qualified dividends.   If you are required to file Schedule D (Form 1040, or Form 1041), you must adjust the amount of your foreign source qualified dividends that you include on line 1a of Form 1116 if one of the following applies to you.

  1. You figured your tax using the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, line 7 of that worksheet is greater than zero, and line 17 of that worksheet is less than line 18.

  2. You figured your tax using the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040NR instructions, line 5 of that worksheet is greater than zero, and line 15 of that worksheet is less than line 16.

  3. You figured your tax using Schedule D (Form 1041), line 23 of Schedule D is greater than zero, and line 33 of Schedule D is less than line 34.

  4. You figured your tax using the Schedule D Tax Worksheet (in the Schedule D (Form 1040) instructions or in the Form 1041 instructions), line 17 of the Schedule D Tax Worksheet is greater than zero, and line 35 of the Schedule D Tax Worksheet is less than line 36.

Adjustment exception.   If you qualify for the adjustment exception, you can elect not to adjust your foreign source qualified dividends. You make this election by not adjusting these dividends or your foreign capital gains (or losses). If you make this election, you must elect not to adjust any of your foreign source qualified dividends. You qualify for the adjustment exception if the amount of your foreign source net capital gain, plus the amount of your foreign source qualified dividends, is less than $20,000 and one of the following applies to you.

  1. Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions or line 17 of the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions is less than or equal to:

    1. $195,850 if married filing jointly or qualifying widow(er),

    2. $97,925 if married filing separately,

    3. $160,850 if single, or

    4. $178,350 if head of household.

  2. Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040NR instructions or line 17 of the Schedule D Worksheet in the Schedule D (Form 1040) instructions is less than or equal to:

    1. $195,850 if you checked filing status box 6,

    2. $97,925 if you checked filing status box 3, 4, or 5, or

    3. $160,850 if you checked filing status box 1 or 2.