Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abord - 2011 Page 32
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44•
This is your adjusted gross income figured with-
expenses allocable to that income (not including
Your foreign taxes for the year that qualify
out taking into account the foreign earned in-
the foreign housing deduction). The denomina-
for the credit are not more than $300
come exclusion, the foreign housing exclusion,
tor (bottom number) of the fraction is your total
($600 if you are filing a joint return) and
or the foreign housing deduction. Other modifi-
foreign earned income received during the tax
are reported on a payee statement.
cations are also required. For more information
year minus all deductible expenses allocable to
•
You elect this procedure.
on IRAs, see Publication 590.
that income (including the foreign housing de-
duction).
If you make this election, you cannot carry back
or carry over any unused foreign tax to or from
If foreign law taxes both earned income and
this year.
some other type of income and the taxes on the
Taxes of Foreign
other type cannot be separated, the denomina-
Separate limit. You must figure the limit on a
tor of the fraction is the total amount of income
Countries and
separate basis with regard to “passive category
subject to foreign tax minus deductible ex-
income” and “general category income” (see the
U.S. Possessions
penses allocable to that income.
instructions for Form 1116).
If you take a foreign tax credit for tax on
!
income you could have excluded under
You can take either a credit or a deduction for
Figuring the limit. In figuring taxable income
your choice to exclude foreign earned
income taxes paid to a foreign country or a U.S.
CAUTION
in each category, you take into account only the
income or your choice to exclude foreign hous-
possession. Taken as a deduction, foreign in-
amount that you must include in income on your
ing costs, one or both of the choices may be
come taxes reduce your taxable income. Taken
federal tax return. Do not take any excluded
considered revoked.
as a credit, foreign income taxes reduce your tax
amount into account.
liability. You must treat all foreign income taxes
To determine your taxable income in each
Credit for Foreign
the same way. If you take a credit for any foreign
category, deduct expenses and losses that are
income taxes, you cannot deduct any foreign
Income Taxes
definitely related to that income.
income taxes. However, you may be able to
Other expenses (such as itemized deduc-
deduct other foreign taxes. See Deduction for
If you take the foreign tax credit, you may have
tions or the standard deduction) not definitely
Other Foreign Taxes, later.
to file Form 1116 with Form 1040. Form 1116 is
related to specific items of income must be ap-
There is no rule to determine whether it is to
used to figure the amount of foreign tax paid or
your advantage to take a deduction or a credit
portioned to the foreign income in each category
accrued that can be claimed as a foreign tax
for foreign income taxes. In most cases, it is to
by multiplying them by a fraction. The numerator
credit. Do not include the amount of foreign tax
your advantage to take foreign income taxes as
(top number) of the fraction is your gross foreign
paid or accrued as withheld federal income
a tax credit, which you subtract directly from
income in the separate limit category. The de-
taxes on Form 1040, line 62.
your U.S. tax liability, rather than as a deduction
nominator (bottom number) of the fraction is
The foreign income tax for which you can
in figuring taxable income. However, if foreign
your gross income from all sources. For this
claim a credit is the amount of legal and actual
income taxes were imposed at a high rate and
purpose, gross income includes income that is
tax liability you pay or accrue during the year.
the proportion of foreign income to U.S. income
excluded under the foreign earned income pro-
The amount for which you can claim a credit is
is small, a lower final tax may result from deduct-
visions but does not include any other exempt
not necessarily the amount withheld by the for-
ing the foreign income taxes. In any event, you
income. You must use special rules for deduct-
eign country. You cannot take a foreign tax
should figure your tax liability both ways and
ing interest expenses. For more information on
credit for income tax you paid to a foreign coun-
then use the one that is better for you.
allocating and apportioning your deductions,
try that would be refunded by the foreign country
You can make or change your choice within
see Publication 514.
if you made a claim for refund.
10 years from the due date for filing the tax
Exemptions. Do not take the deduction for
return on which you are entitled to take either the
Subsidies. If a foreign country returns your
exemptions for yourself, your spouse, or your
deduction or the credit.
foreign tax payments to you in the form of a
dependents in figuring taxable income for pur-
Foreign income taxes. These are generally
subsidy, you cannot claim a foreign tax credit
poses of the limit.
income taxes you pay to any foreign country or
based on these payments. This rule applies to a
possession of the United States.
subsidy provided by any means that is deter-
Recapture of foreign losses. If you have an
mined, directly or indirectly, by reference to the
Foreign income taxes on U.S. return. For-
overall foreign loss and the loss reduces your
amount of tax, or to the base used to figure the
eign income taxes can only be taken as a credit
U.S. source income (resulting in a reduction of
tax.
on Form 1040, line 47, or as an itemized deduc-
your U.S. tax liability), you must recapture the
Some ways of providing a subsidy are re-
tion on Schedule A. These amounts cannot be
loss in later years when you have taxable in-
funds, credits, deductions, payments, or dis-
included as withheld income taxes on Form
come from foreign sources. This is done by
charges of obligations. A credit is also not
1040, line 62.
treating a part of your taxable income from for-
allowed if the subsidy is given to a person re-
eign sources in later years as U.S. source in-
Foreign taxes paid on excluded income.
lated to you, or persons who participated in a
come. This reduces the numerator of the limiting
You cannot take a credit or deduction for foreign
transaction or a related transaction with you.
fraction and the resulting foreign tax credit limit.
income taxes paid on earnings you exclude from
tax under any of the following.
Recapture of domestic losses. If you have
Limit
•
Foreign earned income exclusion.
an overall domestic loss (resulting in no U.S. tax
•
The foreign tax credit is limited to the part of your
liability), you cannot claim a foreign tax credit for
Foreign housing exclusion.
total U.S. tax that is in proportion to your taxable
taxes paid during that year. You must recapture
•
Possession exclusion.
income from sources outside the United States
the loss in later years when you have U.S.
compared to your total taxable income. The al-
If your wages are completely excluded, you can-
source taxable income. This is done by treating
lowable foreign tax credit cannot be more than
not deduct or take a credit for any of the foreign
a part of your taxable income from U.S. sources
your actual foreign tax liability.
taxes paid on your wages.
in later years as foreign source income. This
increases the numerator of the limiting fraction
If only part of your wages is excluded, you
Exemption from limit. You will not be subject
and the resulting foreign tax credit limit.
cannot deduct or take a credit for the foreign
to this limit and will not have to file Form 1116 if
income taxes allocable to the excluded part. You
you meet all three of the following requirements.
Foreign tax credit carryback and carryover.
find the taxes allocable to your excluded wages
The amount of foreign income tax not allowed as
•
by applying a fraction to the foreign taxes paid
Your only foreign source income for the
a credit because of the limit can be carried back
on foreign earned income received during the
year is passive income (dividends, inter-
1 year and carried forward 10 years.
tax year. The numerator (top number) of the
est, royalties, etc.) that is reported to you
More information on figuring the foreign tax
fraction is your excluded foreign earned income
on a payee statement (such as a Form
received during the tax year minus deductible
1099-DIV or 1099-INT).
credit can be found in Publication 514.
Page 32
Chapter 5 Exemptions, Deductions, and Credits
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