Beginning in 2009, taxes on foreign oil related income will be subject to the same rules that apply to taxes on foreign oil and gas extraction income in determining the amount allowed as a foreign tax credit. For more information, see Taxes on Combined Foreign Oil and Gas Income, later.

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, Alternative Minimum Tax—Individuals, for a discussion of the alternative minimum tax foreign tax credit.

If your address changes from the address shown on your last return, use Form 8822, Change of Address, to notify the Internal Revenue Service.

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 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 choose not to be subject to the foreign tax credit limit, you claim the credit by filing Form 1116 with your U.S. income tax return. Two examples with filled-in Forms 1116 are provided at the end of this publication.

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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, you generally 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), Itemized Deductions.

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.

Even if you claim a credit for other foreign taxes, you can deduct any foreign tax that is not allowed as a credit if:

• You paid the tax to a country for which a credit is not allowed because it provides support for acts of international terrorism, or because the United States does not have diplomatic relations with it or recognize its government,
• You paid withholding tax on dividends from foreign corporations whose stock you did not hold for the required period of time,
• You paid withholding tax on income or gain (other than dividends) from property you did not hold for the required period of time,
• You paid withholding tax on income or gain to the extent you had to make related payments on positions in similar or related property,
• You participated in or cooperated with an international boycott, or
• You paid taxes in connection with the purchase or sale of oil or gas.

For more information on these items, see Taxes for Which You Can Only Take an Itemized Deduction, later, under Foreign Taxes for Which You Cannot Take a Credit.

Generally, only foreign income taxes qualify for the foreign tax credit. Other taxes, such as foreign real and personal property taxes, do not qualify. But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes.

You generally can deduct these other taxes only if they are expenses incurred in a trade or business or in the production of income. However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040).

There is a limit on the credit you can claim in a tax year. If your qualified foreign taxes exceed the credit limit, you may be able to carry over or carry back the excess to another tax year. If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year.

For more information on the limit, see How To Figure the Credit, later. For more information on carrybacks and carryovers, see Carryback and Carryover, later.

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 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.

You paid foreign taxes for the last 13 years and chose to deduct them on your U.S. income tax returns. You were timely in both filing your returns and paying your U.S. tax liability. In February 2009, you file an amended return for tax year 1998 choosing to take a credit for your 1998 foreign taxes because you now realize that the credit is more advantageous than the deduction for that year. Because the regular due date of your 1998 return was April 15, 1999, this choice is timely (within 10 years).

Because there is a limit on the credit for your 1998 foreign tax, you have unused 1998 foreign taxes. Ordinarily, you first carry back unused foreign taxes arising in 1998 to, and claim them as a credit in, the 2 preceding tax years. If you are unable to claim all of them in those 2 years, you carry them forward to the 5 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 1996 and 1997 has passed, you cannot change your choice and carry the unused 1998 foreign taxes back to tax years 1996 and 1997.

Because the 10-year periods for changing the choice have not passed for your 1999 through 2003 income tax returns, you can still choose to claim the credit for those years and carry forward any unused 1998 foreign taxes. However, you must reduce the unused 1998 foreign taxes that you carry forward by the amount that would have been allowed as a carryback if you had timely carried back the foreign tax to tax years 1996 and 1997.