Publication 514
taxmap/pubs/p514-009.htm#en_us_publink1000224674Robert Smith, a U.S. citizen, is a salesman who lived and worked
in Country X for all of 2010, except for one week he spent in the United States
on business. He is single and under 65. He is a cash-basis taxpayer who uses the
calendar year as his tax year.
During the year, Robert received income from sources within Country
X and the United States.
taxmap/pubs/p514-009.htm#en_us_publink1000224675Robert received wages of $2,400 for services performed during
the one week in the United States. He also received dividend income of $3,000
from sources within the United States. None of the dividends are qualified
dividends.
taxmap/pubs/p514-009.htm#en_us_publink1000224676Robert received the following income from Country X during the
year and paid tax on the income to Country X on December 31. The conversion rate
throughout the year was 2 pesos to each U.S. dollar (2:1).
| | Income | Tax |
| | $130,100 wages | $32,400 |
| | (260,200 pesos) | (64,800 pesos) |
| | $4,000 dividend income | $450 |
| | (8,000 pesos) | (900 pesos) |
| | $1,000 interest income | $50 |
| | (2,000 pesos) | (100 pesos) |
taxmap/pubs/p514-009.htm#en_us_publink1000224678Robert is a bona fide resident of Country X and figures his allowable
exclusion of foreign earned income on Form 2555, Foreign Earned Income (not
illustrated). He excludes $91,500 of the wages earned in Country X.
taxmap/pubs/p514-009.htm#en_us_publink1000224679Robert was entitled to the following itemized deductions.
| Interest on home mortgage | $5,900 |
| Real estate tax | 1,500 |
| Charitable contribution | 461 |
Employee business expenses
(See the following discussion for computation.)
| 732 |
| Total | $8,593 |
Robert paid $3,400 of unreimbursed business expenses, of which
$1,000 were definitely related to the wages earned in the United States and
$2,400 were definitely related to wages earned in Country X.
Robert must prorate the business expenses related to the wages
earned in Country X between the wages he includes on his U.S. tax return and the
amount he excludes as foreign earned income. He cannot deduct the part of the
expenses related to the income that he excludes. He figures his allowable
expenses (related to the wages earned in Country X) as follows:
$38,600
$130,100
| × | $2,400 | = | $712 |
His employee business expense deduction is $732. This is the
difference between his business expenses of $1,712 ($712 + $1,000 from U.S.
business trip) and the 2%-of-adjusted- gross-income limit ($980).
Robert must use two Forms 1116 to figure his allowable foreign
tax credit. On one Form 1116, he will mark the block to the left of
General category income,
and figure his foreign tax credit on the wages of $38,600 (Country
X wages minus excluded wages). On the other Form 1116, he will mark the block to
the left of
Passive category income,
and figure his foreign tax credit on his interest income of
$1,000 and dividend income of $4,000.
Under the later discussions for each part on the Form 1116, Robert's
computations are explained for each Form 1116 that must be completed. Both Forms
1116 are illustrated near the end of this publication.
taxmap/pubs/p514-009.htm#en_us_publink1000224684Before making any entries on Form 1116, Robert must figure his
taxable income on Form 1040.
His taxable income is $36,757 figured as follows:
| Gross Income | |
| Wages (Country X) | $130,100 |
| Less: Foreign earned income exclusion | 91,500 |
| | $ 38,600 |
| Wages (U.S.) | 2,400 |
| Interest income (Country X) | 1,000 |
| Dividend income (U.S.) | 3,000 |
| Dividend income (Country X) | 4,000 |
| Total (Adjusted gross income) | $49,000 |
| Less: Total Itemized Deductions | 8,593 |
Taxable income before the
personal exemption
| $40,407 |
| Less: Personal Exemption | 3,650 |
| Taxable Income | $36,757 |
On each Form 1116, Robert enters $40,407 (his taxable income
before the personal exemption) on line 17 of Part III.
taxmap/pubs/p514-009.htm#en_us_publink1000224686In figuring the limit on both Forms 1116, Robert must separately
determine his taxable income from Country X (Form 1116, line 7).
taxmap/pubs/p514-009.htm#en_us_publink1000224687On this Form 1116, Robert figures his taxable income from Country
X for general category income only. He does not include his passive category
income of interest and dividends.
taxmap/pubs/p514-009.htm#en_us_publink1000224688Robert enters the foreign wages after exclusion of $38,600 on
line 1a.
taxmap/pubs/p514-009.htm#en_us_publink1000224689The unreimbursed employee business expenses related to these
foreign source wages included in income are $712, as shown earlier. Robert must
determine which part of the 2%-of-adjusted-gross-income limit ($980) is
allocable to these employee business expenses. He figures this as follows:
The denominator ($1,712) is the total allowable unreimbursed
business expenses ($1,000 + $712). The amount of deductible expenses definitely
related to $38,600 of taxable foreign wages is $304 ($712 − $408). He
enters $304 on line 2. He attaches this explanation to his Form 1116 that he
files with his tax return.
Robert enters $1,500 on line 3a. This is his real estate tax,
which is not definitely related to income from any source. Robert must prorate
this itemized deduction by using the ratio of gross income from Country X in
general category income (line 3d) to his gross income from all sources (line
3e). For this purpose, gross income from Country X and gross income from all
sources include the $91,500 of wages that qualify for the foreign earned income
exclusion. He figures the ratable part of deductions, $1,389, as follows and
enters it on line 3g.
$130,100
$140,500
| × | $1,500 | = | $1,389 |
Robert apportions his qualified home mortgage interest, $5,900,
to general category income as follows:
| 1. | Enter gross foreign source income of the type shown on Form
1116.
Do not
enter income excluded on Form 2555
| $38,600 |
| 2. | Enter gross income from all sources.
Do not
enter income excluded on Form 2555
| $49,000 |
| 3. | Divide line 1 by line 2 and enter
the result as a decimal
| .7878 |
| 4. | Enter deductible home mortgage interest (from Schedule A
(Form 1040)) | $ 5,900 |
| 5. | Multiply line 4 by line 3. Enter the result here and on Form
1116,
line 4a
| $ 4,648 |
Robert enters this amount, $4,648, on line 4a.
Robert adds the amounts on lines 2, 3g, and 4a, and enters that
total ($6,341) on line 6.
taxmap/pubs/p514-009.htm#en_us_publink1000224696He subtracts the amount on line 6 from the amount on line 1a
to arrive at foreign source taxable income of $32,259 in this category. Robert
enters this amount on line 7.
taxmap/pubs/p514-009.htm#en_us_publink1000224697On this Form 1116, Robert determines the taxable income from
Country X for passive interest and dividend income.
taxmap/pubs/p514-009.htm#en_us_publink1000224698He adds the $1,000 interest income and the $4,000 dividend income
($5,000) from Country X and enters the total ($5,000) on line 1a. None of the
dividends are qualified dividends.
taxmap/pubs/p514-009.htm#en_us_publink1000224699Robert figures the part of his itemized deduction (real estate
tax) allocable to passive category income as follows and enters the amount on
line 3g.
$5,000
$140,500
| × | $1,500 | = | $53 |
Robert apportions the qualified home mortgage interest to passive
category income as follows:
| 1. | Enter gross foreign source income of the type shown on Form
1116. Do not enter income excluded on Form 2555 | | $ 5,000 |
| 2. | Enter gross income from all sources. Do not enter income
excluded on Form 2555 | | $49,000 |
| 3. | Divide line 1 by line 2 and enter
the result as a decimal
| | .1020 |
| 4. | Enter deductible home mortgage interest (from Schedule A
(Form 1040)) | | $ 5,900 |
| 5. | Multiply line 4 by line 3. Enter the result here and on Form
1116, line 4a | | $ 602 |
He enters this amount, $602, on line 4a.
Robert adds the amounts on lines 3g and 4a and enters that total
($655) on line 6.
taxmap/pubs/p514-009.htm#en_us_publink1000224704He subtracts the amount on line 6 from the amount on line 1a
to arrive at foreign source taxable income of $4,345 in this category. Robert
enters this amount on line 7.
taxmap/pubs/p514-009.htm#en_us_publink1000224705Robert uses Part II, Form 1116, to report the foreign tax paid
or accrued on income from foreign sources.
taxmap/pubs/p514-009.htm#en_us_publink1000224706On this Form 1116, Robert enters the amount of foreign taxes
paid (withheld at source), in foreign currency and in U.S. dollars, on the wages
from Country X.
taxmap/pubs/p514-009.htm#en_us_publink1000224707On this Form 1116, Robert enters the amount of foreign taxes
paid, in foreign currency and in U.S. dollars, on the interest and dividend
income.
taxmap/pubs/p514-009.htm#en_us_publink1000224708Robert figures the amount of foreign tax credit in Part III on
each Form 1116.
taxmap/pubs/p514-009.htm#en_us_publink1000224709On this Form 1116, Robert figures the amount of foreign tax credit
allowable for the foreign taxes paid on his wages from Country X.
taxmap/pubs/p514-009.htm#en_us_publink1000224710
He has a carryover of $200 for unused foreign taxes paid in 2009 and enters that
amount on line 10. He attaches a schedule showing how he figured his $200
carryover to 2010 after carrying back the unused $350 tax paid in 2009 to 2008.
(This schedule is shown in Table 6.) The unused foreign tax in 2009 and the
excess limit in 2008 are general category income. The unused foreign tax of $200
is carried over to general category income in 2010.
taxmap/pubs/p514-009.htm#en_us_publink1000224711On line 12, Robert must reduce the total foreign taxes paid by
the amount related to the wages he excludes as foreign earned income. To do
this, he multiplies the $32,400 foreign tax he paid on his foreign wages by a
fraction. The numerator of the fraction is his foreign earned income exclusion
($91,500) minus a proportionate part of his definitely related business expenses
($2,400 − $712 = $1,688). The denominator of the fraction is his total
foreign wages ($130,100) minus his total definitely related business expenses
($2,400).
| $32,400 | × | $91,500–$1,688
$130,100–$2,400
| = | $22,787 | |
He enters the result, $22,787 on line 12.
His total foreign taxes available for credit are $9,813 ($200
carryover from 2009 + $9,613 paid in 2010 ($32,400 − $22,787)).
taxmap/pubs/p514-009.htm#en_us_publink1000242798Robert figured his tax using the Foreign Earned Income Tax Worksheet
in the Form 1040 instructions.
taxmap/pubs/p514-009.htm#en_us_publink1000224714By completing the rest of Part III, Robert finds that his maximum
credit is $8,212.
taxmap/pubs/p514-009.htm#en_us_publink1000224715The foreign tax credit on the general category income is the
lesser of the foreign tax available for credit, $9,813, or the maximum credit on
line 20, $8,212.
taxmap/pubs/p514-009.htm#en_us_publink1000244979
Table 6. Robert's Schedule Showing Computation of His
Carryover
| | 2008 | 2009 |
| |
| Maximum credit allowable under limit | $750 | $1,200 |
| Foreign tax paid in tax year | 600 | 1,550 |
| Unused foreign tax (+) to be carried over or excess of limit
(-) over tax | −$150 | +$350 |
| Tax credit carried back from 2009 | 150 | |
| Net excess tax to be carried over to 2010 | 0 | +$350 |
| Less carrybacks to 2008 | 150 |
| Amount carried over to 2010 | $200 |
taxmap/pubs/p514-009.htm#en_us_publink1000224716Robert now figures the foreign tax credit allowable for the foreign
taxes he paid on his interest and dividend income from Country X.
By completing Part III of Form 1116, he finds that his maximum
credit for passive category income on line 20 is $1,106.
The foreign tax credit for passive category income is limited
to the amount of tax paid, $500.
taxmap/pubs/p514-009.htm#en_us_publink1000224717Robert summarizes his foreign tax credits for the two types of
income on Part IV of the Form 1116 with the largest amount on line 21. He uses
the Part IV of Form 1116—General category income.
Robert leaves line 28 blank because he did not participate in
or cooperate with an international boycott during the tax year. The allowable
foreign tax credit is $8,712 ($500 + $8,212), shown on line 29. He also enters
this amount on Form 1040, line 47.
taxmap/pubs/p514-009.htm#en_us_publink1000244962Robert now determines if he has any unused foreign taxes that
can be used as a carryback or carryover to other tax years.
taxmap/pubs/p514-009.htm#en_us_publink1000244949Robert has 2010 unused foreign taxes of $1,401 ($9,613 −
$8,212) and $200 of 2009 unused foreign taxes available as a carryover to 2011
and later years. (The foreign taxes related to his foreign earned income
exclusion are not available for carryover.) He cannot carry back any part of the
2010 unused taxes to 2009 as shown in Table 6.
taxmap/pubs/p514-009.htm#en_us_publink1000244956Robert has no unused foreign taxes for 2010.
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