- Publication 514 - Introductory Material
- Publication 514 - Main Content
- Choosing To Take Credit or Deduction
- Why Choose the Credit?
- Credit for Taxes Paid or Accrued
- Foreign Currency and Exchange Rates
- Foreign Tax Redetermination
- Notice to the IRS of Redetermination
- Time Limit on Refund Claims
- Who Can Take the Credit?
- What Foreign Taxes Qualify for the Credit?
- Tax Must Be Imposed on You
- You Must Have Paid or Accrued the Tax
- Tax Must Be the Legal and Actual Foreign Tax Liability
- Tax Must Be an Income Tax (or Tax in Lieu of Income Tax)
- Foreign Taxes for Which You Cannot Take a Credit
- Taxes on Excluded Income
- Taxes for Which You Can Only Take an Itemized Deduction
- Taxes Imposed by Sanctioned Countries (Section 901(j) Income)
- Taxes Imposed on Certain Dividends
- Taxes Withheld on Income or Gain (Other Than Dividends)
- Covered Asset Acquisition
- Taxes in Connection With the Purchase or Sale of Oil or Gas
- Taxes on Foreign Mineral Income
- Taxes From International Boycott Operations
- Taxes on Combined Foreign Oil and Gas Income
- Taxes of U.S. Persons Controlling Foreign Corporations and Partnerships
- Taxes Related to a Foreign Tax Credit Splitting Event
- How To Figure the Credit
- Exemption from foreign tax credit limit.
- Limit on the Credit
- Separate Limit Income
- Income from controlled foreign corporations.
- Partnership distributive share.
- Section 951A Income
- Foreign Branch Income
- Passive Category Income
- General Category Income
- Section 901(j) Income
- Certain Income Re-Sourced by Treaty
- Lump-Sum Distribution
- Allocation of Foreign Taxes
- Foreign Taxes From a Partnership or an S Corporation
- Figuring the Limit
- Determining the source of income from U.S. possessions.
- Determining the Source of Compensation for Labor or Personal Services
- Transportation Income
- Determining the Source of Income From the Sales or Exchanges of Certain Personal Property
- Determining Taxable Income From Sources Outside the United States
- Definitely related.
- Classes of gross income.
- Exempt income.
- Interest expense and state income taxes.
- Class of gross income that includes more than one separate limit category.
- Interest expense.
- Business interest.
- Investment interest.
- Passive activity interest.
- Partnership interest.
- Home mortgage interest.
- State income taxes.
- Foreign income not exempt from state tax.
- Foreign income exempt from state tax.
- Deductions not definitely related.
- Itemized deduction limit
- Qualified Dividends
- Capital Gains and Losses
- Lines 1a and 5 (Form 1116).
- Line 18 (Form 1116).
- Adjustments to Foreign Source Capital Gains and Losses
- U.S. capital loss adjustment.
- Step 1.
- Step 2.
- Capital gain rate differential adjustment.
- How to make the adjustment.
- Net capital gain in a separate category rate group.
- How to determine the amount of net capital gain that must be adjusted.
- Capital gain rate differential adjustment for net capital gains.
- Net capital loss in a separate category rate group.
- How to determine the rate group of the capital gain offset by the net capital loss.
- Step 1.
- Step 2.
- Step 3.
- Capital gain rate differential adjustment for net capital loss.
- Allocation of Foreign and U.S. Losses
- Foreign Losses
- U.S. Losses
- Recapture of Prior Year Overall Foreign Loss Accounts
- Recapture of Separate Limitation Loss Accounts
- Recapture of Overall Domestic Loss Accounts
- Tax Treaties
- Carryback and Carryover
- Special rules for carryforwards of pre-2007 unused foreign taxes.
- Effect of bankruptcy or insolvency.
- Time Limit on Tax Assessment
- Claim for Refund
- Taxes All Credited or All Deducted
- Married Couples
- How To Claim the Credit
- How To Get Tax Help
- Tax reform.
- Preparing and filing your tax return.
- Getting tax forms and publications.
- Access your online account (individual taxpayers only).
- Using direct deposit.
- Refund timing for returns claiming certain credits.
- Getting a transcript or copy of a return.
- Using online tools to help prepare your return.
- Resolving tax-related identity theft issues.
- Checking on the status of your refund.
- Making a tax payment.
- What if I cannot pay now?
- Checking the status of an amended return.
- Understanding an IRS notice or letter.
- Contacting your local IRS office.
- Watching IRS videos.
- Getting tax information in other languages.
- The Taxpayer Advocate Service (TAS) Is Here To Help You
- Low Income Taxpayer Clinics (LITCs)
- Publication 514 - Additional Material
On December 22, 2017, Congress enacted the Tax Cuts and Jobs Act, P.L. 115-97 (the "2017 Act"). The 2017 Act changes the computation of foreign tax credits for post-2017 tax years as follows:
Two new separate categories of income under section 904(d): (i) any amount includible in gross income under section 951A (other than passive category income) ("section 951A income") and (ii) foreign branch income;
Revised sourcing rule for certain income from the sale of inventory under section 863(b); and
Election to increase pre-2018 section 904(g) Overall Domestic Loss (ODL) recapture.
Future developments. For the latest information about developments related to Pub. 514, such as legislation enacted after it was published, go to IRS.gov/Pub514.
Alternative minimum tax. In addition to your regular income tax, you may be liable for the alternative minimum tax. A foreign tax credit may be allowed in figuring this tax. See the Instructions for Form 6251 for a discussion of the alternative minimum tax foreign tax credit.
Photographs of missing children. The IRS is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability.
In most cases, it is to your advantage to take foreign income taxes as a tax credit. The major scope of this publication is the foreign tax credit.
The publication discusses:
How to choose to take the credit or the deduction,
Who can take the credit,
What foreign taxes qualify for the credit,
How to figure the credit, and
How to carry over unused foreign taxes to other tax years.
Unless you qualify for exemption from the foreign tax credit limit, you claim the credit by filing Form 1116 with your U.S. income tax return.
54 Tax Guide for U.S. Citizens and Resident Aliens Abroad
519 U.S. Tax Guide for Aliens
570 Tax Guide for Individuals With Income From U.S. Possessions
Form (and Instructions)
1116 Foreign Tax Credit
See How To Get Tax Help near the end of this publication for information about getting these publications and this form.
You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.
To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U.S. tax return. However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. See How To Figure the Credit , later. To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040).
Figure your tax both ways—claiming the credit and claiming the deduction. Then fill out your return the way that benefits you more. See Why Choose the Credit, later.
As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.
If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.
See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes.
There are exceptions to this general rule, which are described next.
You can make or change your choice to claim a deduction or credit at any time during the period within 10 years from the regular due date for filing the return (without regard to any extension of time to file) for the tax year in which the taxes were actually paid or accrued. You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective.
Note that while the limitations period for refund claims relating to a foreign tax credit generally runs parallel with the election period, the limitations period for refund claims relating to a deduction of foreign tax does not, and may expire before the end of the election period.
You paid foreign taxes for the last 13 years and chose to deduct them on your U.S. income tax returns. You always filed your returns and paid your taxes by April 15. In February 2018, you file an amended return for tax year 2007 choosing to take a credit for your 2007 foreign taxes because you now realize that the credit is more advantageous than the deduction for that year. Because your 2007 return is treated as though filed on April 15, 2008, this choice is timely (within 10 years).
Because there is a limit on the credit for your 2007 foreign tax, you have unused 2007 foreign taxes. Ordinarily, you first carry back unused foreign taxes arising in 2007 to, and claim them as a credit in, the preceding tax year. If you are unable to claim all of them in that year, you carry them forward to the 10 years following the year in which they arose.
Because you originally chose to deduct your foreign taxes and the 10-year period for changing the choice for 2006 has passed, you cannot change your choice and carry the unused 2007 foreign taxes back to tax year 2006.
Because the 10-year periods for changing the choice have not passed for your 2008 through 2017 income tax returns, you can still choose to claim the credit for those years and carry forward any unused 2007 foreign taxes. However, you must reduce the unused 2007 foreign taxes that you carry forward by the amount that would have been allowed as a carryback if you had timely carried back the foreign tax to tax year 2006.
You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later.
The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. In most cases, if the foreign tax rate is higher than the U.S. rate, there will be no U.S. tax on the foreign income. If the foreign tax rate is lower than the U.S. rate, U.S. tax on the foreign income will be limited to the difference between the rates. The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.
Although no one rule covers all situations, in most cases it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. The following bullets explain why the credit may provide a greater tax benefit.
A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax.
You can choose to take the foreign tax credit even if you do not itemize your deductions. You then are allowed the standard deduction in addition to the credit.
If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year. (See Limit on the Credit under How To Figure the Credit, later.)
Your deduction of state and local income, sales, and property taxes, including foreign income and property taxes, is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately).
For 2018, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. None of the dividends are qualified dividends. You file a joint return. You had to pay $1,900 in foreign income taxes on the dividend income. If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. Your taxable income then is $65,300 and your tax is $7,458.
If you take the credit instead, your itemized deductions are only $13,100. Your taxable income then is $67,200 and your tax before the credit is $7,686. After the credit, however, your tax is only $5,786. Therefore, your tax is $1,672 lower ($7,458 − $5,786) by taking the credit.
In 2018, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. You report on your U.S. return this income as well as $56,000 of U.S. source wages and an allowable $49,000 partnership loss from a U.S. partnership. Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. You are single and have other itemized deductions of $6,850. If you deduct the foreign tax on your U.S. return, your taxable income is $3,650 ($5,000 + $56,000 − $49,000 − $1,500 − $6,850) and your tax is $281.
If you take the credit instead, your taxable income is $5,150 ($5,000 + $56,000 − $49,000 − $6,850) and your tax before the credit is $396. You can take a credit of only $353 because of limits discussed in Limit on the Credit , later. Your tax after the credit is $43 ($396 − $353), which is $238 ($281 – $43) more than if you deduct the foreign tax.
If you choose the credit, you will have unused foreign taxes of $1,147 ($1,500 − $353). When deciding whether to take the credit or the deduction this year, you will need to consider whether you can benefit from a carryback or carryover of that unused foreign tax.
You can claim the credit for a qualified foreign tax in the tax year in which you pay it or accrue it, depending on your method of accounting. "Tax year" refers to the tax year for which your U.S. return is filed, not the tax year for which your foreign return is filed.
U.S. income tax is imposed on income expressed in U.S. dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. Therefore, fluctuations in the value of the foreign currency relative to the U.S. dollar may affect the foreign tax credit.
A foreign tax redetermination is any change in your foreign tax liability that may affect your U.S. foreign tax credit claimed.
The year in which to claim the credit remains the year to which the foreign taxes paid or accrued relate, even if the change in foreign tax liability occurs in a later year.
If a foreign tax redetermination occurs, a redetermination of your U.S. tax liability is required if any of the following conditions apply.
The accrued taxes when paid differ from the amounts claimed as a credit.
The accrued taxes you claimed as a credit in one tax year are not paid within 2 years after the end of that tax year.
If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. You will not be allowed a credit for the unpaid taxes until you pay them. When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U.S. dollars using the exchange rate as of the date they were paid. The foreign tax credit is allowed for the year to which the foreign tax relates. See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates.
The foreign taxes you paid are refunded in whole or in part.
For taxes taken into account when accrued but translated into dollars on the date of payment, the dollar value of the accrued tax differs from the dollar value of the tax paid because of fluctuations in the exchange rate between the date of accrual and the date of payment. However, no redetermination is required if the change in foreign tax liability for each foreign country is solely attributable to exchange rate fluctuations and is less than the smaller of:
2% of the total dollar amount of the foreign tax initially accrued for that foreign country for the U.S. tax year.
In this case, you must adjust your U.S. tax in the tax year in which the accrued foreign taxes are paid.
You are required to notify the IRS about a foreign tax credit redetermination that affects your U.S. tax liability for each tax year affected by the redetermination. In most cases, you must file Form 1040X, Amended U.S. Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U.S. tax liability for the year or years affected. See Contents of statement , later.
You are not required to attach Form 1116 for a tax year affected by a redetermination if you meet both of the following criteria.
The amount of your creditable taxes paid or accrued during the tax year is not more than $300 ($600 if married filing a joint return) as a result of the foreign tax redetermination.
You meet the requirements listed under Exemption from foreign tax credit limit under How To Figure the Credit, later.
There are other exceptions to this requirement. They are discussed later under Due date of notification to IRS .
You have 10 years to file a claim for refund of U.S. tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the taxes were actually paid or accrued.
You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. The 10-year period applies to claims for refund or credit based on:
Fixing math errors in figuring qualified foreign taxes,
Reporting qualified foreign taxes not originally reported on the return, or
Any other change in the size of the credit (including one caused by correcting the foreign tax credit limit).
The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. See Making or Changing Your Choice , discussed earlier under Choosing To Take Credit or Deduction.
Note that while the limitations period for refund claims relating to a foreign tax credit generally runs parallel with the election period, the limitations period for refund claims relating to a deduction of foreign tax does not, and may expire before the end of the election period.
U.S. citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U.S. tax on foreign source income may be able to take a foreign tax credit.
If you are a U.S. citizen, you are taxed by the United States on your worldwide income wherever you live. You normally are entitled to take a credit for foreign taxes you pay or accrue.
If you are a resident alien of the United States, you can take a credit for foreign taxes subject to the same general rules as U.S. citizens. If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules.
Usually, you can take a credit only for those foreign taxes imposed on income you actually or constructively received while you had resident alien status.
For information on alien status, see Pub. 519.
If you are a nonresident alien, you cannot take the credit in most cases. However, you may be able to take the credit if you meet either of the following conditions.
You were a bona fide resident of Puerto Rico during your entire tax year.
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.
For information on alien status and effectively connected income, see Pub. 519.
In most cases, the following four tests must be met for any foreign tax to qualify for the credit.
The tax must be imposed on you.
You must have paid or accrued the tax.
The tax must be the legal and actual foreign tax liability.
The tax must be an income tax (or a tax in lieu of an income tax).
Certain foreign taxes do not qualify for the credit even if the four tests are met. See Foreign Taxes for Which You Cannot Take a Credit, later.
You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. For example, a tax that is deducted from your wages is considered to be imposed on you. You cannot shift the right to claim the credit by contract or other means.
In most cases, you can claim the credit only if you paid or accrued the foreign tax to a foreign country or U.S. possession. However, the paragraphs that follow describe some instances in which you can claim the credit even if you did not directly pay or accrue the tax yourself.
The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit.
You are a shareholder of a French corporation. You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. The French government imposes a 15% withholding tax ($15) on the refund you received. You receive a check for $85. You include $100 in your income. The $15 of tax withheld is a qualified foreign tax.
In most cases, only income, war profits, and excess profits taxes (income taxes) qualify for the foreign tax credit. Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. Furthermore, foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax. See Taxes in Lieu of Income Taxes , later.
Simply because the levy is called an income tax by the foreign taxing authority does not make it an income tax for this purpose. A foreign levy is an income tax only if it meets both of the following requirements.
It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it.
The predominant character of the tax is that of an income tax in the U.S. sense.
A foreign levy may meet these requirements even if the foreign tax law differs from U.S. tax law. The foreign law may include in income items that U.S. law does not include, or it may allow certain exclusions or deductions that U.S. law does not allow.
A tax paid or accrued to a foreign country qualifies for the credit if it is imposed in lieu of an income tax otherwise generally imposed. A foreign levy is a tax in lieu of an income tax only if it meets both of the following requirements.
It is not payment for a specific economic benefit as discussed earlier.
The tax is imposed in place of, and not in addition to, an income tax otherwise generally imposed.
A tax in lieu of an income tax does not have to be based on realized net income. A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit.
In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. However, if the foreign country imposes a soak-up tax in lieu of an income tax, the amount that does not qualify for foreign tax credit is the lesser of the following amounts.
The soak-up tax.
The foreign tax you paid that is more than the amount you would have paid if you had been subject to the generally imposed income tax.
This part discusses the foreign taxes for which you cannot take a credit. These are:
Taxes on excluded income,
Taxes for which you can only take an itemized deduction,
Taxes on foreign mineral income,
Taxes from international boycott operations,
A portion of taxes on combined foreign oil and gas income,
Taxes of U.S. persons controlling foreign corporations and partnerships who fail to file required information returns,
Taxes related to a foreign tax splitting event, and
Foreign taxes disallowed under section 965(g).
You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U.S. gross income.
You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U.S. income under the foreign earned income exclusion or the foreign housing exclusion. See Pub. 54 for more information on the foreign earned income and housing exclusions.
You are a U.S. citizen and a cash basis taxpayer, employed by Company X and living in Country A. Your records show the following.
|Foreign earned income received||$125,000|
|Unreimbursed business travel expenses||20,000|
|Income tax paid to Country A||30,000|
|Exclusion of foreign earned
income and housing allowance
Because you can exclude part of your wages, you cannot claim a credit for part of the foreign taxes. To find that part, do the following.
First, find the amount of business expenses allocable to excluded wages and therefore not deductible. To do this, multiply the otherwise deductible expenses by a fraction. That fraction is the excluded wages over your foreign earned income.
Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. To do this, subtract business expenses allocable to excluded wages ($16,624) from excluded wages ($103,900). The result is $87,276.
Then, find the denominator of the fraction by subtracting all your deductible expenses from all your foreign earned income ($125,000 − $20,000 = $105,000).
Finally, multiply the foreign tax you paid by the resulting fraction.
The amount of Country A tax you cannot take a credit for is $24,936.
If you have income from Puerto Rican sources that is not taxable, you must reduce your foreign taxes paid or accrued by the taxes allocable to the exempt income. For information on figuring the reduction, see Pub. 570.
If you are a bona fide resident of American Samoa and exclude income from sources in American Samoa, you cannot take a credit for the taxes you pay or accrue on the excluded income. For more information on this exclusion, see Pub. 570.
You cannot claim a foreign tax credit for foreign income taxes paid or accrued under the following circumstances. However, you can claim an itemized deduction for these taxes. See Choosing To Take Credit or Deduction , earlier.
You cannot claim a foreign tax credit for income taxes paid or accrued to any country if the income giving rise to the tax is for a period (the sanction period) during which:
The Secretary of State has designated the country as one that repeatedly provides support for acts of international terrorism;
The United States has severed or does not conduct diplomatic relations with the country; or
The United States does not recognize the country's government, and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act.
The following countries meet this description for 2018. Income taxes paid or accrued to these countries in 2018 do not qualify for the credit.
Libya (but see Note, later).
You cannot claim a foreign tax credit for withholding tax (defined later ) on dividends paid or accrued if either of the following applies to the dividends.
The dividends are on stock you held for less than 16 days during the 31-day period that begins 15 days before the ex-dividend date (defined later).
The dividends are for a period or periods totaling more than 366 days on preferred stock you held for less than 46 days during the 91-day period that begins 45 days before the ex-dividend date. If the dividend is not for more than 366 days, rule (1) applies to the preferred stock.
When figuring how long you held the stock, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss.
Regardless of how long you held the stock, you cannot claim the credit to the extent you have an obligation under a short sale or otherwise to make payments related to the dividend for positions in substantially similar or related property.
You bought common stock from a foreign corporation on November 3. You sold the stock on November 19. You received a dividend on this stock because you owned it on the ex-dividend date of November 5. To claim the credit, you must have held the stock for at least 16 days within the 31-day period that began on October 21 (15 days before the ex-dividend date). Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit.
The facts are the same as in Example 1, except that you sold the stock on November 14. You held the stock for only 11 days. You are not entitled to the credit.
For income or gain (other than dividends) paid or accrued on property, you cannot claim a foreign tax credit for withholding tax (defined later):
If you have not held the property for at least 16 days during the 31-day period that begins 15 days before the date on which the right to receive the payment arises, or
To the extent you have to make related payments on positions in substantially similar or related property.
When figuring how long you held the property, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss.
You cannot take a credit for the disqualified portion of any foreign tax paid or accrued in connection with a covered asset acquisition. A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U.S. tax purposes but not for foreign tax purposes. For more information, see Internal Revenue Code section 901(m) and the temporary regulations under that section, including Treasury Decision 9800, in Internal Revenue Bulletin 2016-52 at IRS.gov/IRB/2016-52_IRB#TD-9800.
You cannot claim a foreign tax credit for taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of purchase or sale.
You must reduce any taxes paid or accrued to a foreign country or possession on mineral income from that country or possession if you were allowed a deduction for percentage depletion for any part of the mineral income. For details, see Regulations section 1.901-3.
If you participate in or cooperate with an international boycott during the tax year, your foreign taxes resulting from boycott activities will reduce the total taxes available for credit. See the instructions for line 12 in the Form 1116 instructions to figure this reduction.
You must reduce your foreign taxes by a portion of any foreign 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 multiplied by a fraction equal to your pre-credit U.S. tax liability (Form 1040, line 11a and Schedule 2 (Form 1040), line 46) divided by your worldwide taxable income. You may be entitled to carry over to other years taxes reduced under this rule. See Internal Revenue Code section 907(f).
Combined foreign oil and gas income means 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.
If you had control of a foreign corporation or a foreign partnership for the annual accounting period of that corporation or partnership that ended with or within your tax year, you may have to file an annual information return. If you do not file the required information return, you may have to reduce the foreign taxes that may be used for the foreign tax credit. See Penalty for not filing Form 5471 or Form 8865 , later.
Reduce taxes paid or accrued by any taxes paid or accrued with respect to a foreign tax credit splitting event. For foreign taxes paid or accrued in tax years beginning after 2010, 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 (in connection with a splitter arrangement listed below) the related income is (or will be) taken into account by a covered person. A covered person is either of the following.
An entity in which you hold, directly or indirectly, at least a 10% ownership interest (determined by vote or value).
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 Internal Revenue Code section 901(m) is not a foreign tax credit splitting event under Internal Revenue Code section 909.
For more information, see section 909 and the regulations under that section.
As already indicated, you can claim a foreign tax credit only for foreign taxes on income, war profits, or excess profits, or taxes in lieu of those taxes. In addition, there is a limit on the amount of the credit that you can claim. You figure this limit and your credit on Form 1116. Your credit is the amount of foreign tax you paid or accrued or, if smaller, the limit.
If you have foreign taxes available for credit but you cannot use them because of the limit, you may be able to carry them back 1 tax year and forward to the next 10 tax years. See Carryback and Carryover , later.
Also, certain tax treaties have special rules that you must consider when figuring your foreign tax credit. See Tax Treaties , later.
Your foreign tax credit cannot be more than your total U.S. tax liability (Form 1040, line 11a and Schedule 2 (Form 1040), line 46) multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.
To determine the limit, you must separate your foreign source income into categories, as discussed under Separate Limit Income next. The limit treats all foreign income and expenses in each separate category as a single unit and limits the credit to the U.S. income tax on the taxable income in that category from all sources outside the United States.
You must figure the limit on a separate Form 1116 for each of the following categories of income.
Section 951A income.
Foreign branch income.
Passive category income.
General category income.
Section 901(j) income.
Certain income re-sourced by treaty.
Any lump-sum distribution from an employer benefit plan for which the special averaging treatment is used to determine your tax.
In figuring your separate limits, you must combine the income (and losses) in each category from all foreign sources, and then apply the limit.
Section 951A income, a new category beginning in 2018, consists of the global intangible low-taxed income (GILTI) a U.S. shareholder of a CFC is required to include in income under section 951A (other than GILTI that is passive category income). A U.S. shareholder’s GILTI is determined based on its aggregate pro rata share of the tested income of all CFCs it owns, offset by its pro rata share of tested loss of any CFCs it owns, and the shareholder’s net deemed tangible income return with respect to the CFCs. A CFC’s tested income does not include effectively connected income, subpart F income, foreign oil and gas income, or certain related party payments. GILTI is included in income in a manner generally similar to inclusions of subpart F income. See Internal Revenue Code section 951A for more information.
Foreign branch income, a new category beginning in 2018, consists of the business profits of a U.S. person that are attributable to one or more qualified business units (QBUs) in one or more foreign countries. Foreign branch income does not include any passive category income. See Internal Revenue Code section 904(d)(2)(J).
Passive category income consists of passive income and specified passive category income.
If you receive foreign source distributions from a mutual fund or other regulated investment company that elects to pass through to you the foreign tax credit, in most cases the income is considered passive. The mutual fund will provide you with a Form 1099-DIV or substitute statement showing the amount of foreign taxes it elected to pass through to you.
General category income is income that is not section 951A income, foreign branch income, or passive category income or does not fall into one of the other separate limit categories discussed later. In most cases, it includes active business income and wages, salaries, and overseas allowances of an individual as an employee. General category income includes high-taxed income that would otherwise be passive income. See High-taxed income , earlier, under What is not passive income.
This is income earned from activities conducted in sanctioned countries. Income derived from each sanctioned country is subject to a separate foreign tax credit limitation. Therefore, you must use a separate Form 1116 for income earned from each such country. See Taxes Imposed by Sanctioned Countries (Section 901(j) Income) under Taxes for Which You Can Only Take an Itemized Deduction, earlier.
Taxpayers will complete one Schedule H of the Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, with respect to income derived from all sanctioned countries. However, a separate Form 1116 must be completed with respect to section 965 inclusions attributable to each sanctioned country.
If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.
You must figure 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. See sections 865(h), 904(d)(6), and 904(h)(10) and the regulations under those sections (including Regulations section 1.904-5(m)(7)) for any grouping rules and exceptions.
See Tax Treaties , later, for further information regarding income re-sourced by treaty.
If you receive a foreign source lump-sum distribution (LSD) from a retirement plan, and you figure the tax on it using the special averaging treatment for LSDs, you must make a special computation. Follow the Form 1116 instructions and complete the worksheet in those instructions to determine your foreign tax credit on the LSD.
The special averaging treatment for LSDs is elected by filing Form 4972, Tax on Lump-Sum Distributions.
Solely for purposes of allocating foreign taxes to separate limit income categories, those separate limit categories include any U.S. source income that is taxed by the foreign country or U.S. possession.
If you paid or accrued foreign income tax for a tax year on income in more than one separate limit income category, allocate the tax to the income category to which the tax specifically relates. If the tax is not specifically related to any one category, you must allocate the tax to each category of income.
You do this by multiplying the foreign income tax related to more than one category by a fraction. The numerator of the fraction is the net income taxed by the foreign country in a separate category. The denominator is the total net income.
You figure net income by deducting from the gross income in each category and from the total gross income taxed by the foreign country or U.S. possession, any expenses, losses, and other deductions definitely related to them under the laws of the foreign country or U.S. possession. If the expenses, losses, and other deductions are not definitely related to a category of income under foreign law, they are apportioned under the principles of the foreign law. If the foreign law does not provide for apportionment, use the principles covered in the U.S. Internal Revenue Code.
You paid foreign income taxes of $3,200 to Country A on wages of $80,000 and interest income of $3,000. These were the only items of income on your foreign return. You also have deductions of $4,400 that, under foreign law, are not definitely related to either the wages or interest income. Your total net income is $78,600 ($83,000 – $4,400).
Because the foreign tax is not specifically for either item of income, you must allocate the tax between the wages and the interest under the tax laws of Country A. For purposes of this example, assume that the laws of Country A do this in a manner similar to the U.S. Internal Revenue Code. First, figure the net income in each category by allocating those expenses that are not definitely related to either category of income.
You figure the expenses allocable to wages (general category income) as follows.
$83,000 (total income)
|The net wages are $75,759 ($80,000 − $4,241).|
You figure the expenses allocable to interest (passive category income) as follows.
$83,000 (total income)
|The net interest is $2,841 ($3,000 − $159).|
Then, to figure the foreign tax on the wages, you multiply the total foreign income tax by the following fraction.
|$75,759 (net wages)
$78,600 (total net income)
You figure the foreign tax on the interest income as follows.
|$2,841 (net interest)
$78,600 (total net income)
If foreign taxes were paid or accrued on your behalf by a partnership or an S corporation, you will figure your credit using certain information from the Schedule K-1 you received from the partnership or S corporation. If you received a 2018 Schedule K-1 from a partnership or an S corporation that includes foreign tax information, see your Form 1116 instructions for how to report that information.
Before you can determine the limit on your credit, you must first figure your total taxable income from all sources before the deduction for personal exemptions. This is the amount shown on line 10 of Form 1040 or line 41 of Form 1040NR. Then for each category of income, you must figure your taxable income from sources outside the United States.
Before you can figure your taxable income in each category from sources outside the United States, you must first determine whether your gross income in each category is from U.S. sources or foreign sources. Some of the general rules for figuring the source of income are outlined in Table 2.
See Determining the Source of Compensation for Labor or Personal Services and Determining the Source of Income From the Sales or Exchanges of Certain Personal Property , later, for a more detailed discussion on determining the source of these types of income.
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 certain fringe benefits) is sourced on a time basis. Certain fringe benefits (such as housing and education) are sourced on a geographical basis.
Or, you may be permitted to use an alternative basis to determine the source of compensation. See Alternative basis , later.
If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next.
Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. This is true whether the vessel or aircraft is owned, hired, or leased. The term "vessel or aircraft" includes any container used in connection with a vessel or aircraft.
All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States.
For transportation income from personal services, 50% of the income is U.S. source income if the transportation is between the United States and a U.S. possession. For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft.
In most cases, if personal property is sold by a U.S. resident, the gain or loss from the sale is treated as U.S. source. If personal property is sold by a nonresident, the gain or loss is treated as foreign source.
This rule does not apply to the sale of inventory, intangible property, or depreciable property, or property sold through a foreign office or fixed place of business. The rules for these types of property are discussed later.
To figure your taxable income in each category from sources outside the United States, you first allocate to specific classes (kinds) of gross income the expenses, losses, and other deductions (including the deduction for foreign housing costs) that are definitely related to that income.
Qualified dividends are the amounts you entered on Form 1040, line 3a, or Form 1040NR, line 10b. If you have any qualified dividends, you may be required to make adjustments to the amount of those qualified dividends before you take them into account on line 1a or line 18 of Form 1116. See Foreign Qualified Dividends and Capital Gains (Losses) in the Form 1116 instructions to determine the adjustments you may be required to make before taking foreign qualified dividends into account on line 1a of Form 1116. See the instructions for line 18 in the Form 1116 instructions to determine the adjustments you may be required to make before taking U.S. or foreign qualified dividends into account on line 18 of Form 1116.
If you have capital gains (including any capital gain distributions) or capital losses, you may have to make certain adjustments to those gains or losses before taking them into account on line 1a (gains), line 5 (losses), or line 18 (taxable income before subtracting exemptions) of Form 1116.
You may have to make the following adjustments to your foreign source capital gains and losses.
U.S. capital loss adjustment.
Capital gain rate differential adjustment.
Before you make these adjustments, you must reduce your net capital gain by the amount of any gain you elected to include in investment income on line 4g of Form 4952. Your net capital gain is the excess of your net long-term capital gain for the year over any net short-term capital loss for the year. Foreign source gain you elected to include on line 4g of Form 4952 must be entered directly on line 1a of Form 1116 without adjustment.
The facts are the same as Example 2 . Dennis has a $100 foreign source 15% capital loss that is passive category income.
This loss is netted against the $200 foreign source 15% capital gain that is general category income according to Step 1 .
Dennis includes $40.54 of the capital loss on line 5 of the Form 1116 for general category income.
|($100 × 0.4054)|
Dawn has a $20 net capital loss in the 15% rate group that is passive category income, a $40 net capital loss in the 15% rate group that is general category income, a $50 U.S. source net capital gain in the 15% rate group, and a $50 net capital gain in the 28% rate group that is passive category income, as shown in the following table.
|Income category||28% rate||15% rate|
Of the total $60 of foreign source net capital losses in the 15% rate group, $50 is treated as offsetting the $50 U.S. source net capital gain in the 15% rate group. (See Step 3(1) .)
|$16.67 of the $50 is treated as coming from passive category income.
($50 × $20/$60)
$33.33 of the $50 is treated as coming from general category income.
($50 × $40/$60)
The remaining $10 of foreign source net capital losses in the 15% rate group are treated as offsetting net capital gain in the 28% rate group. (See Step 3(2)(c) .)
|$3.33 is treated as coming from passive category income.
($10 × $20/$60)
$6.67 is treated as coming from general category income.
($10 × $40/$60)
Dawn includes $9.28 of the capital loss in the amount she enters on line 5 of Form 1116 for passive category income.
|This is $6.76
($16.67 × 0.4054)
($3.33 × 0.7568)
Dawn includes $18.56 of capital loss in the amount she enters on line 5 of Form 1116 for general category income.
|This is $13.51
($33.33 × 0.4054)
($6.67 × 0.7568)
Dawn also includes $37.84 ($50 × 0.7568) of capital gain in the amount she enters on line 1a of Form 1116 for passive category income.
You must allocate foreign losses for any tax year and U.S. losses for any tax year (to the extent such losses do not exceed the separate limitation incomes for such year) among incomes on a proportionate basis.
If you have a foreign loss when figuring your taxable income in a separate limit income category, and you have income in one or more of the other separate categories, you must first reduce the income in these other categories by the loss before reducing income from U.S. sources.
You have $10,000 of passive category income and incur a loss of $5,000 of general category income. You must use the $5,000 loss to offset $5,000 of passive category income.
You should allocate any net loss from sources in the United States among the different categories of foreign income after allocating all foreign losses as described earlier, and before any of the adjustments discussed later.
The amount of your net loss from sources in the United States is equal to the excess of (1) your foreign source taxable income in all of your separate categories in the aggregate, after taking into account any adjustments under Qualified Dividends and Adjustments to Foreign Source Capital Gains and Losses over (2) the amount of taxable income you enter on Form 1116, line 18.
If you have only losses in your separate limit categories, or if you have a loss remaining after allocating your foreign losses to other separate categories, you have an overall foreign loss. If you use this loss to offset U.S. source income (resulting in a reduction of your U.S. tax liability), you must recapture your loss in each succeeding year in which you have taxable income from foreign sources in the same separate limit category. You must recapture the overall loss regardless of whether you chose to claim the foreign tax credit for the loss year.
You recapture the loss by treating part of your taxable income from foreign sources in a later year as U.S. source income. In addition, if, in a later year, you sell or otherwise dispose of property used in your foreign trade or business, you may have to recognize gain and treat it as U.S. source income, even if the disposition would otherwise be nontaxable. See Dispositions , later. The amount you treat as U.S. source income reduces the foreign source income, and therefore reduces the foreign tax credit limit.
You must establish separate accounts for each type of foreign loss that you sustain. The balances in these accounts are the overall foreign loss subject to recapture. Reduce these balances at the end of each tax year by the loss that you recaptured. You must attach a statement to your Form 1116 to report the balances (if any) in your overall foreign loss accounts.
If, in a prior tax year, you reduced your foreign taxable income in the separate limit category by a pro rata share of a loss from another category, you must recharacterize in 2018 all or part of any income you receive in 2018 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 2018 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 foreign taxable income (adjusted by any of the other adjustments previously mentioned) for each of the separate categories (other than the loss category) previously reduced by any separate limitation loss, and
Decreasing foreign taxable income (adjusted by any of the other adjustments previously mentioned) for the loss category by the amount of recharacterized income.
In 2017, you had a $2,000 loss that was general category income, $3,000 of passive category income, and $2,000 of income re-sourced by treaty. You had to allocate the $2,000 loss to the income in the other separate categories. 60% ($3,000 ÷ $5,000) of the $2,000 loss (or $1,200) reduced passive category income and 40% ($2,000 ÷ $5,000) or $800 reduced the income re-sourced by treaty.
In 2018, you have $4,000 of passive category income, $1,000 of income re-sourced by treaty, and $5,000 of general category income. Because $1,200 of the general category loss was used to reduce your passive category income in 2017, $1,200 of the 2018 general category income of $5,000 must be recharacterized as passive category income. This makes the 2018 total passive category income $5,200 ($4,000 + $1,200). Similarly, because $800 of the general category loss was used to reduce your income re-sourced by treaty, $800 of the general category income must be recharacterized as income re-sourced by treaty. This makes the 2018 total of income re-sourced by treaty $1,800 ($1,000 + $800). The total general category income is $3,000 ($5,000 − $1,200 − $800).
If you dispose of appreciated property that generates, or would generate, gain in a separate limitation loss account, the disposition is subject to recapture rules similar to those applicable to overall foreign loss accounts. See Internal Revenue Code section 904(f)(5)(F).
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.
New Internal Revenue Code section 904(g)(5) allows for an election to recapture up to 100% of an unused pre-2018 overall domestic loss from a prior year, as opposed to the 50% stated in the previous paragraph. This election is applicable for any taxable year beginning after 2017 and before 2028.
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.
For more information, see the Instructions for Form 1116.
The United States is a party to tax treaties that are designed, in part, to prevent double taxation of the same income by the United States and the treaty country. Many treaties do this by allowing you to treat U.S. source income as foreign source income. Certain treaties have special rules you must consider when figuring your foreign tax credit if you are a U.S. citizen residing in the treaty country. These rules generally limit the amount of U.S. source income that is treated as foreign source income. The treaties that provide for this type of restriction include those with Australia, Austria, Bangladesh, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Malta, Mexico, the Netherlands, New Zealand, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, and the United Kingdom. There is a worksheet at the end of this publication to help you figure the additional credit that is allowed by reason of these limited re-sourcing rules. But do not use this worksheet to figure the additional credit under the treaties with Australia and New Zealand. In addition, except as provided in regulations, the worksheet does not apply for tax years beginning after August 10, 2010. The amount of income re-sourced in the separate category, as described under Certain Income Re-Sourced by Treaty , earlier, must be figured in accordance with the applicable treaty provision.
You can get more information by writing to:
Philadelphia, PA 19255-0725
If, because of the limit on the credit, you cannot use the full amount of qualified foreign taxes paid or accrued in the tax year, you are allowed a 1-year carryback and then a 10-year carryover of the unused foreign taxes.
This means that you can treat the unused foreign tax of a tax year as though the tax were paid or accrued in your first preceding and 10 succeeding tax years up to the amount of any excess limit in those years. A period of less than 12 months for which you make a return is considered a tax year.
The unused foreign tax in each category is the amount by which the qualified taxes paid or accrued are more than the limit for that category. The excess limit in each category is the amount by which the limit is more than the qualified taxes paid or accrued for that category.
Figure your carrybacks or carryovers separately for each separate limit income category.
The 1-year carryback and 10-year carryover do not apply to unused taxes in the GILTI category.
The mechanics of the carryback and carryover are illustrated by the following examples.
All of your foreign income is general category income for 2017 and 2018. The limit on your credit and the qualified foreign taxes paid on the income are as follows:
|Unused foreign tax (+)
or excess limit (−)
In 2018, you had unused foreign tax of $200 to carry to other years. You are considered to have paid this unused foreign tax first in 2017 (the first preceding tax year) up to the excess limit in that year of $100. You can then carry forward the remaining $100 of unused tax.
All your foreign income is general category income for 2014 through 2019. In 2014, all of your foreign income was general category income, and you had an unused foreign tax of $200. Because you had no foreign income in 2013, you cannot carry back the unused foreign tax to that year. However, you may be able to carry forward the unused tax to the next 10 years. The limit on your credit and the qualified foreign taxes paid on general category income for 2014–2019 are as follows:
|Unused foreign tax (+)
or excess limit (−)
You cannot carry the $200 of unused foreign tax from 2014 to 2015 or 2016 because you have no excess limit in any of those years. Therefore, you carry the tax forward to 2017, up to the excess limit of $150. The carryover reduces your excess limit in that year to zero. The remaining unused foreign tax of $50 from 2014 can be carried to 2018. At this point, you have fully absorbed the unused foreign tax from 2014 and can carry it no further. You also can carry forward the unused foreign tax from 2015 and 2016.
When you carry back an unused foreign tax, the IRS is given additional time to assess any tax resulting from the carryback. An assessment can be made up to the end of 1 year after the expiration of the statutory period for an assessment relating to the year in which the carryback originated.
In a given year, you must either claim a credit for all foreign taxes that qualify for the credit or claim a deduction for all of them. This rule is applied with the carryback and carryover procedure, as follows.
You cannot claim a credit carryback or carryover from a year in which you deducted qualified foreign taxes.
You cannot deduct unused foreign taxes in any year to which you carry them, even if you deduct qualified foreign taxes actually paid in that year.
You cannot claim a credit for unused foreign taxes in a year to which you carry them unless you also claim a credit for foreign taxes actually paid or accrued in that year.
You cannot carry back or carry over any unused foreign taxes to or from a year for which you elect not to be subject to the foreign tax credit limit. See Exemption from foreign tax credit limit under How To Figure the Credit, earlier.
For a tax year in which you and your spouse file a joint return, you must figure the unused foreign tax or excess limit in each separate limit category on the basis of your combined income, deductions, taxes, and credits.
For a tax year in which you and your spouse file separate returns, you figure the unused foreign tax or excess limit by using only your own separate income, deductions, taxes, and credits. However, if you file a joint return for any other year involved in figuring a carryback or carryover of unused foreign tax to the current tax year, you will need to make an allocation, as explained under Allocations Between Spouses , later.
You may have to allocate an unused foreign tax or excess limit for a tax year in which you and your spouse filed a joint return. This allocation is needed in the following three situations.
You and your spouse file separate returns for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed a joint return.
You and your spouse file separate returns for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed separate returns, but through a tax year for which you and your spouse filed a joint return.
You and your spouse file a joint return for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed a joint return, but through a tax year for which you and your spouse filed separate returns.
These three situations are illustrated in Figure A. In each of the situations, 2018 is the current year.
When you file a joint return in a deduction year, and carry unused foreign tax through that year from the prior year in which you and your spouse filed separate returns, the amount absorbed in the deduction year is the unused foreign tax of each spouse deemed paid or accrued in the deduction year up to the amount of that spouse's excess limit in that year. You cannot reduce either spouse's excess limit in the deduction year by the other's unused foreign taxes in that year.
You must file Form 1116 to claim the foreign tax credit unless you meet one of the following exceptions.
You must file a Form 1116 with your U.S. income tax return, Form 1040 or Form 1040NR. You must file a separate Form 1116 for each of the following categories of income for which you claim a foreign tax credit.
Section 951A income.
Foreign branch income.
Passive category income.
General category income.
Section 901(j) income.
Income re-sourced by treaty.
A Form 1116 consists of four parts.
Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above). Enter the gross amounts of your foreign, or U.S. possession, source income in the separate limit category for which you are completing the form. Do not include income you excluded on Form 2555 or Form 2555-EZ. From these, subtract the deductions that are definitely related to the separate limit income, and a ratable share of the deductions not definitely related to that income. If, in a separate limit category, you received income from more than one foreign country or U.S. possession, complete a separate column for each. You do not need to report income passed through from a 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 i of Part I. Total all foreign taxes passed through and enter the total on a single line in Part II for the applicable category. Because computations for inclusions under sections 951A and 965 are reported on separate forms, Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income, and Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System, you do not need to report those inclusions on a country-by-country basis. For inclusions under section 965, in the applicable category, enter the total in a single column in Part l. Enter "965" on line i. For inclusions under section 951A, enter the total inclusion in a single column in Part l. Enter "951A" on line i.
Do not report the inclusion under section 965(a) net of the deduction allowed under section 965(c). Furthermore, do not report the inclusion under section 951A net of the deduction allowed under section 250. The deduction under section 965(c) and the deduction under section 250 are included in Part I, line 2.
Part II—Foreign Taxes Paid or Accrued. This part shows the foreign taxes you paid or accrued on the income in the separate limit category in foreign currency and U.S. dollars. If you paid (or accrued) foreign tax to more than one foreign country or U.S. possession, complete a separate line for each. If you receive income passed through from a RIC, aggregate all foreign taxes paid or accrued on that income on a single line in Part II.
Part III—Figuring the Credit. You use this part to figure the foreign tax credit that is allowable. No foreign tax carryovers are allowed for foreign taxes paid or accrued on section 951A income. Leave line 10 of Form 1116 blank if you complete a Form 1116 for section 951A income, as carrybacks and carryovers are not allowed for this category of income.
Part IV—Summary of Credits From Separate Parts III. You use this part on one Form 1116 (the one with the largest amount entered on line 22) to summarize the foreign tax credits figured on separate Forms 1116.
You should keep the following records in case you are later asked to verify the taxes shown on your Form 1116, Form 1040, or Form 1040NR. You do not have to attach these records to your Form 1040 or Form 1040NR.
A receipt for each foreign tax payment.
The foreign tax return if you claim a credit for taxes accrued.
Any payee statement (such as Form 1099-DIV or Form 1099-INT) showing foreign taxes reported to you.
The receipt or return you keep as proof should either be the original, a duplicate original, or a duly certified or authenticated copy. If the receipt or return is in a foreign language, you also should have a certified translation of it. Revenue Ruling 67-308 in Cumulative Bulletin 1967-2 discusses in detail the requirements of the certified translation. Issues of the Cumulative Bulletin are available in most IRS offices and you are welcome to read them there.
Note. File this worksheet with your Form 1040 as an attachment to Form 1116.
|I. U.S. tax on U.S. source income (U.S. source rules)||COL. A||COL. B|
|5.||a.||Gross earned income|
|b.||Allocable employee business expenses|
|c.||Net compensation. Subtract line 5b from line 5a|
|6.||a.||Gross rent, real property|
|c.||Net rent. Subtract line 6b from line 6a|
|8.||In column A, enter the sum of column A, lines 1–5a, 6a, and 7. In column B, enter the sum of column B, lines 1–4, 5c, 6c, and 7|
|9.||Enter tax from Form 1040 (see instructions)|
|10.||Enter adjusted gross income (AGI) from line 7, Form 1040|
|11.||Divide line 9 by line 10. Enter the result as a decimal. This is the average tax rate on your AGI|
|12.||Multiply line 11 by line 8 (column B). This is your estimated U.S. tax on your U.S. source income|
|II. Tax at source allowable under treaty|
|A.||Items fully taxable by the United States.|
|b.||Multiply line 13a by line 11|
|B.||Items partly taxable by the United States.|
|c.||Allowable tax at source (Multiply line 14a by line 14b.)|
|c.||Allowable tax at source (Multiply line 15a by line 15b.)|
|16.||Total (Add lines 13b, 14c, and 15c.)|
|C.||Identify each item of U.S. source income from Col. A, Step I, on which the United States may
not, under treaty, tax residents of the other country who are not U.S. citizens.
|III. Additional credit|
|17.||Residence country tax on U.S. source income before foreign tax credit|
|18.||Foreign tax credit allowed by residence country for U.S. income tax paid|
|19.||Maximum credit. Subtract the greater of line 16 or line 18 from line 12|
|20.||a.||Enter the amount from line 17|
|b.||Enter the greater of line 16 or line 18|
|c.||Subtract line 20b from line 20a|
|21.||Additional credit. Enter the smaller of line 19 or line 20c. Add this amount to line 12 of Part III and line 30 of Part IV of Form 1116|
|* See the discussion on Tax Treaties , earlier, for information on when you should use this worksheet.|
|Note. Complete a separate worksheet for each separate limit income category.|
|Figure the estimated tax on U.S. source income in the separate limit income category using U.S. rules for determining the source of income.|
|Lines 1–7 Enter the gross amount for each type of income in Column A, and the net amount in Column B.|
|Line 9 Enter the amounts from Form 1040, line 11a and Schedule 2 (Form 1040), line 46.|
|Determine the amount of tax that the United States is allowed to collect at source under the treaty on income in the separate limit income category of residents of the other country who are not U.S. citizens. (In most cases, this amount should be claimed, to the extent allowable, as a foreign tax credit on your foreign tax return.)|
|PART A Income in the separate limit income category fully taxable by the United States. In most cases, this includes income from a U.S. trade or business and gains from dispositions of U.S. real property. Identify the type and amount on line 13a.|
|PART B Income in the separate limit income category for which treaty limits U.S. tax at source. This may include dividends, interest, royalties, and certain pensions.|
|Lines 14 and 15 Identify each type and amount of income. Use the specified treaty rate. (The current treaty rates are available at IRS.gov/Individuals/International-Taxpayers/Tax-Treaty-Tables.)|
|PART C Identify the items in the separate limit income category not taxable at source by the United States under the treaty.|
|Figure the amount of the additional credit for foreign taxes paid or accrued on U.S. source income. The additional credit is limited to the difference between the estimated U.S. tax (Step I) and the greater of the allowable U.S. tax at source (Step II) or the foreign tax credit allowed by the residence country (line 18).|
|Line 17 Enter the amount of the residence country tax on your U.S. source income before reduction for foreign tax credits. If possible, use the fraction of the pre-credit residence country tax which U.S. source taxable income bears to total taxable income. Otherwise, report that fraction of the pre-credit foreign tax which gross U.S. income bears to total gross income for foreign tax purposes.|
|Line 21 This amount may be claimed as a foreign tax credit on Form 1116. First, add this amount to the reduction in foreign taxes on line 12, Part III, and complete Form 1116 according to the instructions. Add this amount as an additional credit to line 30, Part IV, of Form 1116 as well and report that total on your Form 1040. File this worksheet with your Form 1040 as an attachment to Form 1116.|
If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.
Getting answers to your tax questions. On IRS.gov, get answers to your tax questions anytime, anywhere.
Go to IRS.gov/Help for a variety of tools that will help you get answers to some of the most common tax questions.
Go to IRS.gov/ITA for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.
Go to IRS.gov/Pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, 2018 tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML, as a PDF, or download it to your mobile device as an eBook.
You may also be able to access tax law information in your electronic filing software.
TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.
The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.
TAS can help you resolve problems that you cannot resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:
Your problem is causing financial difficulty for you, your family, or your business;
You face (or your business is facing) an immediate threat of adverse action; or
You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.
TAS has offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/Contact-Us. You can also call them at 877-777-4778.
TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS.
TAS also has a website, Tax Reform Changes, which shows you how the new tax law may change your future tax filings and helps you plan for these changes. The information is categorized by tax topic in the order of the IRS Form 1040. Go to TaxChanges.us for more information.
LITCs are independent from the IRS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. To find a clinic near you, visit TaxpayerAdvocate.IRS.gov/LITCmap or see IRS Pub. 4134, Low Income Taxpayer Clinic List.
- Accrual foreign taxes, adjustments, You may have to post a bond.
- Accrual method of accounting, Accrual method of accounting.
- Alternative minimum tax, Reminders
- Amended return, Claim for Refund
- American Samoa, resident of, Possession Exclusion
- Assistance (see Tax help)
- Capital gains and losses, Capital Gains and Losses
- Carryback and carryover, Carrybacks and carryovers.
- Allocations between spouses, Allocations Between Spouses
- Claim for refund, Time Limit on Tax Assessment
- Joint return, Married Couples
- Joint return–deduction year, Joint Return Filed in a Deduction Year
- Taxes all credited or deducted, Claim for Refund
- Time limit on tax assessment, Time Limit on Tax Assessment
- Choice to take credit or deduction
- Claim for refund, Claim for Refund
- Classes of gross income, Classes of gross income.
- Compensation for labor or personal services, Determining the Source of Compensation for Labor or Personal Services
- Geographical basis, Geographical basis.
- Controlled foreign corporation shareholder, Controlled foreign corporation shareholder., Income from controlled foreign corporations.
- Covered asset acquisition, Covered Asset Acquisition
- Credit for taxes paid or accrued, Credit for Taxes Paid or Accrued
- Economic benefits, Specific economic benefit.
- Excess limit, Carryback and Carryover
- Exchange rates, Foreign Currency and Exchange Rates
- Excluded income
- Exemption from foreign tax credit limit, Exemption from foreign tax credit limit.
- Export financing interest, Export financing interest.
- Extraterritorial income, Extraterritorial Income Exclusion
- Financial services income, Financial services income.
- Foreign corporation–U.S. shareholders, filing requirements, Taxes of U.S. Persons Controlling Foreign Corporations and Partnerships
- Foreign country, Foreign country.
- Foreign currency and exchange rates, Foreign Currency and Exchange Rates
- Foreign income, translating, Translating foreign currency into U.S. dollars.
- Foreign losses
- Allocation of, Foreign Losses
- Recapture of, Recapture of Prior Year Overall Foreign Loss Accounts
- Foreign mineral income, taxes on, Taxes on Foreign Mineral Income
- Foreign oil and gas extraction income, taxes on, Taxes on Combined Foreign Oil and Gas Income
- Foreign partnerships–U.S. partners, filing requirement, Taxes of U.S. Persons Controlling Foreign Corporations and Partnerships
- Foreign tax refund, Foreign tax refund., Foreign tax refund.
- Foreign tax(es)
- Allocation to income categories, Allocation of Foreign Taxes
- For which you cannot take a credit, Foreign Taxes for Which You Cannot Take a Credit
- Imposed on foreign refund, Foreign tax imposed on foreign refund.
- Qualifying for credit, What Foreign Taxes Qualify for the Credit?
- Redetermination, Foreign Tax Redetermination
- Refund, Foreign tax imposed on foreign refund.
- Functional currency, Translating foreign currency into U.S. dollars.
- General category income, separate limit, General Category Income
- High-taxed income, High-taxed income.
- Identity theft, Resolving tax-related identity theft issues.
- Income from sources in U.S. possessions, Determining the source of income from U.S. possessions.
- Income re-sourced by treaty, separate limit, Certain Income Re-Sourced by Treaty
- Income tax, Income Tax
- Income tax bond, You may have to post a bond.
- Interest, Penalties and interest.
- Interest expense, apportioning, Interest expense.
- International boycott, Taxes From International Boycott Operations
- Itemized deduction, Taxes for Which You Can Only Take an Itemized Deduction
- Making or changing your choice, Making or Changing Your Choice
- Married couples
- Mineral income, foreign,, Taxes on Foreign Mineral Income
- Mutual fund distributions, Mutual fund shareholder., Passive income.
- Mutual fund shareholder, Mutual fund shareholder.
- Overall foreign loss, Overall foreign loss.
- Partner, Partner or S corporation shareholder., Partnership distributive share., Foreign Taxes From a Partnership or an S Corporation
- Passive category income, Passive Category Income
- Penalties, Failure-to-notify penalty., Penalties and interest.
- Pension, employment, and disability fund payments, Pension, unemployment, and disability fund payments.
- Personal property, sales or exchanges of, Determining the Source of Income From the Sales or Exchanges of Certain Personal Property
- Possession exclusion, Possession Exclusion
- Publications (see Tax help)
- Purchase or sale of oil or gas, taxes in connection with, Taxes in Connection With the Purchase or Sale of Oil or Gas
- Rate of exchange, Rate of exchange for foreign taxes paid.
- Recapture of foreign losses, Recapture of Prior Year Overall Foreign Loss Accounts
- Records to keep, Records To Keep
- Redetermination of foreign tax, Foreign Tax Redetermination
- Refund claims, time limit, Time Limit on Refund Claims
- Refund, foreign tax, Foreign tax refund.
- Reporting requirements (international boycott), Reporting requirements.
- Resident aliens, Resident Aliens
- S corporation shareholder, Partner or S corporation shareholder., Foreign Taxes From a Partnership or an S Corporation
- Sanctioned countries, Taxes Imposed by Sanctioned Countries (Section 901(j) Income)
- Section 901(j) income, Section 901(j) Income
- Section 901(j) sanctioned income, Taxes Imposed by Sanctioned Countries (Section 901(j) Income)
- Separate limit income, Separate Limit Income
- Shareholder, Mutual fund shareholder.
- Soak-up taxes, Soak-up taxes.
- Social security taxes, Pension, unemployment, and disability fund payments.
- Source of compensation for labor or personal services
- State income taxes, State income taxes.
- Subsidy, Subsidy received.
- Tax help, How To Get Tax Help
- Tax treaties, Tax Treaties
- Taxable income from sources outside the U.S., determination of, Determining Taxable Income From Sources Outside the United States
- Excluded income, Foreign Earned Income and Housing Exclusions
- In lieu of income taxes, Taxes in Lieu of Income Taxes
- On dividends, Taxes Imposed on Certain Dividends
- Paid or accrued, Credit for Taxes Paid or Accrued
- Withheld on income or gain, Taxes Withheld on Income or Gain (Other Than Dividends)
- Taxes related to a foreign tax credit splitting event, Taxes Related to a Foreign Tax Credit Splitting Event
- Time limit
- Translating foreign currency, Translating foreign currency into U.S. dollars.