Specific Instructions

Part I—Taxable Income or Loss From Sources Outside the United States

Part I must be completed by all filers unless specifically indicated otherwise in these instructions.

Line g—Foreign Country or U.S. Possession

Generally, if you received income from, or paid taxes to, more than one foreign country or U.S. possession, report information on a country-by-country basis on Form 1116, Parts I and II. Use a separate column in Part I and a separate line in Part II for each country or possession. If you paid taxes to more than three countries or possessions, attach additional sheets following the format of Parts I and II.

If you have passive income that is treated as general category income because it is high taxed, use a separate column in Part I. Enter “HTKO” on line g of Forms 1116 for passive category income and general category income.

If you had a foreign tax credit splitting event in a previous year and you are taking the related income into account in 2013, enter “909 income” on line g for that income instead of the country or possession name.

You do not need to report income passed through from a mutual fund or other regulated investment company (RIC) on a country-by-country basis. Total all income, in the applicable category, passed through from the mutual fund or other RIC and enter the total in a single column in Part I. Enter “RIC” on line g. Total all foreign taxes passed through and enter the total on a single line in Part II for the applicable category.

Lines 1a and 1b—Foreign Gross Income

Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line g. You must include income even if it is not taxable by that foreign country. Identify the type of income on the dotted line next to line 1a. Do not include any earned income excluded on Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

Example.

If you received dividends (passive category income) and wages (general category income) from foreign sources, you must complete two Forms 1116. On one Form 1116, check box a (passive category income), enter the dividends on line 1a, and write “Dividends” on the dotted line. On the other Form 1116, check box b (general category income), enter on line 1a wages not excluded on Form 2555 or Form 2555-EZ, and write “Wages” on the dotted line. Complete Parts I, II, and III of each Form 1116. Then, complete Part IV on the Form 1116 with the larger amount entered on line 22.

If you are filing a Form 1116 that includes foreign source qualified dividends or foreign source capital gains or losses, see Foreign Qualified Dividends and Capital Gains (Losses) earlier.

High-taxed income.   On your Form 1116 for passive category income, passive income that is treated as general category income because it is high taxed should be included on line 1a in the column for the country entered on line g. Also, enter the high-taxed income in the “HTKO” column on line 1a as a negative number. On your Form 1116 for general category income, the high-taxed income should be entered as a positive number on line 1a in the “HTKO” column.

Line 1b

You must check the box on line 1b if all of the following apply.

  • The income on line 1a is compensation for services you performed as an employee.

  • Your total employee compensation from both U.S. and foreign sources was $250,000 or more.

  • You used an alternative basis (discussed in Pub. 514) to determine the source of the compensation entered on line 1a.

In addition, attach to Form 1116 a statement that contains the following information.

  • The specific compensation income or the specific fringe benefit for which the alternative basis is used.

  • For each such item, the alternative basis of allocation of source used.

  • For each such item, a computation showing how the alternative allocation was computed.

  • A comparison of the dollar amount of the compensation sourced within and without the United States under both the alternative basis and the time or geographical basis for determining the source.

You must keep documentation showing why the alternative basis more properly determines the source of the compensation.

Lines 2 Through 5—Deductions and Losses

You must reduce your foreign gross income on line 1a by entering on lines 2 through 5:

  • Any of your deductions that definitely relate to that foreign income, and

  • A ratable share of your other deductions that do not definitely relate to that foreign income, any other foreign income, or U.S. source income.

Do not enter any amounts on lines 2 through 5 for your HTKO column. Add all deductions that are definitely related or apportioned to passive income that is treated as general category income because it is high-taxed and enter the total amount of those deductions on line 6 in the HTKO column. Enter the amount as a negative number on your Form 1116 for passive category income. Enter the amount as a positive number on your Form 1116 for general category income.

Do not include:

  • Deductions and losses related to exempt or excluded income, such as foreign earned income you have excluded on Form 2555 or  
    Form 2555-EZ.

  • The deduction for personal exemptions.

Special rules apply to the allocation of research and experimental expenditures. See Regulations section 1.861-17.

If the law of a U.S. state to which you pay income taxes does not specifically exempt foreign source income from tax, you may be required to make a special allocation of state taxes you paid. See Pub. 514 for more information.

Itemized deduction limit.   If you must reduce the total amount of your itemized deductions on Schedule A (Form 1040), line 29 (or Form 1040NR, Schedule A, line 15), you must reduce each of the itemized deductions that are subject to the reduction by the reduction percentage before you complete lines 2, 3a, and 4a.

Exception.

You do not need to figure the reduction percentage if the entire amount of your itemized deductions is entered on any one of the following lines: line 2, line 3a, or line 4a. Just enter your reduced itemized deductions on that line.

Figuring the reduction percentage.

Use the Itemized Deductions Worksheet in your tax return instructions to figure the reduction percentage. Divide the amount on line 9 of the worksheet (the overall reduction) by the amount on line 3 of the worksheet (total itemized deductions subject to the reduction). This is your reduction percentage. Apply this reduction percentage (expressed as a decimal rounded to at least four places) to each itemized deduction subject to the reduction to determine the amount to enter on the appropriate line of Form 1116.

Example.

You are single, file Form 1040, and have an adjusted gross income of $280,000. Your itemized deductions subject to the overall reduction (line 3 of the worksheet) total $20,000. $8,000 of these deductions are definitely related to the income on Form 1116, line 1a. The other $12,000 ($20,000 - $8,000) is for real estate taxes, which are not definitely related.

The amount of the overall reduction on line 9 of the worksheet is $900. To figure the amount of the real estate taxes to include in the total for line 3a of Form 1116, divide the amount on line 9 of the worksheet ($900) by the amount on line 3 of the worksheet ($20,000). This is your reduction percentage (4.5%). You must reduce your $12,000 deduction by $540 (4.5% × $12,000). The reduced deduction of $11,460 ($12,000 - $540) is the amount to enter on line 3a of Form 1116. Make a similar computation to figure the amount of definitely related itemized deductions ($7,640) to enter on line 2.

Line 2

Before you complete line 2, read Itemized deduction limit earlier.

Enter your deductions that definitely relate to the gross income from foreign sources shown on line 1a. For example, if you are an employee reporting foreign earned income on line 1a, include on line 2 expenses such as those incurred to move to a new principal place of work outside the United States or supplies you bought for your job outside the United States.

Do not include any interest expense on line 2. See lines 4a and 4b for special rules for interest expense.

Lines 3a and 3b

Some deductions do not definitely relate to either your foreign source income or your U.S. source income. Enter on lines 3a and 3b any deductions (other than interest expense) that:

  • Are not shown on line 2, and

  • Are not definitely related to your U.S. source income.

Line 3a.   Enter the following itemized deductions (from Schedule A (Form 1040)) on line 3a.
  • Medical expenses (line 4)

  • General sales taxes (line 5)

  • Real estate taxes (line 6)

  If you do not itemize deductions, enter your standard deduction on  
line 3a.

Line 3b.   Enter on line 3b any other deductions that do not definitely relate to any specific type of income (for example, the deduction for alimony paid from Form 1040, line 31a).

Lines 3d and 3e

For lines 3d and 3e, gross income means the total of your gross receipts (reduced by cost of goods sold), total capital and ordinary gains (before subtracting any losses), and all other income (before subtracting any deductions).

Line 3d.   Enter your gross foreign source income from the category you checked above Part I of this  
Form 1116. Include any foreign earned income you have excluded on Form 2555 or Form 2555-EZ but do not include any other exempt income.

  If you had income from more than one country, you must enter income from only one country in each column.

  If you had to adjust your foreign qualified dividends or capital gains (discussed earlier), include those amounts without regard to any adjustments.

Line 3e.   Enter on line 3e in each column your gross income from all sources and all categories, both U.S. and foreign. Include any foreign earned income you have excluded on Form 2555 or Form 2555-EZ but do not include any other exempt income.

  If you are a nonresident alien, include on both lines 3d and 3e your income that is not effectively connected with a trade or business in the United States.

  If you had to adjust your foreign qualified dividends or capital gains (discussed earlier), include those amounts without regard to any adjustments.

Line 3f

Divide line 3d by line 3e and round off the result to at least four decimal places (for example, if your result is 0.8756782, round off to 0.8757, not to 0.876 or 0.88). Enter the result, but do not enter more than “1.

Line 4a

If your gross foreign source income (including income excluded on Form 2555 or Form 2555-EZ) does not exceed $5,000, you can allocate all of your interest expense to U.S. source income. Otherwise, deductible home mortgage interest (including points and qualified mortgage insurance premiums) is apportioned using a gross income method. Use the Worksheet for Home Mortgage Interest—Line 4a, on the previous page, to figure the amount to enter on line 4a.

Worksheet for Home Mortgage Interest 
—Line 4a

Note: Before you complete this worksheet, read the instructions for line 4a  
later.
1. Enter gross foreign source income* of the type shown on Form 1116. Do not enter income excluded on Form 2555 or Form 2555-EZ 1.  
2. Enter gross income from all sources. Do not enter income excluded on Form 2555 or Form 2555-EZ 2.  
3. Divide line 1 by line 2 and enter the result as a decimal (rounded to at least four places) 3.  
4. Enter deductible home mortgage interest (from lines 10 through 13 of Schedule A (Form 1040)) 4.  
5. Multiply line 4 by line 3. Enter the result here and on the appropriate Form 1116, line 4a 5.  
*If you have to report income from more than one country on Form 1116, complete a separate worksheet for each country. Use only the income from that country on line 1 of the worksheet.

Line 4b

Other interest expense includes investment interest, interest incurred in a trade or business, and passive activity interest. If you are a U.S. citizen, resident alien, or a domestic estate, and your gross foreign source income (including any income excluded on Form 2555 or Form 2555-EZ) does not exceed $5,000, you can allocate all of your interest expense to U.S. source income. Otherwise, each type of interest expense is apportioned separately using an “asset method.” See Pub. 514 for more information.

Example.

You have investment interest expense of $2,000. Your assets of $100,000 consist of stock generating U.S. source income (adjusted basis, $40,000) and stock generating foreign source income (adjusted basis, $60,000). You apportion 40% ($40,000/$100,000) of $2,000, or $800 of your investment interest, to U.S. source income and 60% ($60,000/$100,000) of $2,000, or $1,200, to foreign source income. In this example, you will enter the $1,200 apportioned to foreign source income on line 4b. You would not enter the $800 apportioned to U.S. source income on any line of Part I of Form 1116.

Line 5

If you have capital losses from foreign sources, see Foreign Qualified Dividends and Capital Gains (Losses) earlier for information on adjustments you may be required to make.

Part II—Foreign Taxes Paid or Accrued

See General Instructions earlier for descriptions of foreign taxes that are eligible for the foreign tax credit and for foreign taxes that are not eligible for the foreign tax credit.

Generally, you can take a foreign tax credit in the tax year you paid or accrued the foreign taxes, depending on your method of accounting. If you report on the cash basis, you can choose to take the credit for accrued taxes by checking the “accrued” box in Part II. But once you choose to do this, you must credit foreign taxes in the year they accrue on all future returns.

Generally, you must enter in Part II the amount of foreign taxes, in both the foreign currency denomination(s) and as converted into U.S. dollars, that relate to the category of income checked above Part I. Taxes are related to the income if the income is included in the foreign tax base on which the tax is imposed. If the foreign tax you paid or accrued relates to more than one category of income, apportion the tax among the categories. The apportionment is based on the ratio of net foreign taxable income in each category to the total net income subject to the foreign tax. See Pub. 514 for an example.

Enter in Part II the foreign taxes that were previously suspended under section 909 and that are allowed in 2013 because the related income is taken into account in 2013. Enter “909 taxes” in column (j) instead of the date paid or accrued. Complete the other columns as appropriate.

If foreign tax paid on passive income is reported to you in U.S. dollars on a Form 1099-DIV, 1099-INT, or similar statement, you do not have to convert the amount shown into foreign currency. This rule applies whether or not you can make the election to claim the foreign tax credit without filing Form 1116 (as explained earlier). Enter “1099 taxes” in Part II, column (j), and complete columns (o) through (s) for each foreign country indicated in Part I.

Note.

If you are taking a credit for additional taxes paid or accrued as the result of an audit by a foreign taxing authority or you are filing an amended return reflecting a foreign tax refund, attach a statement to Form 1116 identifying these taxes.

Part III—Figuring the Credit

Line 10

Enter the unused foreign taxes in the separate category from another tax year that are eligible to be carried forward to or back to 2013.

You can carry back 1 year and then forward 10 years any foreign tax you paid or accrued to any foreign country or U.S. possession (reduced as described under Line 12, later) on income in a separate category that is more than the limitation. First, apply the excess to the earliest year to which it may be carried. Then, apply it to the next earliest year, and so on. The carryback-carryforward period cannot be extended even if you are unable to take a credit in one of the intervening years.

Special rules apply to the carryback and carryforward of foreign taxes paid or accrued on foreign oil and gas income. In addition, special restrictions apply to the carryforward of pre-2009 unused oil and gas extraction taxes to years beginning after 2008. See section 907(f).

File Form 1040X or other amended return and a revised Form 1116 for the earlier tax year to which you are carrying back excess foreign taxes.

Special rules for carryforwards of pre-2007 unused foreign taxes.   The foreign taxes carried forward generally are allocated to your post-2006 separate income categories to which those taxes would have been allocated if the taxes were paid or accrued in a tax year beginning after 2006. Alternatively, you can allocate unused foreign taxes in the pre-2007 separate category for passive income to the post-2006 separate category for passive category income, and you can allocate all other unused foreign taxes in the categories that were eliminated in 2007 to the post-2006 separate category for general category income.

Restrictions.   You cannot carry a credit back to a tax year for which you claimed a deduction, rather than a credit, for foreign taxes paid or accrued. However, you must reduce the amount of any carryback or carryforward by the amount that you would have used had you chosen to claim a credit rather than a deduction in that year.

   If, for any year, you elected to claim the foreign tax credit without filing Form 1116 (as explained earlier), the following rules apply.
  • You cannot carry over unused foreign taxes paid or accrued in a year to which the election does not apply to or from any year for which you made the election.

  • The carryback-carryforward period is not extended if you are unable to use a carryback or carryforward because you made the election.

  • Do not reduce the carryback or carryforward by the amount you would have used in the election year if you had not made the election.

More information.   See Pub. 514 for more information on carryback and carryforward provisions, including examples.

Line 12

You may have to reduce the foreign taxes you paid or accrued by the following items.

  • Taxes on income excluded on Form 2555 or Form 2555-EZ. Reduce taxes paid or accrued by the taxes allocable to any foreign earned income excluded on Form 2555 or Form 2555-EZ. If only part of your foreign earned income is excluded, you must determine the amount of tax allocable to excluded income. To do so, multiply the foreign taxes paid or accrued on foreign earned income received or accrued during the tax year by the following fraction.

    Numerator: Foreign earned income and housing amounts you excluded for the tax year minus otherwise deductible expenses (not including the foreign housing deduction) allocable to that income.

    Denominator: Your total foreign earned income received or accrued during the tax year minus deductible expenses (including the foreign housing deduction) allocable to that income. However, if the foreign jurisdiction charges tax on foreign earned income and some other income (for example, earned income from U.S. sources or a type of income not subject to U.S. tax) and the taxes on the other income cannot be segregated, the denominator is the total amount of income subject to foreign tax minus deductible expenses allocable to that income.

    See Pub. 514 for a comprehensive example.

  • Taxes on income from Puerto Rico exempt from U.S. tax. The reduction applies if you have income from Puerto Rican sources that is not taxable on your U.S. tax return. To figure the credit, reduce your foreign taxes paid or accrued by the taxes allocable to the exempt income. See Pub. 570 for more information.

  • Taxes on income from American Samoa excluded on Form 4563. If you are a bona fide resident of American Samoa, reduce taxes paid or accrued by any taxes attributable to income from sources in American Samoa excluded on Form 4563. For more information, see Pub. 570.

  • Taxes on combined foreign oil and gas income. Reduce taxes paid or accrued by a portion of taxes imposed on combined foreign oil and gas income. 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 for the year multiplied by a fraction equal to your pre-credit U.S. tax liability (for example, Form 1040, line 44) divided by your worldwide taxable income. You may be entitled to carry over to other years taxes reduced under this rule. See section 907(f). 
    Combined foreign oil and gas income is the sum of foreign oil related income and foreign oil and gas extraction income. Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes.

  • Taxes on foreign mineral income. Reduce taxes paid or accrued on mineral income from a foreign country or U.S. possession if you took a deduction for percentage depletion under section 613 for any part of the mineral income.

  • Reduction for failure to file Form 5471. U.S. shareholders who control a foreign corporation must file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. If you do not file Form 5471 and furnish all of the information required by the due date of your tax return, reduce by 10% all foreign taxes that you otherwise may take into account for the foreign tax credit. You may have to make additional reductions if the failure continues. See section 6038(c) and Regulations section 1.6038-2(k) for details and exceptions.

    Note.

    The reduction in foreign taxes is reduced by any dollar penalty imposed under section 6038(b).

  • Reduction for failure to file Form 8865. U.S. partners who control a foreign partnership must file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. If you do not file Form 8865 and furnish all of the information required by the due date of your tax return, reduce by 10% all foreign taxes that you otherwise may take into account for the foreign tax credit. You may have to make additional reductions if the failure continues. See section 6038(c) and Regulations section 1.6038-3(k) for details and exceptions.

    Note.

    The reduction in foreign taxes is reduced by any dollar penalty imposed under section 6038(b).

  • Reduction of taxes or credit due to international boycott operations. In general, if you agree to participate in, or cooperate with, an international boycott, you must file Form 5713, International Boycott Report, and attach all supporting schedules. In addition, you must reduce either the total taxes available for credit or the credit otherwise allowable by your foreign taxes resulting from boycott activities. If you can figure the taxes specifically attributable to boycott operations, enter the amount on line 12. If you cannot figure the amount of taxes specifically attributable to boycott operations, multiply the credit otherwise allowable by the international boycott factor (figured on Schedule A (Form 5713), International Boycott Factor) and enter the result on Form 1116, line 29. Attach a statement to Form 1116 showing in detail how you figured the reduction.

    For more information, see Form 5713 and its instructions.

  • Taxes related to a foreign tax credit splitting event. Reduce taxes paid or accrued by any taxes paid or accrued with respect to a foreign tax credit splitting event. If there is a foreign tax credit splitting event, you may not take the foreign tax into account before the tax year in which you take the income into account. There is a foreign tax credit splitting event with respect to a foreign income tax if the related income is (or will be) taken into account by a covered person. A covered person is either of the following.

  1. An entity in which you hold, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value).

  2. Any person who is related to you. For a list of related persons, see Nondeductible Loss in Pub. 544, chapter 2.

A covered asset acquisition under section 901(m) is not a foreign tax credit splitting event under section 909.

For more information, see section 909 and any regulations under that section.

Line 13

You must adjust the foreign taxes paid or accrued if they relate to passive income that is treated as general category income because it is high-taxed. On your Form 1116 for passive category income, enter as a negative number (in parentheses) the amount of your foreign taxes that relate to that income. On your Form 1116 for general category income, enter as a positive number the amount of foreign taxes that relate to that income.

Line 15

The amount on line 15 is your taxable income (or loss), before adjustments, from sources outside the United States. If the amount on line 15 is zero or a loss, you generally have no foreign tax credit for the category of income checked above Part I of this Form 1116. However, you must complete line 16 and continue with the form even if line 15 is zero or a loss.

Line 16

You are required to increase or decrease the amount on line 15 by the following adjustments. The adjustments must be made in the order listed. If you have more than one adjustment, enter the net adjustment on line 16 and attach a detailed statement showing your computation. See Pub. 514 for more details on each of these adjustments.

The adjustments are:

1. Allocation of foreign losses.    If you have a loss on line 15 of one Form 1116 and you have income on line 15 of one or more other Forms 1116, you must reduce the foreign income by a pro rata share of the loss before you use any remaining loss to reduce U.S. source income.

  If the loss reduces foreign source income, you create, or increase the balance of, a separate limitation loss account and you must recharacterize the income you receive in the loss category in later years. See Recapture of separate limitation loss accounts later. In situations where the loss to be allocated exceeds foreign income in other categories, the excess reduces U.S. source income (as modified below under Capital losses), you create, or increase the balance in, an overall foreign loss account, and for later years you must follow the rules described under Recapture of prior year overall foreign loss accounts later. If the loss in one category reduces foreign source income in another category and that second category has a separate limitation loss account with respect to the first category, then the two offsetting separate limitation loss account balances are netted for purposes of determining the amount of income in either category that is subject to recharacterization under Recapture of separate limitation loss accounts later.

Capital losses.

In determining your U.S. source income, reduce the amount of any capital losses from U.S. sources by the amount you entered on line 4 of Worksheet A or line 5 of the Line 2 Worksheet for Worksheet B. If you have capital losses from U.S. sources and you did not use either Worksheet A or Worksheet B, see Pub. 514 to determine your U.S. source income.

Example.

For 2013, you completed three Forms 1116. The first had a loss from general category income of $2,000 on line 15, the second had passive category income of $4,000 on line 15, and the third had income of $1,000 from the certain income re-sourced by treaty category on line 15. You must allocate the $2,000 loss between the passive category income and the certain income re-sourced by treaty category in the same proportion as each category's income bears to the total foreign income.

The amount of the loss that would reduce passive category income would be 80% ($4,000/$5,000) of the $2,000 loss or $1,600. Include the $1,600 (in parentheses) on line 16 of the passive category income Form 1116. Assuming you have no other line 16 adjustments, enter $2,400 ($4,000 − $1,600) on line 17 of that form.

The amount of the loss that would reduce the certain income re-sourced by treaty would be 20% ($1,000/$5,000) of the $2,000 loss or $400. Include the $400 in parentheses on line 16 of the certain income re-sourced by treaty Form 1116. Assuming you have no other line 16 adjustments, enter $600 ($1,000 − $400) on line 17 of that form.

In this case, all of the $2,000 loss was allocated between the foreign source passive category income and the certain income re-sourced by treaty category, and no reduction was made to U.S. source income.

If you receive general category income in a later year, you must recharacterize all or part of that income as passive category income and certain income re-sourced by treaty in that later year. See the example under Recapture of separate limitation loss accounts later.

2. Allocation of U.S. losses.    If you have a net loss from U.S. sources, proportionately allocate that loss among the separate categories of your foreign income. Reduce the income on line 15 (adjusted by any allocation of losses, as described under Allocation of foreign losses in these line 16 instructions) by including (in parentheses) on line 16 the allocable portion of any U.S. loss. In later years, you will be allowed to treat part of your U.S. source income as foreign source income.

   A U.S. loss includes a rental loss on property located in the United States. If you have any qualified dividends or capital gains (including capital gain distributions) or losses for the taxable year and you are required to make any adjustments to those amounts, as explained under Foreign Qualified Dividends and Capital Gains (Losses), earlier, or in the instructions for line 18, the amount of your U.S. loss is the excess of:

  a. The total of the amounts entered on line 15 for each Form 1116 you are filing, over

  b. The amount entered on line 18 of the Form 1116.

  You allocate the net loss to a separate category of income by multiplying the net loss by a fraction. The numerator of the fraction is the foreign source income in a separate category and the denominator is the total foreign source income in all separate categories.

3. Recapture of prior year overall foreign loss accounts.    If you had an overall foreign loss in a prior year that offset U.S. source income, a part of your foreign income (in the same category as the loss) is recharacterized as U.S. source income in each following tax year.

  The part of your total foreign income subject to recharacterization is the lesser of the following:

  a. The total amount of maximum potential recapture in all overall foreign loss accounts. The maximum potential recapture in any account for a category is the lesser of:

  i. The current year taxable income from foreign sources in that category (the amount from line 15, less any adjustment for allocation of losses, as described earlier under Allocation of foreign losses and Allocation of U.S. losses for that category), or

  ii. The balance in the overall foreign loss account for that category.

  b. 50% (or more, if you choose) of your total taxable income from foreign sources.

  If the total foreign income subject to recharacterization is the amount described in a above, then for each separate category the recapture amount is the maximum potential recapture amount for that category. If the total foreign income subject to recharacterization is the amount described in b above, then for each separate category the recapture amount is computed by multiplying the total recapture amount by the following fraction:
  Maximum potential recapture amount for the overall foreign loss account in the separate category  
  Total amount of maximum potential recapture in all overall foreign loss accounts  

  Reduce the amount on line 15 by including (in parentheses) on line 16 the amount of the recapture for the category checked above Part I as determined above. Be sure to attach your computation. If you elect to recapture more of an overall foreign loss than is required (b above), show in your computation the percentage of taxable income recharacterized and the dollar amount recharacterized.

  Attach a statement to Form 1116 showing the balance in each separate category overall foreign loss account. See Regulations section 1.904(f)-1(b) for more information.

Dispositions of certain property.

If you generated foreign source gain in the same category as the overall foreign loss on a disposition of property that was used predominantly in a foreign trade or business and that generated foreign source income in the same category as the overall foreign loss, then the gain on the disposition may be subject to recharacterization as U.S. source income to the extent of 100% of your foreign source taxable income. This is true whether or not you would otherwise recognize gain on the disposition. See section 904(f)(3).

The above rule also generally applies to a gain on the disposition of stock in a controlled foreign corporation (CFC), if you owned more than 50% (by vote or value) of the stock right before you disposed of it. See section 904(f)(3)(D) for more information and exceptions.

Reduce line 15 by including (in parentheses) on line 16 the smallest of (a) the amount of the gain not recaptured above, (b) the remaining amount of the overall foreign loss not recaptured in earlier years or in the current year, or (c) the amount from line 15 (less any adjustment for allocation of losses, as described under Allocation of foreign losses and under Allocation of U.S. losses in these line 16 instructions, and any adjustment for any recapture above). See Pub. 514 if you disposed of property described above and you recognized foreign source gain in a different category than the overall foreign loss, you recognized U.S. source gain, or you did not recognize gain.

4. Recapture of separate limitation loss accounts.   If, in a prior tax year, you reduced your foreign taxable income in the category checked above Part I by a pro rata share of a loss from another category, you must recharacterize in 2013 all or part of any income you receive in 2013 in that loss category. If you have separate limitation loss accounts in the loss category relating to more than one other category and the total balances in those loss accounts exceed the income you receive in 2013 in the loss category, then income in the loss category is recharacterized as income in those other categories in proportion to the balances of the separate limitation loss accounts for those other categories. You recharacterize the income by:
  • Increasing the amount on line 15 (adjusted by any of the other adjustments previously mentioned in these line 16 instructions) of the Form 1116 for each of the separate categories, other than the loss category, previously reduced by including on line 16 any recharacterized income and

  • Decreasing the amount on line 15 (adjusted by any of the other adjustments previously mentioned in these line 16 instructions) of the Form 1116 for the loss category by including on line 16 the amount of recharacterized income as a negative number (in parentheses).

Example.

Using the facts in the example under Allocation of foreign losses earlier, in the next year (2014), you have $5,000 of general category income, $3,000 of passive category income, and $500 of certain income re-sourced by treaty. Because $1,600 of the general category income loss was used to reduce your passive category income in 2013, $1,600 of your 2014 general category income must be recharacterized as passive category income. Similarly, $400 of the general category income must be recharacterized as certain income re-sourced by treaty. On your 2014 Form 1116 for passive category income, you would include $1,600 on line 16. On your 2014 Form 1116 for certain income re-sourced by treaty, you would include $400 on line 16. On your 2014 Form 1116 for general category income, you would include ($2,000) on line 16.

  
Recharacterizing income from a separate category does not result in recharacterizing any tax.

5. Recapture of overall domestic loss accounts.   If you have an overall domestic loss for any tax year beginning after 2006, you create, or increase the balance in, an overall domestic loss account and you must recharacterize a portion of your U.S. source taxable income as foreign source taxable income in succeeding years for purposes of the foreign tax credit.

  The part that is treated as foreign source taxable income for the tax year is the smaller of:
  • The total balance in your overall domestic loss account in each separate category (less amounts recaptured in earlier years), or

  • 50% of your U.S. source taxable income for the tax year.

  You must establish and maintain separate overall domestic loss accounts for each separate category in which foreign source income is offset by the domestic loss. The balance in each overall domestic loss account is the amount of the overall domestic loss subject to recapture. The recharacterized income is allocated among and increases foreign source income in separate categories in proportion to the balances of the overall domestic loss accounts for those separate categories. You increase the amount on line 15 (as adjusted by any of the other adjustments previously mentioned in these line 16 instructions) of the Form 1116 for each of the separate categories to which the recharacterized income is allocated.

Overall domestic loss defined.

In a tax year in which 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 choose 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.

Domestic loss.

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 expenses, losses, and other deductions properly allocated or apportioned to that income. Determine this amount by taking into account any net operating loss carried forward from a prior tax year (but not any loss carried back). If you have any capital gains or losses, take them into account after any adjustments required earlier under Foreign Qualified Dividends and Capital Gains (Losses).

Line 18

If you have qualified dividends or capital gains, you may be required to make adjustments to those qualified dividends and gains before you take those amounts into account on line 18.

Worksheet for Line 18 (Worldwide Qualified Dividends and Capital Gains)

Caution: See the instructions for Line 18 below before starting this worksheet.
1. Individuals: Enter the amount from Form 1040, line 41. If you are a nonresident alien, enter the amount from Form 1040NR, line 39.  
Estates and trusts: Enter taxable income without the deduction for your exemption
1.  
2. Enter your worldwide 28% gains (see instructions) 2.      
3. Multiply line 2 by 0.2929 3.      
4. Enter your worldwide 25% gains (see instructions) 4.      
5. Multiply line 4 by 0.3687 5.      
6. Enter your worldwide 20% gains and qualified dividends (see instructions) 6.      
7. Multiply line 6 by 0.4949 7.      
8. Enter your worldwide 15% gains and qualified dividends (see instructions) 8.      
9. Multiply line 8 by 0.6212 9.      
10. Enter your worldwide 0% gains and qualified dividends (see instructions) 10.      
11. Add lines 3, 5, 7, 9, and 10 11.  
12. Subtract line 11 from line 1. Enter the result here and on Form 1116, line 18 12.  

Individuals Who Completed a Qualified Dividends and Capital Gain Tax Worksheet

If you completed the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for your tax return, you must use the Worksheet for Line 18 to figure the amount to enter on line 18 if:

  1. You file Form 1040 and

    1. Line 7 of your Qualified Dividends and Capital Gain Tax Worksheet is greater than zero, and

    2. Line 25 of your Qualified Dividends and Capital Gain Tax Worksheet is less than line 26 of that worksheet, or

  2. You file Form 1040NR and

    1. Line 5 of your Qualified Dividends and Capital Gain Tax Worksheet is greater than zero, and

    2. Line 23 of your Qualified Dividends and Capital Gain Tax Worksheet is less than line 24 of that worksheet.

Adjustment exception.    If you qualify for the adjustment exception, you can elect not to adjust your qualified dividends and capital gains. You make this election by not completing the Worksheet for Line 18. You must make this election if you have any foreign qualified dividends or foreign capital gains (or losses) and you chose not to make any adjustments to those amounts when you completed lines 1a and 5. You cannot make this election if you have any foreign qualified dividends or foreign capital gains (or losses) and you made adjustments to those amounts when you completed lines 1a and 5. In this case, complete the Worksheet for Line 18.

  If you are not required to complete the Worksheet for Line 18 or you qualify for the adjustment exception and elect not to adjust your qualified dividends and capital gains, enter on line 18 of Form 1116 your taxable income without the deduction for your exemption (for example, the amount from Form 1040, line 41).

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:

    • $223,050 if married filing jointly or qualifying widow(er);

    • $111,525 if married filing separately;

    • $183,250 if single; or

    • $203,150 if head of household.

  2. The amount of your foreign source net capital gain, 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.

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. $223,050 if you checked filing status box 6,

    2. $111,525 if you checked filing status box 3, 4, or 5, or

    3. $183,250 if you checked filing status box 1 or 2.

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

Your foreign source net capital gain is the excess of your foreign source net long-term capital gain over your foreign source net short-term capital loss.

Completing the Worksheet for Line 18.   If you do need to complete the Worksheet for Line 18, do the following.

Lines 2 through 5.

Skip these lines.

Line 6.

Enter the amount from:

  • Line 22 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, or

  • Line 20 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040NR instructions.

Line 8.

Enter the amount from:

  • Line 19 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, or

  • Line 17 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040NR instructions.

Line 10.

Enter the amount from:

  • Line 11 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, or

  • Line 9 of the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040NR instructions.

Complete all other lines as instructed on the worksheet.

Estates and Trusts That Completed a Qualified Dividends Tax Worksheet or Schedule D

If you completed the Qualified Dividends Tax Worksheet in the instructions for Form 1041 or you completed Part V of Schedule D (Form 1041), you must use the Worksheet for Line 18, earlier, to figure the amount to enter on line 18 if:

  1. You figured your tax using the Qualified Dividends Tax Worksheet, line 5 of that worksheet is greater than zero, and line 21 of your Qualified Dividends Tax Worksheet is less than line 22 of that worksheet, or

  2. You figured your tax using the Part V of Schedule D (Form 1041), line 27 of the Schedule D is greater than zero, and line 43 of the Schedule D is less than line 44.

Adjustment exception. If you qualify for the adjustment exception, you can elect not to adjust your qualified dividends and capital gains. You make this election by not completing the Worksheet for Line 18. You must make this election if you have any foreign qualified dividends or foreign capital gains (or losses) and you chose not to make any adjustments to those amounts when you completed lines 1a and 5. You cannot make this election if you have any foreign qualified dividends or foreign capital gains (or losses) and you made adjustments to those amounts when you completed lines 1a and 5. In this case, complete the Worksheet for Line 18. You qualify for the adjustment exception if:

  1. Line 5 of the Qualified Dividends Tax Worksheet or line 27 of Schedule D (Form 1041) does not exceed $8,750, and

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

Your foreign source net capital gain is the excess of your foreign source net long-term capital gain over your foreign source net short-term capital loss.

If you are not required to complete the Worksheet for Line 18 or you qualify for the adjustment exception and elect not to adjust your qualified dividends and capital gains, enter on line 18 of Form 1116 the estate's or trust's taxable income without the deduction for its exemption.

Completing the Worksheet for Line 18.   If you do need to complete the Worksheet for Line 18, do the following.

Lines 2 through 5.

Skip these lines.

Line 6.

Enter the amount from line 18 of the Qualified Dividends Tax Worksheet or line 40 of Schedule D.

Line 8.

Enter the amount from line 14 of the Qualified Dividends Tax Worksheet or line 36 of Schedule D.

Line 10.

Enter the amount from line 8 of the Qualified Dividends Tax Worksheet or line 30 of Schedule D.

Taxpayers Who Completed the Schedule D Tax Worksheet

If you figured your tax using the Schedule D Tax Worksheet (in the Schedule D (Form 1040) instructions or in the Schedule D (Form 1041) instructions), you may have to use the Worksheet for Line 18 to figure the amount of tax to enter on line 18 of Form 1116. 

Form 1040 and 1040NR filers.   You must use the Worksheet for Line 18 to figure the amount of tax to enter on line 18 of Form 1116 if:
  • Line 18 of the Schedule D Tax Worksheet is greater than zero, and

  • Line 43 of the Schedule D Tax Worksheet is less than line 44.

Form 1041 filers.   You must use the Worksheet for Line 18 to figure the amount of tax to enter on line 18 of Form 1116 if:
  • Line 17 of the Schedule D Tax Worksheet is greater than zero, and

  • Line 42 of the Schedule D Tax Worksheet is less than line 43.

Adjustment exception. If you qualify for the adjustment exception, you can elect not to adjust your qualified dividends and capital gains. You make this election by not completing the Worksheet for Line 18. You must make this election if you have any foreign qualified dividends or foreign capital gains (or losses) and you chose not to make any adjustments to those amounts when you completed lines 1a and 5. You cannot make this election if you have any foreign qualified dividends or foreign capital gains (or losses) and you made adjustments to those amounts when you completed lines 1a and 5. In this case, complete the Worksheet for Line 18. You qualify for the adjustment exception if:

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

  2. Line 18 of the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions is less than or equal to:

  • $223,050 if married filing jointly or qualifying widow(er);

  • $111,525 if married filing separately;

  • $183,250 if single; or

  • $203,150 if head of household

(or, for trusts and estates, line 17 of the Schedule D Tax Worksheet in the Schedule D (Form 1041) instructions is less than or equal to $8,750).

Your foreign source net capital gain is the excess of your foreign source net long-term capital gain over your foreign source net short-term capital loss. Ignore any foreign source qualified dividends or capital gains that you elected to include on Form 4952, line 4g, in determining the amount of your foreign source qualified dividends and net capital gain.

If you are not required to complete the Worksheet for Line 18 or you qualify for the adjustment exception and elect not to adjust your qualified dividends and capital gains, enter on line 18 of Form 1116 your taxable income without the deduction for your exemption (for example, the amount from Form 1040, line 41).

If you do need to complete the Worksheet for Line 18, do the following.

Line 2.

Enter the amount (if any) from line 40 of the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions or line 39 of the Schedule D Tax Worksheet in the Schedule D (Form 1041) instructions.

Line 4.

Enter the amount (if any) from line 37 of the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions or line 36 of the Schedule D Tax Worksheet in the Schedule D (Form 1041) instructions.

Line 6.

Enter the amount (if any) from line 31 of the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions or line 30 of the Schedule D Tax Worksheet in the Schedule D (Form 1041) instructions.

Line 8.

Enter the amount (if any) from line 28 of the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions or line 26 of the Schedule D Tax Worksheet in the Schedule D (Form 1041) instructions.

Line 10.

Enter the amount (if any) from line 20 of the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions or line 19 of the Schedule D Tax Worksheet in the Schedule D (Form 1041) instructions.

Complete all other lines as instructed on the worksheet.

Line 20

If you are completing line 20 for separate category e (lump-sum distributions), enter the amount from line 5 of the Worksheet for Lump-Sum Distributions earlier.

Do not complete line 20 for separate category c (section 901(j) income), discussed earlier.

For all other applicable categories, complete line 20 as follows.

Form 1040 filers.   Enter the amount from Form 1040, line 44, less any tax included on line 44 from Form 4972.

Form 1040NR filers.   Enter the amount from Form 1040NR, line 42, less any tax included on line 42 from Form 4972.

Form 1041 filers.   Enter the amount from Form 1041, Schedule G, line 1a.

Line 22

The maximum foreign tax credit you can claim in the current year is generally limited to the allocated amount of U.S. tax imposed on the foreign income, or the actual amount of foreign tax paid or accrued on the foreign income (after reductions required on line 12), whichever is less. However, see Foreign Taxes Eligible for a Credit earlier for additional information.

If the amount on line 21 is smaller than the amount on line 14, see  
Pub. 514 for more information on carryback and carryforward provisions, including examples.

Part IV— Summary of Credits From Separate Parts III

Complete lines 23 through 26 in  
Part IV only if you must complete more than one Form 1116 because you have more than one of the categories of income listed above Part I.

Complete Part IV on only one Form 1116 (the one with the largest amount entered on line 22) to summarize the credits you figured on all of your Forms 1116. However, if you completed a Form 1116 for category e (lump-sum distributions) or c (section 901(j) income), do not use Part IV of that Form 1116 as your summary. Enter the credits from line 22 of all of your Forms 1116 on lines 23 through 26 of the Form 1116 with the largest amount entered on line 22 to summarize your credits. File the other Forms 1116 as attachments.

Line 28

Enter the smaller of line 20 or line 27.

Note.

Generally, line 27 will exceed line 20 only if you have U.S. capital gains or qualified dividends that are subject to the capital gain rate differential (figured in the Worksheet for Line 18 earlier).


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