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IRS.gov Website
Publication 514
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Comprehensive Example —
Filled-In Form 1116(p26)

rule
Robert Smith, a U.S. citizen, is a salesman who lived and worked in Country X for all of 2011, 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.
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Income from United States.(p26)

rule
Robert 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.
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Income from Country X.(p26)

rule
Robert 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).
 IncomeTax
 $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)
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Foreign earned income.(p26)
Robert 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 $92,900 of the wages earned in Country X.
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Itemized deductions.(p26)

rule
Robert was entitled to the following itemized deductions.
Interest on home mortgage$5,900
Real estate tax1,500
Charitable contribution to a U.S. charity461
Employee business expenses
(See the following discussion for computation.)
734
Total$8,595
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Employee business expenses.(p26)
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:
$37,200
$130,100
×$2,400=$686
His employee business expense deduction is $734. This is the difference between his business expenses of $1,686 ($686 + $1,000 from U.S. business trip) and the 2%-of-adjusted- gross-income limit ($952).
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Forms 1116(p26)

rule
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 $37,200 (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.
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Computation of
Taxable Income(p26)

rule
Before making any entries on Form 1116, Robert must figure his taxable income on Form 1040.
His taxable income is $35,305 figured as follows:
Gross Income 
Wages (Country X)$130,100
Less: Foreign earned income exclusion92,900
 $ 37,200
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)$47,600
Less: Total Itemized Deductions8,595
Taxable income before the
personal exemption
$39,005
Less: Personal Exemption3,700
Taxable Income$35,305
On each Form 1116, Robert enters $39,005 (his taxable income before the personal exemption) on line 18 of Part III.
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Part I—Taxable
Income or Loss From
Sources Outside the
United States (for Category
Checked Above)(p27)

rule
In figuring the limit on both Forms 1116, Robert must separately determine his taxable income from Country X (Form 1116, line 7).
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Form 1116—General category income.(p27)

rule
On 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.
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Line 1a.(p27)
Robert enters the foreign wages after exclusion of $37,200 on line 1a.
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Line 2.(p27)
The unreimbursed employee business expenses related to these foreign source wages included in income are $686, as shown earlier. Robert must determine which part of the 2%-of-adjusted-gross-income limit ($952) is allocable to these employee business expenses. He figures this as follows:
$686
$1,686
×$952=$387
The denominator ($1,686) is the total allowable unreimbursed business expenses ($1,000 + $686). The amount of deductible expenses definitely related to $37,200 of taxable foreign wages is $299 ($686 − $387). He enters $299 on line 2. He attaches this explanation to his Form 1116 that he files with his tax return.
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Line 3a–g.(p27)
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 $92,900 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
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Line 4a.(p27)
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 $37,200
2.Enter gross income from all sources. Do not enter income excluded on Form 2555 $47,600
3.Divide line 1 by line 2 and enter
the result as a decimal
.7815
4.Enter deductible home mortgage interest (from lines 10 through 13 of Schedule A (Form 1040))$ 5,900
5.Multiply line 4 by line 3. Enter the result here and on Form 1116,
line 4a
$ 4,611
Robert enters this amount, $4,611, on line 4a.
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Line 6.(p27)
Robert adds the amounts on lines 2, 3g, and 4a, and enters that total ($6,299) on line 6.
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Line 7.(p27)
He subtracts the amount on line 6 from the amount on line 1a to arrive at foreign source taxable income of $30,901 in this category. Robert enters this amount on line 7.
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Form 1116—Passive category income.(p27)

rule
On this Form 1116, Robert determines the taxable income from Country X for passive interest and dividend income.
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Line 1a.(p27)
He 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.
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Line 3a–g.(p27)
Robert 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
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Line 4a.(p27)
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 $47,600
3.Divide line 1 by line 2 and enter
the result as a decimal
 .1050
4.Enter deductible home mortgage interest (from lines 10 through 13 of Schedule A (Form 1040)) $ 5,900
5.Multiply line 4 by line 3. Enter the result here and on Form 1116, line 4a $  620
He enters this amount, $620, on line 4a.
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Line 6.(p27)
Robert adds the amounts on lines 3g and 4a and enters that total ($673) on line 6.
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Line 7.(p27)
He subtracts the amount on line 6 from the amount on line 1a to arrive at foreign source taxable income of $4,327 in this category. Robert enters this amount on line 7.
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Part II—Foreign Taxes
Paid or Accrued(p27)

rule
Robert uses Part II, Form 1116, to report the foreign tax paid or accrued on income from foreign sources.
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Form 1116—General category income.(p27)

rule
On 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.
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Form 1116—Passive category income.(p27)

rule
On 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.
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Part III—Figuring
the Credit(p27)

rule
Robert figures the amount of foreign tax credit in Part III on each Form 1116.
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Form 1116—General category income.(p27)

rule
On this Form 1116, Robert figures the amount of foreign tax credit allowable for the foreign taxes paid on his wages from Country X.
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Line 10.(p27)
He has a carryover of $200 for unused foreign taxes paid in 2010 and enters that amount on line 10. He attaches a schedule showing how he figured his $200 carryover to 2011 after carrying back the unused $350 tax paid in 2010 to 2009. (This schedule is shown in Table 6.) The unused foreign tax in 2010 and the excess limit in 2009 are general category income. The unused foreign tax of $200 is carried over to general category income in 2011.
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Line 12.(p27)
On 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 ($92,900) minus a proportionate part of his definitely related business expenses ($2,400 − $686 = $1,714). The denominator of the fraction is his total foreign wages ($130,100) minus his total definitely related business expenses ($2,400).
$32,400× $92,900–$1,714
$130,100–$2,400
=$23,136 
He enters the result, $23,136 on line 12.
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Line 14.(p27)
His total foreign taxes available for credit are $9,464 ($200 carryover from 2010 + $9,264 paid in 2011 ($32,400 − $23,136)).
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Line 20.(p34)
Robert figured his tax using the Foreign Earned Income Tax Worksheet in the Form 1040 instructions.
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Line 21.(p34)
By completing the rest of Part III, Robert finds that his maximum credit is $7,825.
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Line 22.(p34)
The foreign tax credit on the general category income is the lesser of the foreign tax available for credit, $9,464, or the maximum credit on line 21, $7,825.
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Table 6. Robert's Schedule Showing Computation of His Carryover

 20092010
 
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 2010 150 
Net excess tax to be carried over to 20110+$350
Less carrybacks to 2009150
Amount carried over to 2011$200
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Form 1116—Passive category income.(p34)

rule
Robert 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 21 is $1,095.
The foreign tax credit for passive category income is limited to the amount of tax paid, $500.
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Part IV—Summary of
Credits From
Separate Parts III(p34)

rule
Robert summarizes his foreign tax credits for the two types of income on Part IV of the Form 1116 with the largest amount on line 22. He uses the Part IV of Form 1116—General category income.
Robert leaves line 29 blank because he did not participate in or cooperate with an international boycott during the tax year. The allowable foreign tax credit is $8,325 ($500 + $7,825) shown on line 30. He also enters this amount on Form 1040, line 47.
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Unused Foreign Taxes(p34)

rule
Robert now determines if he has any unused foreign taxes that can be used as a carryback or carryover to other tax years.
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General category income.(p34)

rule
Robert has 2011 unused foreign taxes of $1,439 ($9,264 − $7,825) and $200 of 2010 unused foreign taxes available as a carryover to 2012 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 2011 unused taxes to 2010 as shown in Table 6.
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Passive category income.(p34)

rule
Robert has no unused foreign taxes for 2011.
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