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 2012, 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) |
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 $95,100 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 to a U.S. charity | 461 |
Employee business expenses
(See the following discussion for computation.)
| 738 |
| Total | $8,599 |
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:
$35,000
$130,100
| × | $2,400 | = | $646 |
His employee business expense deduction is $738. This is the difference between his business expenses of $1,646 ($646 + $1,000 from U.S. business trip) and the 2%-of-adjusted- gross-income limit
($908).
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.
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 $33,001 figured as follows:
| Gross Income | |
| Wages (Country X) | $130,100 |
| Less: Foreign earned income exclusion | 95,100 |
| | $ 35,000 |
| 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) | $45,400 |
| Less: Total Itemized Deductions | 8,599 |
Taxable income before the
personal exemption
| $36,801 |
| Less: Personal Exemption | 3,800 |
| Taxable Income | $33,001 |
On each Form 1116, Robert enters $36,801 (his taxable income before the personal exemption) on line 18 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 $35,000 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 $646, as shown earlier. Robert must determine which part of the 2%-of-adjusted-gross-income limit ($908) is allocable to these employee business expenses. He figures this as
follows:
The denominator ($1,646) is the total allowable unreimbursed business expenses ($1,000 + $646). The amount of deductible expenses definitely related to $35,000 of taxable foreign wages is $290 ($646 − $356). He enters $290 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 $95,100 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 deductible 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
| $35,000 |
| 2. | Enter gross income from all sources.
Do not
enter income excluded on Form 2555
| $45,400 |
| 3. | Divide line 1 by line 2 and enter
the result as a decimal
| .7709 |
| 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
| $ 4,548 |
Robert enters this amount, $4,548, on line 4a.
Robert adds the amounts on lines 2, 3g, and 4a, and enters that total ($6,227) 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 $28,773 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 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 deductible 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 | | $45,400 |
| 3. | Divide line 1 by line 2 and enter
the result as a decimal
| | .1101 |
| 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 | | $ 650 |
He enters this amount, $650, on line 4a.
Robert adds the amounts on lines 3g and 4a and enters that total ($703) 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 $4,297 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 2011 and enters that
amount on line 10. He attaches a schedule showing how he figured his $200
carryover to 2012 after carrying back the unused $350 tax paid in 2011 to 2010.
(This schedule is shown in Table 6.) The unused foreign tax in 2011 and the
excess limit in 2010 are general category income. The unused foreign tax of $200
is carried over to general category income in 2012.
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 ($95,100) minus a proportionate part of his definitely related business expenses ($2,400 − $646 = $1,754). The denominator of the fraction is his total foreign wages ($130,100) minus his total definitely related business expenses
($2,400).
| $32,400 | × | $95,100 – $1,754
$130,100 – $2,400
| = | $23,684 | |
He enters the result, $23,684, on line 12.
His total foreign taxes available for credit are $8,916 ($200 carryover from 2011 + $8,716 paid in 2012 ($32,400 − $23,684)).
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
$7,219.
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, $8,916, or the maximum credit on line 21,
$7,219.
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 21 is
$1,079.
The foreign tax credit for passive category income is limited to the amount of tax paid,
$500.
taxmap/pubs/p514-009.htm#en_us_publink1000272094Table 6. Robert's Schedule Showing Computation of His
Carryover
| | 2010 | 2011 |
| |
| 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 2011 | 150 | |
| Net excess tax to be carried over to 2012 | 0 | +$350 |
| Less carrybacks to 2010 | 150 |
| Amount carried over to 2012 | $200 |
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 $7,719 ($500 + $7,219) shown on line 30. 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 2012 unused foreign taxes of $1,697 ($8,916 − $7,219) and $200 of 2011 unused foreign taxes available as a carryover to 2013 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 2012 unused taxes to 2011 as shown in Table 6.
taxmap/pubs/p514-009.htm#en_us_publink1000244956Robert has no unused foreign taxes for 2012.
 | Worksheet. Additional Foreign Tax Credit on U.S. income* | I.
U.S. tax on U.S. source income | COL. A | COL. B |
|---|
| | (U.S. source rules) | | | | 1. | Dividends | | | | | | 2. | Interest | | | | | | 3. | Royalties | | | | | | 4. | Capital gain | | | | | | 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 | | | | | | | b. | Direct expenses | | | | | | | c. | Net rent. Subtract line 6b from line 6a | | | | | | 7. | Other
| | | | | | 8. | Add lines 1-5a, 6a and 7 in column A and lines 1-4, 5c, 6c and 7 in column
B | | | | | | 9. | Enter tax from Form 1040 (see instructions) | | | | | 10. | Enter adjusted gross income (AGI) from line 37, 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 U.S. | | | | | | 13. | a. | Identify
| | | | | | | b. | Multiply line 13a by line 11 | | | | B. | Items partly taxable by U.S. | | | | 14. | a. | Identify
| | | | | | | b. | Treaty rate | | | | | | | c. | Allowable tax at source (Multiply line 14a by line 14b) | | | | | 15. | a. | Identify
| | | | | | | b. | Treaty rate | | | | | | | 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 U.S. 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 Form 1116.
| |
| * See the discussion on
Tax Treaties
for information on when you should use this worksheet.
|
|
taxmap/pubs/p514-009.htm#en_us_publink1000297437 | Worksheet Instructions. Additional Foreign Tax Credit on U.S.
Income | Note.
Complete a separate worksheet for each separate limit income category.
| | | | | STEP I | | 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 amount from Form 1040, line 44.
| | | | | STEP II | | 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 14-15
Identify each type and amount of income. Use the specified treaty rate. (See Publication
901, U.S. Tax Treaties.)
| | | PART C
Identify the items in the separate limit income category not taxable at source by the United States under the treaty.
| | | | | STEP III | | 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.
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