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1040nr ez Publication 529 - Main Content Table of Contents Deductions Subject to the 2% LimitUnreimbursed Employee Expenses Tax Preparation Fees Other Expenses Deductions Not Subject to the 2% LimitList of Deductions Nondeductible ExpensesList of Nondeductible Expenses How To ReportWho can use Form 2106-EZ. 1040nr ez Computer used in a home office. 1040nr ez Example How To Get Tax HelpLow Income Taxpayer Clinics Deductions Subject to the 2% Limit You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040 or Form 1040NR). 1040nr ez You can claim the amount of expenses that is more than 2% of your adjusted gross income. 1040nr ez You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. 1040nr ez Your adjusted gross income is the amount on Form 1040, line 38, or Form 1040NR, line 37. 1040nr ez Generally, you apply the 2% limit after you apply any other deduction limit. 1040nr ez For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed later under Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging ) before you apply the 2% limit. 1040nr ez Deductions subject to the 2% limit are discussed in the following three categories. 1040nr ez Unreimbursed employee expenses (Schedule A (Form 1040), line 21 or Schedule A (Form 1040NR), line 7). 1040nr ez Tax preparation fees (Schedule A (Form 1040), line 22 or Schedule A (Form 1040NR), line 8). 1040nr ez Other expenses (Schedule A (Form 1040), line 23 or Schedule A (Form 1040NR), line 9). 1040nr ez Unreimbursed Employee Expenses Generally, the following expenses are deducted on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. 1040nr ez You can deduct only unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. 1040nr ez An expense is ordinary if it is common and accepted in your trade, business, or profession. 1040nr ez An expense is necessary if it is appropriate and helpful to your business. 1040nr ez An expense does not have to be required to be considered necessary. 1040nr ez You may be able to deduct the following items as unreimbursed employee expenses. 1040nr ez Business bad debt of an employee. 1040nr ez Business liability insurance premiums. 1040nr ez Damages paid to a former employer for breach of an employment contract. 1040nr ez Depreciation on a computer your employer requires you to use in your work. 1040nr ez Dues to a chamber of commerce if membership helps you do your job. 1040nr ez Dues to professional societies. 1040nr ez Educator expenses. 1040nr ez Home office or part of your home used regularly and exclusively in your work. 1040nr ez Job search expenses in your present occupation. 1040nr ez Laboratory breakage fees. 1040nr ez Legal fees related to your job. 1040nr ez Licenses and regulatory fees. 1040nr ez Malpractice insurance premiums. 1040nr ez Medical examinations required by an employer. 1040nr ez Occupational taxes. 1040nr ez Passport for a business trip. 1040nr ez Repayment of an income aid payment received under an employer's plan. 1040nr ez Research expenses of a college professor. 1040nr ez Rural mail carriers' vehicle expenses. 1040nr ez Subscriptions to professional journals and trade magazines related to your work. 1040nr ez Tools and supplies used in your work. 1040nr ez Travel, transportation, meals, entertainment, gifts, and local lodging related to your work. 1040nr ez Union dues and expenses. 1040nr ez Work clothes and uniforms if required and not suitable for everyday use. 1040nr ez Work-related education. 1040nr ez Business Bad Debt A business bad debt is a loss from a debt created or acquired in your trade or business. 1040nr ez Any other worthless debt is a business bad debt only if there is a very close relationship between the debt and your trade or business when the debt becomes worthless. 1040nr ez A debt has a very close relationship to your trade or business of being an employee if your main motive for incurring the debt is a business reason. 1040nr ez Example. 1040nr ez You make a bona fide loan to the corporation you work for. 1040nr ez It fails to pay you back. 1040nr ez You had to make the loan in order to keep your job. 1040nr ez You have a business bad debt as an employee. 1040nr ez More information. 1040nr ez   For more information on business bad debts, see chapter 10 in Publication 535. 1040nr ez For information on nonbusiness bad debts, see chapter 4 in Publication 550, Investment Income and Expenses. 1040nr ez Business Liability Insurance You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job. 1040nr ez Damages for Breach of Employment Contract If you break an employment contract, you can deduct damages you pay your former employer if the damages are attributable to the pay you received from that employer. 1040nr ez Depreciation on Computers You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: For the convenience of your employer, and Required as a condition of your employment. 1040nr ez For the convenience of your employer. 1040nr ez   This means that your use of the computer is for a substantial business reason of your employer. 1040nr ez You must consider all facts in making this determination. 1040nr ez Use of your computer during your regular working hours to carry on your employer's business is generally for the convenience of your employer. 1040nr ez Required as a condition of your employment. 1040nr ez   This means that you cannot properly perform your duties without the computer. 1040nr ez Whether you can properly perform your duties without it depends on all the facts and circumstances. 1040nr ez It is not necessary that your employer explicitly requires you to use your computer. 1040nr ez But neither is it enough that your employer merely states that your use of the item is a condition of your employment. 1040nr ez Example. 1040nr ez You are an engineer with an engineering firm. 1040nr ez You occasionally take work home at night rather than work late at the office. 1040nr ez You own and use a computer that is similar to the one you use at the office to complete your work at home. 1040nr ez Since your use of the computer is not for the convenience of your employer and is not required as a condition of your employment, you cannot claim a depreciation deduction for it. 1040nr ez Which depreciation method to use. 1040nr ez   The depreciation method you use depends on whether you meet the more-than-50%-use test. 1040nr ez More-than-50%-use test met. 1040nr ez   You meet this test if you use the computer more than 50% in your work. 1040nr ez If you meet this test, you can claim accelerated depreciation under the General Depreciation System (GDS). 1040nr ez In addition, you may be able to take the section 179 deduction for the year you place the item in service. 1040nr ez More-than-50%-use test not met. 1040nr ez   If you do not meet the more-than-50%-use test, you are limited to the straight line method of depreciation under the Alternative Depreciation System (ADS). 1040nr ez You also cannot claim the section 179 deduction. 1040nr ez (But if you use your computer in a home office, see the exception below. 1040nr ez ) Investment use. 1040nr ez   Your use of a computer in connection with investments (described later under Other Expenses ) does not count as use in your work. 1040nr ez However, you can combine your investment use with your work use in figuring your depreciation deduction. 1040nr ez Exception for computer used in a home office. 1040nr ez   The more-than-50%-use test does not apply to a computer used only in a part of your home that meets the requirements described later under Home Office . 1040nr ez You can claim accelerated depreciation using GDS for a computer used in a qualifying home office, even if you do not use it more than 50% in your work. 1040nr ez You also may be able to take a section 179 deduction for the year you place the computer in service. 1040nr ez See Computer used in a home office under How To Report, later. 1040nr ez More information. 1040nr ez   For more information on depreciation and the section 179 deduction for computers and other items used in a home office, see Business Furniture and Equipment in Publication 587. 1040nr ez Publication 946 has detailed information about the section 179 deduction and depreciation deductions using GDS and ADS. 1040nr ez Reporting your depreciation deduction. 1040nr ez    See How To Report, later, for information about reporting a deduction for depreciation. 1040nr ez You must keep records to prove your percentage of business and investment use. 1040nr ez Dues to Chambers of Commerce and Professional Societies You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. 1040nr ez Similar organizations include: Boards of trade, Business leagues, Civic or public service organizations, Real estate boards, and Trade associations. 1040nr ez Lobbying and political activities. 1040nr ez    You may not be able to deduct that part of your dues that is for certain lobbying and political activities. 1040nr ez See Lobbying Expenses under Nondeductible Expenses, later. 1040nr ez Educator Expenses If you were an eligible educator in 2013, you can deduct up to $250 of qualified expenses you paid in 2013 as an adjustment to gross income on Form 1040, line 23, rather than as a miscellaneous itemized deduction. 1040nr ez If you file Form 1040A, you can deduct these expenses on line 16. 1040nr ez If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. 1040nr ez However, neither spouse can deduct more than $250 of his or her qualified expenses. 1040nr ez Eligible educator. 1040nr ez   An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in school for at least 900 hours during a school year. 1040nr ez Qualified expenses. 1040nr ez   Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. 1040nr ez An ordinary expense is one that is common and accepted in your educational field. 1040nr ez A necessary expense is one that is helpful and appropriate for your profession as an educator. 1040nr ez An expense does not have to be required to be considered necessary. 1040nr ez   Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education. 1040nr ez You must reduce your qualified expenses by the following amounts. 1040nr ez Excludable U. 1040nr ez S. 1040nr ez series EE and I savings bond interest from Form 8815. 1040nr ez Nontaxable qualified state tuition program earnings. 1040nr ez Nontaxable earnings from Coverdell education savings accounts. 1040nr ez Any reimbursements you received for those expenses that were not reported to you on your Form W-2, box 1. 1040nr ez Educator expenses over limit. 1040nr ez   If you were an educator in 2013 and you had qualified expenses that you cannot take as an adjustment to gross income, you can deduct the rest as an itemized deduction subject to the 2% limit. 1040nr ez Home Office If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. 1040nr ez You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: As your principal place of business for any trade or business, As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or In the case of a separate structure not attached to your home, in connection with your trade or business. 1040nr ez The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. 1040nr ez Principal place of business. 1040nr ez   If you have more than one place of business, the business part of your home is your principal place of business if: You use it regularly and exclusively for administrative or management activities of your trade or business, and You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 1040nr ez   Otherwise, the location of your principal place of business generally depends on the relative importance of the activities performed at each location and the time spent at each location. 1040nr ez You should keep records that will give the information needed to figure the deduction according to these rules. 1040nr ez Also keep canceled checks, substitute checks, or account statements and receipts of the expenses paid to prove the deductions you claim. 1040nr ez More information. 1040nr ez   See Publication 587 for more detailed information and a worksheet for figuring the deduction. 1040nr ez Job Search Expenses You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. 1040nr ez You cannot deduct these expenses if: You are looking for a job in a new occupation, There was a substantial break between the ending of your last job and your looking for a new one, or You are looking for a job for the first time. 1040nr ez Employment and outplacement agency fees. 1040nr ez    You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. 1040nr ez Employer pays you back. 1040nr ez   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. 1040nr ez See Recoveries in Publication 525. 1040nr ez Employer pays the employment agency. 1040nr ez   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. 1040nr ez Résumé. 1040nr ez   You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation. 1040nr ez Travel and transportation expenses. 1040nr ez   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. 1040nr ez You can deduct the travel expenses if the trip is primarily to look for a new job. 1040nr ez The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. 1040nr ez   Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area. 1040nr ez    You can choose to use the standard mileage rate to figure your car expenses. 1040nr ez The 2013 rate for business use of a vehicle is 56½ cents per mile. 1040nr ez See Publication 463 for more information on travel and car expenses. 1040nr ez Legal Fees You can deduct legal fees related to doing or keeping your job. 1040nr ez Licenses and Regulatory Fees You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. 1040nr ez Occupational Taxes You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. 1040nr ez If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return. 1040nr ez Repayment of Income Aid Payment An “income aid payment” is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. 1040nr ez If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment. 1040nr ez Research Expenses of a College Professor If you are a college professor, you can deduct your research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to your teaching duties. 1040nr ez You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. 1040nr ez However, you cannot deduct the cost of travel as a form of education. 1040nr ez Rural Mail Carriers' Vehicle Expenses If your expenses to use a vehicle in performing services as a rural mail carrier are more than the amount of your reimbursements, you can deduct the unreimbursed expenses. 1040nr ez See chapter 4 of Publication 463 for more information. 1040nr ez Tools Used in Your Work Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. 1040nr ez You can depreciate the cost of tools that have a useful life substantially beyond the tax year. 1040nr ez For more information about depreciation, see Publication 946. 1040nr ez Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging If you are an employee and have ordinary and necessary business-related expenses for travel away from home, local transportation, entertainment, and gifts, you may be able to deduct these expenses. 1040nr ez Generally, you must file Form 2106 or Form 2106-EZ to claim these expenses. 1040nr ez Travel expenses. 1040nr ez   Travel expenses are those incurred while traveling away from home for your employer. 1040nr ez You can deduct travel expenses paid or incurred in connection with a temporary work assignment. 1040nr ez Generally, you cannot deduct travel expenses paid or incurred in connection with an indefinite work assignment. 1040nr ez   Travel expenses may include: The cost of getting to and from your business destination (air, rail, bus, car, etc. 1040nr ez ), Meals and lodging while away from home, Taxi fares, Baggage charges, and Cleaning and laundry expenses. 1040nr ez   Travel expenses are discussed more fully in chapter 1 of Publication 463. 1040nr ez Temporary work assignment. 1040nr ez    If your assignment or job away from home in a single location is realistically expected to last (and does in fact last) for 1 year or less, it is temporary, unless there are facts and circumstances that indicate it is not. 1040nr ez Indefinite work assignment. 1040nr ez   If your assignment or job away from home in a single location is realistically expected to last for more than 1 year, it is indefinite, whether or not it actually lasts for more than 1 year. 1040nr ez If your assignment or job away from home in a single location is realistically expected to last for 1 year or less, but at some later date it is realistically expected to exceed 1 year, it will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that your realistic expectation changes, and it will be treated as indefinite after that date. 1040nr ez Federal crime investigation and prosecution. 1040nr ez   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule for deducting temporary travel expenses. 1040nr ez This means that you may be able to deduct travel expenses even if you are away from your tax home for more than 1 year. 1040nr ez   To qualify, the Attorney General must certify that you are traveling: For the Federal Government, In a temporary duty status, and To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime. 1040nr ez Armed Forces reservists traveling more than 100 miles from home. 1040nr ez   If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct some of your travel expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. 1040nr ez The amount of expenses you can deduct as an adjustment to gross income is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. 1040nr ez The balance, if any, is reported on Schedule A. 1040nr ez   You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Naval, Marine Corps, Air Force, Coast Guard Reserve, the Army National Guard of the United States, the Air National Guard of the United States, or the Reserve Corps of the Public Health Service. 1040nr ez   For more information on travel expenses, see Publication 463. 1040nr ez Local transportation expenses. 1040nr ez   Local transportation expenses are the expenses of getting from one workplace to another when you are not traveling away from home. 1040nr ez They include the cost of transportation by air, rail, bus, taxi, and the cost of using your car. 1040nr ez   You can choose to use the standard mileage rate to figure your car expenses. 1040nr ez The 2013 rate for business use of a vehicle is 56½ cents per mile. 1040nr ez    In general, the costs of commuting between your residence and your place of business are nondeductible. 1040nr ez Work at two places in a day. 1040nr ez   If you work at two places in a day, whether or not for the same employer, you can generally deduct the expenses of getting from one workplace to the other. 1040nr ez Temporary work location. 1040nr ez   You can deduct expenses incurred in going between your home and a temporary work location if at least one of the following applies. 1040nr ez The work location is outside the metropolitan area where you live and normally work. 1040nr ez You have at least one regular work location (other than your home) for the same trade or business. 1040nr ez (If this applies, the distance between your home and the temporary work location does not matter. 1040nr ez )   For this purpose, a work location is generally considered temporary if your work there is realistically expected to last (and does in fact last) for 1 year or less. 1040nr ez It is not temporary if your work there is realistically expected to last for more than 1 year, even if it actually lasts for 1 year or less. 1040nr ez If your work there initially is realistically expected to last for 1 year or less, but later is realistically expected to last for more than 1 year, the work location is generally considered temporary until the date your realistic expectation changes and not temporary after that date. 1040nr ez For more information, see chapter 1 of Publication 463. 1040nr ez Home office. 1040nr ez   You can deduct expenses incurred in going between your home and a workplace if your home is your principal place of business for the same trade or business. 1040nr ez (In this situation, whether the other workplace is temporary or regular and its distance from your home do not matter. 1040nr ez ) See Home Office , earlier, for a discussion on the use of your home as your principal place of business. 1040nr ez Meals and entertainment. 1040nr ez   Generally, you can deduct entertainment expenses (including entertainment-related meals) only if they are directly related to the active conduct of your trade or business. 1040nr ez However, the expense only needs to be associated with the active conduct of your trade or business if it directly precedes or follows a substantial and bona fide business-related discussion. 1040nr ez   You can deduct only 50% of your business-related meal and entertainment expenses unless the expenses meet certain exceptions. 1040nr ez You apply this 50% limit before you apply the 2%-of-adjusted-gross-income limit. 1040nr ez Meals when subject to “hours of service” limits. 1040nr ez   You can deduct 80% of your business-related meal expenses if you consume the meals during or incident to any period subject to the Department of Transportation's “hours of service” limits. 1040nr ez You apply this 80% limit before you apply the 2%-of-adjusted-gross-income limit. 1040nr ez Gift expenses. 1040nr ez   You can generally deduct up to $25 of business gifts you give to any one individual during the year. 1040nr ez The following items do not count toward the $25 limit. 1040nr ez Identical, widely distributed items costing $4 or less that have your name clearly and permanently imprinted. 1040nr ez Signs, racks, and promotional materials to be displayed on the business premises of the recipient. 1040nr ez Local lodging. 1040nr ez   If your employer provides or requires you to obtain lodging while you are not traveling away from home, you can deduct the cost of the lodging if it is: on a temporary basis, necessary for you to participate in or be available for a business meeting or employer function, and the costs are ordinary and necessary, but not lavish or extravagant. 1040nr ez   If your employer provides the lodging or reimburses you for the cost of the lodging, you can deduct the cost only if the value or the reimbursement is included in your gross income because it is reported as wages on your Form W-2. 1040nr ez Additional information. 1040nr ez    See Publication 463 for more information on travel, transportation, meal, entertainment, and gift expenses, and reimbursements for these expenses. 1040nr ez Union Dues and Expenses You can deduct dues and initiation fees you pay for union membership. 1040nr ez You can also deduct assessments for benefit payments to unemployed union members. 1040nr ez However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. 1040nr ez Also, you cannot deduct contributions to a pension fund even if the union requires you to make the contributions. 1040nr ez You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. 1040nr ez See Lobbying Expenses under Nondeductible Expenses, later. 1040nr ez Work Clothes and Uniforms You can deduct the cost and upkeep of work clothes if the following two requirements are met. 1040nr ez You must wear them as a condition of your employment. 1040nr ez The clothes are not suitable for everyday wear. 1040nr ez It is not enough that you wear distinctive clothing. 1040nr ez The clothing must be specifically required by your employer. 1040nr ez Nor is it enough that you do not, in fact, wear your work clothes away from work. 1040nr ez The clothing must not be suitable for taking the place of your regular clothing. 1040nr ez Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc. 1040nr ez ). 1040nr ez Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear. 1040nr ez However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. 1040nr ez Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible. 1040nr ez Protective clothing. 1040nr ez   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. 1040nr ez   Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers. 1040nr ez Military uniforms. 1040nr ez   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. 1040nr ez However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. 1040nr ez In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses. 1040nr ez   If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive. 1040nr ez   If you are a student at an armed forces academy, you cannot deduct the cost of your uniforms if they replace regular clothing. 1040nr ez However, you can deduct the cost of insignia, shoulder boards, and related items. 1040nr ez    You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school. 1040nr ez Work-Related Education You can deduct expenses you have for education, even if the education may lead to a degree, if the education meets at least one of the following two tests. 1040nr ez It maintains or improves skills required in your present work. 1040nr ez It is required by your employer or the law to keep your salary, status, or job, and the requirement serves a business purpose of your employer. 1040nr ez You cannot deduct expenses you have for education, even though one or both of the preceding tests are met, if the education: Is needed to meet the minimum educational requirements to qualify you in your trade or business, or Is part of a program of study that will lead to qualifying you in a new trade or business. 1040nr ez If your education qualifies, you can deduct expenses for tuition, books, supplies, laboratory fees, and similar items, and certain transportation costs. 1040nr ez If the education qualifies you for a new trade or business, you cannot deduct the educational expenses even if you do not intend to enter that trade or business. 1040nr ez Travel as education. 1040nr ez   You cannot deduct the cost of travel that in itself constitutes a form of education. 1040nr ez For example, a French teacher who travels to France to maintain general familiarity with the French language and culture cannot deduct the cost of the trip as an educational expense. 1040nr ez More information. 1040nr ez    See Publication 970, Tax Benefits for Education, for a complete discussion of the deduction for work-related education expenses. 1040nr ez Education Expenses During Unemployment If you stop working for a year or less in order to get education in order to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. 1040nr ez Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. 1040nr ez Tax Preparation Fees You can usually deduct tax preparation fees on the return for the year in which you pay them. 1040nr ez Thus, on your 2013 return, you can deduct fees paid in 2013 for preparing your 2012 return. 1040nr ez These fees include the cost of tax preparation software programs and tax publications. 1040nr ez They also include any fee you paid for electronic filing of your return. 1040nr ez See Tax preparation fees under How To Report, later. 1040nr ez Other Expenses You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit. 1040nr ez On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9, you can deduct the ordinary and necessary expenses that you pay: To produce or collect income that must be included in your gross income, To manage, conserve, or maintain property held for producing such income, or To determine, contest, pay, or claim a refund of any tax. 1040nr ez You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonable and closely related to these purposes. 1040nr ez These other expenses include the following items. 1040nr ez Appraisal fees for a casualty loss or charitable contribution. 1040nr ez Casualty and theft losses from property used in performing services as an employee. 1040nr ez Clerical help and office rent in caring for investments. 1040nr ez Depreciation on home computers used for investments. 1040nr ez Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust. 1040nr ez Fees to collect interest and dividends. 1040nr ez Hobby expenses, but generally not more than hobby income. 1040nr ez Indirect miscellaneous deductions from pass-through entities. 1040nr ez Investment fees and expenses. 1040nr ez Legal fees related to producing or collecting taxable income or getting tax advice. 1040nr ez Loss on deposits in an insolvent or bankrupt financial institution. 1040nr ez Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you. 1040nr ez Repayments of income. 1040nr ez Repayments of social security benefits. 1040nr ez Safe deposit box rental, except for storing jewelry and other personal effects. 1040nr ez Service charges on dividend reinvestment plans. 1040nr ez Tax advice fees. 1040nr ez Trustee's fees for your IRA, if separately billed and paid. 1040nr ez If the expenses you pay produce income that is only partially taxable, see Tax-Exempt Income Expenses, later, under Nondeductible Expenses. 1040nr ez Appraisal Fees You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property. 1040nr ez Casualty and Theft Losses You can deduct a casualty or theft loss as a miscellaneous itemized deduction subject to the 2% limit if you used the damaged or stolen property in performing services as an employee. 1040nr ez First report the loss in Section B of Form 4684, Casualties and Thefts. 1040nr ez You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. 1040nr ez To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. 1040nr ez For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040nr ez Clerical Help and Office Rent You can deduct office expenses, such as rent and clerical help, that you have in connection with your investments and collecting the taxable income on them. 1040nr ez Credit or Debit Card Convenience Fees You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. 1040nr ez The fees are deductible on the return for the year in which you paid them. 1040nr ez For example, fees charged to payments made in 2013 can be claimed on the 2013 tax return. 1040nr ez Depreciation on Home Computer You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). 1040nr ez You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. 1040nr ez But if you work as an employee and also use the computer in that work, see Depreciation on Computers under Unreimbursed Employee Expenses, earlier. 1040nr ez For more information on depreciation, see Publication 946. 1040nr ez Excess Deductions of an Estate If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. 1040nr ez Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. 1040nr ez The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. 1040nr ez For more information, see Termination of Estate in Publication 559, Survivors, Executors, and Administrators. 1040nr ez Fees To Collect Interest and Dividends You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. 1040nr ez But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. 1040nr ez You must add the fee to the cost of the property. 1040nr ez You cannot deduct the fee you pay to a broker to sell securities. 1040nr ez You can use the fee only to figure gain or loss from the sale. 1040nr ez See the instructions for Schedule D (Form 1040) for information on how to report the fee. 1040nr ez Hobby Expenses You can generally deduct hobby expenses, but only up to the amount of hobby income. 1040nr ez A hobby is not a business because it is not carried on to make a profit. 1040nr ez See Not-for-Profit Activities in chapter 1 of Publication 535. 1040nr ez Indirect Deductions of Pass-Through Entities Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. 1040nr ez Deductions of pass-through entities are passed through to the partners or shareholders. 1040nr ez The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr ez Example. 1040nr ez You are a member of an investment club that is formed solely to invest in securities. 1040nr ez The club is treated as a partnership. 1040nr ez The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. 1040nr ez In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr ez However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income. 1040nr ez Publicly offered mutual funds. 1040nr ez   Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. 1040nr ez A mutual fund is “publicly offered” if it is: Continuously offered pursuant to a public offering, Regularly traded on an established securities market, or Held by or for at least 500 persons at all times during the tax year. 1040nr ez   A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). 1040nr ez This net figure is the amount you report on your return as income. 1040nr ez You cannot further deduct investment expenses related to publicly offered mutual funds because they are already included as part of the net income amount. 1040nr ez Information returns. 1040nr ez   You should receive information returns from pass-through entities. 1040nr ez Partnerships and S corporations. 1040nr ez   These entities issue Schedule K-1, which lists the items and amounts you must report, and identifies the tax return schedules and lines to use. 1040nr ez Nonpublicly offered mutual funds. 1040nr ez   These funds will send you a Form 1099-DIV, or a substitute form, showing your share of gross income and investment expenses. 1040nr ez You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit. 1040nr ez Investment Fees and Expenses You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income. 1040nr ez Legal Expenses You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax. 1040nr ez You can also deduct legal expenses that are: Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, For tax advice related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way, or To collect taxable alimony. 1040nr ez You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule. 1040nr ez You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040 or Form 1040NR). 1040nr ez See Tax Preparation Fees, earlier. 1040nr ez Unlawful discrimination claims. 1040nr ez   You may be able to deduct, as an adjustment to income on Form 1040, line 36, or Form 1040NR, line 35, rather than as a miscellaneous itemized deduction, attorney fees and court costs for actions settled or decided after October 22, 2004, involving a claim of unlawful discrimination, a claim against the U. 1040nr ez S. 1040nr ez Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act. 1040nr ez However, the amount you can deduct on Form 1040, line 36, or Form 1040NR, line 35, is limited to the amount of the judgment or settlement you are including in income for the tax year. 1040nr ez See Publication 525 for more information. 1040nr ez Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. 1040nr ez If you can reasonably estimate the amount of your loss on money you have on deposit in a financial institution that becomes insolvent or bankrupt, you can generally choose to deduct it in the current year even though its exact amount has not been finally determined. 1040nr ez If elected, the casualty loss is subject to certain deduction limitations. 1040nr ez The election is made on Form 4684. 1040nr ez Once you make this choice, you cannot change it without IRS approval. 1040nr ez If none of the deposit is federally insured, you can deduct the loss in either of the following ways. 1040nr ez As an ordinary loss (as a miscellaneous itemized deduction subject to the 2% limit). 1040nr ez Write the name of the financial institution and “Insolvent Financial Institution” beside the amount on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. 1040nr ez This deduction is limited to $20,000 ($10,000 if you are married filing separately) for each financial institution, reduced by any expected state insurance proceeds. 1040nr ez As a casualty loss. 1040nr ez Report it on Form 4684 first and then on Schedule A (Form 1040). 1040nr ez See Publication 547 for details. 1040nr ez As a nonbusiness bad debt. 1040nr ez Report it on Schedule D (Form 1040). 1040nr ez If any part of the deposit is federally insured, you can deduct the loss only as a casualty loss. 1040nr ez Exception. 1040nr ez   You cannot make this choice if you are a 1%-or-more-owner or an officer of the financial institution, or are related to such owner or officer. 1040nr ez For a definition of “related,” see Deposit in Insolvent or Bankrupt Financial Institution in chapter 4 of Publication 550. 1040nr ez Actual loss different from estimated loss. 1040nr ez   If you make this choice and your actual loss is less than your estimated loss, you must include the excess in income. 1040nr ez See Recoveries in Publication 525. 1040nr ez If your actual loss is more than your estimated loss, treat the excess loss as explained under Choice not made, next. 1040nr ez Choice not made. 1040nr ez   If you do not make this choice (or if you have an excess actual loss after choosing to deduct your estimated loss), treat your loss (or excess loss) as a nonbusiness bad debt (deductible as a short-term capital loss) in the year its amount is finally determined. 1040nr ez See Nonbusiness Bad Debts in chapter 4 of Publication 550. 1040nr ez Loss on IRA If you have a loss on your traditional IRA (or Roth IRA) investment, you can deduct the loss as a miscellaneous itemized deduction subject to the 2% limit, but only when all the amounts in all your traditional IRA (or Roth IRA) accounts have been distributed to you and the total distributions are less than your unrecovered basis. 1040nr ez For more information, see Publication 590, Individual Retirement Arrangements (IRAs). 1040nr ez Repayments of Income If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. 1040nr ez If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. 1040nr ez If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later. 1040nr ez Repayments of Social Security Benefits If the total of the amounts in box 5 (net benefits for 2013) of all your Forms SSA-1099, Social Security Benefit Statement, and Forms RRB-1099, Payments By the Railroad Retirement Board, is a negative figure (a figure in parentheses), you may be able to take a miscellaneous itemized deduction subject to the 2% limit. 1040nr ez The amount you can deduct is the part of the negative figure that represents an amount you included in gross income in an earlier year. 1040nr ez The amount in box 5 of Form SSA-1099 or RRB-1099 is the net amount of your benefits for the year. 1040nr ez It will be a negative figure if the amount of benefits you repaid in 2013 (box 4) is more than the gross amount of benefits paid to you in 2013 (box 3). 1040nr ez If the deduction is more than $3,000, you will have to use a special computation to figure your tax. 1040nr ez See Publication 915, Social Security and Equivalent Railroad Retirement Benefits, for additional information. 1040nr ez Safe Deposit Box Rent You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. 1040nr ez You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities. 1040nr ez Service Charges on Dividend Reinvestment Plans You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. 1040nr ez These service charges include payments for: Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. 1040nr ez Trustee's Administrative Fees for IRA Trustee's administrative fees that are billed separately and paid by you in connection with your IRA are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit. 1040nr ez Deductions Not Subject to the 2% Limit You can deduct the items listed below as miscellaneous itemized deductions. 1040nr ez They are not subject to the 2% limit. 1040nr ez Report these items on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14. 1040nr ez List of Deductions Amortizable premium on taxable bonds. 1040nr ez Casualty and theft losses from income-producing property. 1040nr ez Federal estate tax on income in respect of a decedent. 1040nr ez Gambling losses up to the amount of gambling winnings. 1040nr ez Impairment-related work expenses of persons with disabilities. 1040nr ez Loss from other activities from Schedule K-1 (Form 1065-B), box 2. 1040nr ez Losses from Ponzi-type investment schemes. 1040nr ez Repayments of more than $3,000 under a claim of right. 1040nr ez Unrecovered investment in an annuity. 1040nr ez Amortizable Premium on Taxable Bonds In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. 1040nr ez You can elect to amortize the premium on taxable bonds. 1040nr ez The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item. 1040nr ez Pre-1998 election to amortize bond premium. 1040nr ez   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. 1040nr ez Bonds acquired after October 22, 1986, and before 1988. 1040nr ez   The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you chose to treat it as an offset to interest income on the bond. 1040nr ez Bonds acquired before October 23, 1986. 1040nr ez   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2% limit. 1040nr ez Deduction for excess premium. 1040nr ez   On certain bonds (such as bonds that pay a variable rate of interest or that provide for an interest-free period), the amount of bond premium allocable to a period may exceed the amount of stated interest allocable to the period. 1040nr ez If this occurs, treat the excess as a miscellaneous itemized deduction that is not subject to the 2% limit. 1040nr ez However, the amount deductible is limited to the amount by which your total interest inclusions on the bond in prior periods exceed the total amount you treated as a bond premium deduction on the bond in prior periods. 1040nr ez If any of the excess bond premium cannot be deducted because of the limit, this amount is carried forward to the next period and is treated as bond premium allocable to that period. 1040nr ez    Pre-1998 choice to amortize bond premium. 1040nr ez If you made the choice to amortize the premium on taxable bonds before 1998, you can deduct the bond premium amortization that is more than your interest income only for bonds acquired during 1998 and later years. 1040nr ez More information. 1040nr ez    For more information on bond premium, see Bond Premium Amortization in chapter 3 of Publication 550. 1040nr ez Casualty and Theft Losses of Income-Producing Property You can deduct a casualty or theft loss as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). 1040nr ez First report the loss in Section B of Form 4684. 1040nr ez You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. 1040nr ez To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. 1040nr ez For more information on casualty and theft losses, see Publication 547. 1040nr ez Federal Estate Tax on Income in Respect of a Decedent You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. 1040nr ez Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. 1040nr ez See Publication 559 for information about figuring the amount of this deduction. 1040nr ez Gambling Losses Up to the Amount of Gambling Winnings You must report the full amount of your gambling winnings for the year on Form 1040, line 21. 1040nr ez You deduct your gambling losses for the year on Schedule A (Form 1040), line 28. 1040nr ez You cannot deduct gambling losses that are more than your winnings. 1040nr ez Generally, nonresident aliens cannot deduct gambling losses on Schedule A (Form 1040NR). 1040nr ez You cannot reduce your gambling winnings by your gambling losses and report the difference. 1040nr ez You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. 1040nr ez Therefore, your records should show your winnings separately from your losses. 1040nr ez Diary of winnings and losses. 1040nr ez You must keep an accurate diary or similar record of your losses and winnings. 1040nr ez Your diary should contain at least the following information. 1040nr ez The date and type of your specific wager or wagering activity. 1040nr ez The name and address or location of the gambling establishment. 1040nr ez The names of other persons present with you at the gambling establishment. 1040nr ez The amount(s) you won or lost. 1040nr ez Proof of winnings and losses. 1040nr ez   In addition to your diary, you should also have other documentation. 1040nr ez You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment. 1040nr ez   For specific wagering transactions, you can use the following items to support your winnings and losses. 1040nr ez    These recordkeeping suggestions are intended as general guidelines to help you establish your winnings and losses. 1040nr ez They are not all-inclusive. 1040nr ez Your tax liability depends on your particular facts and circumstances. 1040nr ez Keno. 1040nr ez   Copies of the keno tickets you purchased that were validated by the gambling establishment, copies of your casino credit records, and copies of your casino check cashing records. 1040nr ez Slot machines. 1040nr ez   A record of the machine number and all winnings by date and time the machine was played. 1040nr ez Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc. 1040nr ez ). 1040nr ez   The number of the table at which you were playing. 1040nr ez Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage. 1040nr ez Bingo. 1040nr ez   A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. 1040nr ez Supplemental records include any receipts from the casino, parlor, etc. 1040nr ez Racing (horse, harness, dog, etc. 1040nr ez ). 1040nr ez   A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. 1040nr ez Supplemental records include unredeemed tickets and payment records from the racetrack. 1040nr ez Lotteries. 1040nr ez   A record of ticket purchases, dates, winnings, and losses. 1040nr ez Supplemental records include unredeemed tickets, payment slips, and winnings statements. 1040nr ez Impairment-Related Work Expenses If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. 1040nr ez Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at your place of work and other expenses in connection with your place of work that are necessary for you to be able to work. 1040nr ez Example. 1040nr ez You are blind. 1040nr ez You must use a reader to do your work. 1040nr ez You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. 1040nr ez The reader's services are only for your work. 1040nr ez You can deduct your expenses for the reader as impairment-related work expenses. 1040nr ez Self-employed. 1040nr ez   If you are self-employed, enter your impairment-related work expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. 1040nr ez See Impairment-related work expenses. 1040nr ez , later under How To Report. 1040nr ez Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss, report it on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14 (only if effectively connected with a U. 1040nr ez S. 1040nr ez trade or business). 1040nr ez It is not subject to the passive activity limitations. 1040nr ez Officials Paid on a Fee Basis If you are a fee-basis official, you can claim your expenses in performing services in that job as an adjustment to income rather than as a miscellaneous itemized deduction. 1040nr ez See Publication 463 for more information. 1040nr ez Performing Artists If you are a qualified performing artist, you can deduct your employee business expenses as an adjustment to income rather than as a miscellaneous itemized deduction. 1040nr ez If you are an employee, complete Form 2106 or Form 2106-EZ. 1040nr ez See Publication 463 for more information. 1040nr ez Losses From Ponzi-type Investment Schemes These losses are deductible as theft losses of income-producing property on your tax return for the year the loss was discovered. 1040nr ez You figure the deductible loss in Section B of Form 4684. 1040nr ez However, if you qualify to use Revenue Procedure 2009-20 (as modified by Revenue Procedure 2011-58) and you choose to follow the procedures in the guidance, complete Section C of Form 4684 before completing Section B. 1040nr ez Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. 1040nr ez You do not need to complete Appendix A. 1040nr ez See the Form 4684 instructions and Publication 547, Casualties, Disasters, and Thefts, for more information. 1040nr ez Repayments Under Claim of Right If you had to repay more than $3,000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid, or take a credit against your tax. 1040nr ez See Repayments in Publication 525 for more information. 1040nr ez Unrecovered Investment in Annuity A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. 1040nr ez If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. 1040nr ez See Publication 575, Pension and Annuity Income, for more information about the tax treatment of pensions and annuities. 1040nr ez Nondeductible Expenses You cannot deduct the following expenses. 1040nr ez List of Nondeductible Expenses Adoption expenses. 1040nr ez Broker's commissions. 1040nr ez Burial or funeral expenses, including the cost of a cemetery lot. 1040nr ez Campaign expenses. 1040nr ez Capital expenses. 1040nr ez Check-writing fees. 1040nr ez Club dues. 1040nr ez Commuting expenses. 1040nr ez Fees and licenses, such as car licenses, marriage licenses, and dog tags. 1040nr ez Fines and penalties, such as parking tickets. 1040nr ez Health spa expenses. 1040nr ez Hobby losses—but see Hobby Expenses, earlier. 1040nr ez Home repairs, insurance, and rent. 1040nr ez Home security system. 1040nr ez Illegal bribes and kickbacks—see Bribes and kickbacks in chapter 11 of Publication 535. 1040nr ez Investment-related seminars. 1040nr ez Life insurance premiums paid by the insured. 1040nr ez Lobbying expenses. 1040nr ez Losses from the sale of your home, furniture, personal car, etc. 1040nr ez Lost or misplaced cash or property. 1040nr ez Lunches with co-workers. 1040nr ez Meals while working late. 1040nr ez Medical expenses as business expenses other than medical examinations required by your employer. 1040nr ez Personal disability insurance premiums. 1040nr ez Personal legal expenses. 1040nr ez Personal, living, or family expenses. 1040nr ez Political contributions. 1040nr ez Professional accreditation fees. 1040nr ez Professional reputation, expenses to improve. 1040nr ez Relief fund contributions. 1040nr ez Residential telephone line. 1040nr ez Stockholders' meeting, expenses of attending. 1040nr ez Tax-exempt income, expenses of earning or collecting. 1040nr ez The value of wages never received or lost vacation time. 1040nr ez Travel expenses for another individual. 1040nr ez Voluntary unemployment benefit fund contributions. 1040nr ez Wristwatches. 1040nr ez Adoption Expenses You cannot deduct the expenses of adopting a child but you may be able to take a credit for those expenses. 1040nr ez For details, see Form 8839, Qualified Adoption Expenses. 1040nr ez Commissions Commissions paid on the purchase of securities are not deductible, either as business or nonbusiness expenses. 1040nr ez Instead, these fees must be added to the taxpayer's cost of the securities. 1040nr ez Commissions paid on the sale are deductible as business expenses only by dealers. 1040nr ez Campaign Expenses You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. 1040nr ez These include qualification and registration fees for primary elections. 1040nr ez Legal fees. 1040nr ez   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign. 1040nr ez Capital Expenses You cannot currently deduct amounts paid to buy property that has a useful life substantially beyond the tax year or amounts paid to increase the value or prolong the life of property. 1040nr ez If you use such property in your work, you may be able to take a depreciation deduction. 1040nr ez See Publication 946. 1040nr ez If the property is a car used in your work, also see Publication 463. 1040nr ez Check-Writing Fees on Personal Account If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest. 1040nr ez Club Dues Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. 1040nr ez This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. 1040nr ez You cannot deduct dues paid to an organization if one of its main purposes is to: Conduct entertainment activities for members or their guests, or Provide members or their guests with access to entertainment facilities. 1040nr ez Dues paid to airline, hotel, and luncheon clubs are not deductible. 1040nr ez Commuting Expenses You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). 1040nr ez If you haul tools, instruments, or other items in your car to and from work, you can deduct only the additional cost of hauling the items, such as the rent on a trailer to carry the items. 1040nr ez Fines or Penalties You cannot deduct fines or penalties you pay to a governmental unit for violating a law. 1040nr ez This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). 1040nr ez Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike. 1040nr ez Health Spa Expenses You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer. 1040nr ez Home Security System You cannot deduct the cost of a home security system as a miscellaneous deduction. 1040nr ez However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. 1040nr ez See Home Office under Unreimbursed Employee Expenses, earlier, and Publication 587. 1040nr ez Investment-Related Seminars You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes. 1040nr ez Life Insurance Premiums You cannot deduct premiums you pay on your life insurance. 1040nr ez You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. 1040nr ez See Publication 504, Divorced or Separated Individuals, for information on alimony. 1040nr ez Lobbying Expenses You generally cannot deduct amounts paid or incurred for lobbying expenses. 1040nr ez These include expenses to: Influence legislation, Participate, or intervene, in any political campaign for, or against, any candidate for public office, Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials. 1040nr ez Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities. 1040nr ez Covered executive branch official. 1040nr ez   A covered executive branch official, for the purpose of (4) above, is any of the following officials. 1040nr ez The President. 1040nr ez The Vice President. 1040nr ez Any officer or employee of the White House Office of the Executive Office of the President, and the two most senior level officers of each of the other agencies in the Executive Office. 1040nr ez Any individual serving in a position in Level I of the Executive Schedule under section 5312 of Title 5, United States Code, any other individual designated by the President as having Cabinet-level status, and any immediate deputy of one of these individuals. 1040nr ez Dues used for lobbying. 1040nr ez   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. 1040nr ez Exceptions. 1040nr ez   You can deduct certain lobbying expenses if they are ordinary and necessary expenses of carrying on your trade or business. 1040nr ez You can deduct expenses for attempting to influence the legislation of any local council or similar governing body (local legislation). 1040nr ez An Indian tribal government is considered a local council or similar governing body. 1040nr ez You can deduct in-house expenses for influencing legislation or communicating directly with a covered executive branch official if the expenses for the tax year are not more than $2,000 (not counting overhead expenses). 1040nr ez If you are a professional lobbyist, you can deduct the expenses you incur in the trade or business of lobbying on behalf of another person. 1040nr ez Payments by the other person to you for lobbying activities cannot be deducted. 1040nr ez Lost or Mislaid Cash or Property You cannot deduct a loss based on the mere disappearance of money or property. 1040nr ez However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. 1040nr ez See Publication 547. 1040nr ez Example. 1040nr ez A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. 1040nr ez The diamond falls from the ring and is never found. 1040nr ez The loss of the diamond is a casualty. 1040nr ez Lunches With Co-workers You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. 1040nr ez See Publication 463 for information on deductible expenses while traveling away from home. 1040nr ez Meals While Working Late You cannot deduct the cost of meals while working late. 1040nr ez However, you may be able to claim a deduction if the cost of the meals is a deductible entertainment expense, or if you are traveling away from home. 1040nr ez See Publication 463 for information on deductible entertainment expenses and expenses while traveling away from home. 1040nr ez Personal Legal Expenses You cannot deduct personal legal expenses such as those for the following. 1040nr ez Custody of children. 1040nr ez Breach of promise to marry suit. 1040nr ez Civil or criminal charges resulting from a personal relationship. 1040nr ez Damages for personal injury (except certain whistleblower claims and unlawful discrimination claims). 1040nr ez For more information about unlawful discrimination claims, see Deductions Subject to the 2% Limit, earlier. 1040nr ez Preparation of a title (or defense or perfection of a title). 1040nr ez Preparation of a will. 1040nr ez Property claims or property settlement in a divorce. 1040nr ez You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property. 1040nr ez Political Contributions You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. 1040nr ez Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible. 1040nr ez Professional Accreditation Fees You cannot deduct professional accreditation fees such as the following. 1040nr ez Accounting certificate fees paid for the initial right to practice accounting. 1040nr ez Bar exam fees and incidental expenses in securing initial admission to the bar. 1040nr ez Medical and dental license fees paid to get initial licensing. 1040nr ez Professional Reputation You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation. 1040nr ez Relief Fund Contributions You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job. 1040nr ez Residential Telephone Service You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business. 1040nr ez Stockholders' Meetings You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. 1040nr ez You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments. 1040nr ez Tax-Exempt Income Expenses You cannot deduct expenses to produce tax-exempt income. 1040nr ez You cannot deduct interest on a debt incurred or continued to buy or carry tax-exempt securities. 1040nr ez If you have expenses to p
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New Voluntary Closing Agreement Program Request Form

The Internal Revenue Service released the new Form 14429, Tax Exempt Bonds Voluntary Closing Agreement Program Request. Completion, in full, of the new form is a requirement before the submission to the Tax Exempt Bonds Voluntary Closing Agreement Program (TEB VCAP) is accepted. The purpose of the new form is to assist issuers in organizing TEB VCAP submission requests and to ensure that their submissions are complete, in accordance with the requirements under Notice 2008-31, 2008-11 I.R.B. 592 and IRM 7.2.3. Use of the new form should avoid delays in processing a request because of missing information as well as facilitating the process for accepting and assigning requests.  

The Tax Exempt Bonds (TEB) function, within the Tax Exempt & Government Entities Division, administers TEB VCAP. Generally, TEB VCAP provides remedies for issuers of tax-advantaged bonds (tax-exempt bonds, tax credit bonds, and direct pay bonds) who voluntarily come forward to resolve a violation of the federal tax requirements applicable to a bond issue that the issuer cannot self-correct under programs described in the Income Tax Regulations (Regulations) or other published guidance. An issuer will generally receive a more favorable treatment in resolving its tax violation under TEB VCAP than it would for the same tax violation discovered during an IRS examination of their bonds. As such, TEB VCAP encourages issuers, and other parties involved in tax-advantaged bond transactions, to exercise due diligence in complying with the applicable federal tax laws. TEB VCAP also provides a vehicle to correct violations as expeditiously as possible before discovery of the violations during an IRS examination.

The improvement of the TEB VCAP program, through procedural enhancements, is a TEB commitment. The new Form 14429 is an example of the latest effort by TEB to improve the administration of the TEB VCAP program and further this commitment. Last year, TEB provided web content to provide more information about the TEB VCAP program as well as descriptions (provided in IRM 7.2.3.4) of the resolution standards for identified violations both for tax-exempt and certain direct pay bonds. TEB believes that these resolution standards encourage due diligence by providing certainty, to issuers and other parties, in understanding the methodologies available to resolve eligible violations.

IRM Section 7.2.3 provides additional procedural guidance on how to submit a TEB VCAP request. See TEB Voluntary Compliance under Information for the Tax Exempt Bond Community on TEB's website.

Page Last Reviewed or Updated: 04-Sep-2013

The 1040nr Ez

1040nr ez Publication 514 - Main Content Table of Contents Choosing To Take Credit or DeductionChoice Applies to All Qualified Foreign Taxes Making or Changing Your Choice Why Choose the Credit?Credit for Taxes Paid or Accrued Foreign Currency and Exchange Rates Foreign Tax Redetermination Who Can Take the Credit?U. 1040nr ez S. 1040nr ez Citizens Resident Aliens Nonresident Aliens What Foreign Taxes Qualify for the Credit?Tax Must Be Imposed on You You Must Have Paid or Accrued the Tax Tax Must Be the Legal and Actual Foreign Tax Liability Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) Foreign Taxes for Which You Cannot Take a CreditTaxes on Excluded Income Taxes for Which You Can Only Take an Itemized Deduction Taxes on Foreign Mineral Income Taxes From International Boycott Operations Taxes on Combined Foreign Oil and Gas Income Taxes of U. 1040nr ez S. 1040nr ez Persons Controlling Foreign Corporations and Partnerships Taxes Related to a Foreign Tax Credit Splitting Event How To Figure the CreditLimit on the Credit Separate Limit Income Allocation of Foreign Taxes Foreign Taxes From a Partnership or an S Corporation Figuring the Limit Qualified Dividends Capital Gains and Losses Allocation of Foreign and U. 1040nr ez S. 1040nr ez Losses Tax Treaties Carryback and CarryoverTime Limit on Tax Assessment Claim for Refund Taxes All Credited or All Deducted Married Couples How To Claim the CreditForm 1116 Records To Keep Simple Example — Filled-In Form 1116Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Comprehensive Example — Filled-In Form 1116Foreign earned income. 1040nr ez Employee business expenses. 1040nr ez Forms 1116 Computation of Taxable Income Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Unused Foreign Taxes How To Get Tax HelpLow Income Taxpayer Clinics Choosing To Take Credit or Deduction 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. 1040nr ez You can change your choice for each year's taxes. 1040nr ez To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. 1040nr ez S. 1040nr ez tax return. 1040nr ez However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. 1040nr ez See How To Figure the Credit , later. 1040nr ez To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. 1040nr ez Figure your tax both ways—claiming the credit and claiming the deduction. 1040nr ez Then fill out your return the way that benefits you more. 1040nr ez See Why Choose the Credit, later. 1040nr ez Choice Applies to All Qualified Foreign Taxes As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes. 1040nr ez If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. 1040nr ez You cannot deduct any of them. 1040nr ez Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. 1040nr ez You cannot take a credit for any of them. 1040nr ez See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. 1040nr ez There are exceptions to this general rule, which are described next. 1040nr ez Exceptions for foreign taxes not allowed as a credit. 1040nr ez   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 or does not conduct diplomatic relations with it or recognize its government and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act, 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 substantially similar or related property, You participated in or cooperated with an international boycott, You paid taxes in connection with the purchase or sale of oil or gas, or You paid or accrued taxes on income or gain in connection with a covered asset acquisition. 1040nr ez Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. 1040nr ez S. 1040nr ez tax purposes. 1040nr ez For more information, see Internal Revenue Code section 901(m). 1040nr ez The IRS intends to issue guidance that will explain this provision in greater detail. 1040nr ez   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. 1040nr ez Foreign taxes that are not income taxes. 1040nr ez   In most cases, only foreign income taxes qualify for the foreign tax credit. 1040nr ez Other taxes, such as foreign real and personal property taxes, do not qualify. 1040nr ez But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. 1040nr ez   In most cases, you can deduct these other taxes only if they are expenses incurred in a trade or business or in the production of income. 1040nr ez However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). 1040nr ez Carrybacks and carryovers. 1040nr ez   There is a limit on the credit you can claim in a tax year. 1040nr ez 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. 1040nr ez If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. 1040nr ez That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. 1040nr ez   For more information on the limit, see How To Figure the Credit , later. 1040nr ez For more information on carrybacks and carryovers, see Carryback and Carryover , later. 1040nr ez Making or Changing Your Choice 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 (without regard to any extension of time to file) for the tax year in which the taxes were actually paid or accrued. 1040nr ez You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. 1040nr ez Example. 1040nr ez You paid foreign taxes for the last 13 years and chose to deduct them on your U. 1040nr ez S. 1040nr ez income tax returns. 1040nr ez You were timely in both filing your returns and paying your U. 1040nr ez S. 1040nr ez tax liability. 1040nr ez In February 2013, you file an amended return for tax year 2002 choosing to take a credit for your 2002 foreign taxes because you now realize that the credit is more advantageous than the deduction for that year. 1040nr ez Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). 1040nr ez Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. 1040nr ez Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. 1040nr ez If you are unable to claim all of them in those 2 years, you carry them forward to the 10 years following the year in which they arose. 1040nr ez Because you originally chose to deduct your foreign taxes and the 10-year period for changing the choice for 2000 and 2001 has passed, you cannot change your choice and carry the unused 2002 foreign taxes back to tax years 2000 and 2001. 1040nr ez Because the 10-year periods for changing the choice have not passed for your 2003 through 2012 income tax returns, you can still choose to claim the credit for those years and carry forward any unused 2002 foreign taxes. 1040nr ez However, you must reduce the unused 2002 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 2000 and 2001. 1040nr ez You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. 1040nr ez See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. 1040nr ez Why Choose the Credit? The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. 1040nr ez In most cases, if the foreign tax rate is higher than the U. 1040nr ez S. 1040nr ez rate, there will be no U. 1040nr ez S. 1040nr ez tax on the foreign income. 1040nr ez If the foreign tax rate is lower than the U. 1040nr ez S. 1040nr ez rate, U. 1040nr ez S. 1040nr ez tax on the foreign income will be limited to the difference between the rates. 1040nr ez The foreign tax credit can only reduce U. 1040nr ez S. 1040nr ez taxes on foreign source income; it cannot reduce U. 1040nr ez S. 1040nr ez taxes on U. 1040nr ez S. 1040nr ez source income. 1040nr ez Although no one rule covers all situations, in most cases it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. 1040nr ez This is because: A credit reduces your actual U. 1040nr ez S. 1040nr ez income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax, You can choose to take the foreign tax credit even if you do not itemize your deductions. 1040nr ez You then are allowed the standard deduction in addition to the credit, and If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year. 1040nr ez (See Limit on credit under How To Figure the Credit, later. 1040nr ez ) Example 1. 1040nr ez For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. 1040nr ez None of the dividends are qualified dividends. 1040nr ez You file a joint return and can claim two $3,900 exemptions. 1040nr ez You had to pay $2,000 in foreign income taxes on the dividend income. 1040nr ez If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. 1040nr ez Your taxable income then is $57,500 and your tax is $7,736. 1040nr ez If you take the credit instead, your itemized deductions are only $13,000. 1040nr ez Your taxable income then is $59,500 and your tax before the credit is $8,036. 1040nr ez After the credit, however, your tax is only $6,036. 1040nr ez Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. 1040nr ez Example 2. 1040nr ez In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. 1040nr ez You report on your U. 1040nr ez S. 1040nr ez return this income as well as $56,000 of U. 1040nr ez S. 1040nr ez source wages and an allowable $49,000 partnership loss from a U. 1040nr ez S. 1040nr ez partnership. 1040nr ez Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. 1040nr ez You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. 1040nr ez If you deduct the foreign tax on your U. 1040nr ez S. 1040nr ez return, your taxable income is a negative $250 ($5,000 + $56,000 − $49,000 − $1,500 − $6,850 − $3,900) and your tax is $0. 1040nr ez If you take the credit instead, your taxable income is $1,250 ($5,000 + $56,000 − $49,000 − $3,900 − $6,850) and your tax before the credit is $126. 1040nr ez You can take a credit of only $113 because of limits discussed later. 1040nr ez Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. 1040nr ez If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). 1040nr ez When deciding whether to take the credit or the deduction this year, you will need to consider whether you can benefit from a carryback or carryover of that unused foreign tax. 1040nr ez Credit for Taxes Paid or Accrued You can claim the credit for a qualified foreign tax in the tax year in which you pay it or accrue it, depending on your method of accounting. 1040nr ez “Tax year” refers to the tax year for which your U. 1040nr ez S. 1040nr ez return is filed, not the tax year for which your foreign return is filed. 1040nr ez Accrual method of accounting. 1040nr ez   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. 1040nr ez You are using an accrual method of accounting if you report income when you earn it, rather than when you receive it, and you deduct your expenses when you incur them, rather than when you pay them. 1040nr ez   In most cases, foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it. 1040nr ez Generally, this occurs on the last day of the tax year for which your foreign return is filed. 1040nr ez Contesting your foreign tax liability. 1040nr ez   If you are contesting your foreign tax liability, you cannot accrue it and take a credit until the amount of foreign tax due is finally determined. 1040nr ez However, if you choose to pay the tax liability you are contesting, you can take a credit for the amount you pay before a final determination of foreign tax liability is made. 1040nr ez Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. 1040nr ez If the amount of foreign taxes taken as a credit differs from the final foreign tax liability, you may have to adjust the credit, as discussed later under Foreign Tax Redetermination . 1040nr ez You may have to post a bond. 1040nr ez   If you claim a credit for taxes accrued but not paid, you may have to post an income tax bond to guarantee your payment of any tax due in the event the amount of foreign tax paid differs from the amount claimed. 1040nr ez   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. 1040nr ez Cash method of accounting. 1040nr ez   If you use the cash method of accounting, you can choose to take the credit either in the year you pay the tax or in the year you accrue it. 1040nr ez You are using the cash method of accounting if you report income in the year you actually or constructively receive it, and deduct expenses in the year you pay them. 1040nr ez Choosing to take credit in the year taxes accrue. 1040nr ez   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. 1040nr ez You make the choice by checking the box in Part II of Form 1116. 1040nr ez Once you make that choice, you must follow it in all later years and take a credit for foreign taxes in the year they accrue. 1040nr ez   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. 1040nr ez You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. 1040nr ez   If you make the choice to take the credit when foreign taxes accrue and pay them in a later year, you cannot claim a deduction for any part of the previously accrued taxes. 1040nr ez Credit based on taxes paid in earlier year. 1040nr ez   If, in earlier years, you took the credit based on taxes paid, and this year you choose to take the credit based on taxes accrued, you may be able to take the credit this year for taxes from more than one year. 1040nr ez Example. 1040nr ez Last year you took the credit based on taxes paid. 1040nr ez This year you chose to take the credit based on taxes accrued. 1040nr ez During the year you paid foreign income taxes owed for last year. 1040nr ez You also accrued foreign income taxes for this year that you did not pay by the end of the year. 1040nr ez You can base the credit on your return for this year on both last year's taxes that you paid and this year's taxes that you accrued. 1040nr ez Foreign Currency and Exchange Rates U. 1040nr ez S. 1040nr ez income tax is imposed on income expressed in U. 1040nr ez S. 1040nr ez dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. 1040nr ez Therefore, fluctuations in the value of the foreign currency relative to the U. 1040nr ez S. 1040nr ez dollar may affect the foreign tax credit. 1040nr ez Translating foreign currency into U. 1040nr ez S. 1040nr ez dollars. 1040nr ez   If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U. 1040nr ez S. 1040nr ez dollars. 1040nr ez How and when you do this depends on your functional currency. 1040nr ez In most cases, your functional currency is the U. 1040nr ez S. 1040nr ez dollar unless you are required to use the currency of a foreign country. 1040nr ez   You must make all federal income tax determinations in your functional currency. 1040nr ez The U. 1040nr ez S. 1040nr ez dollar is the functional currency for all taxpayers except some qualified business units. 1040nr ez A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. 1040nr ez Unless you are self-employed, your functional currency is the U. 1040nr ez S. 1040nr ez dollar. 1040nr ez   Even if you are self-employed and have a qualified business unit, your functional currency is the U. 1040nr ez S. 1040nr ez dollar if any of the following apply. 1040nr ez You conduct the business primarily in dollars. 1040nr ez The principal place of business is located in the United States. 1040nr ez You choose to or are required to use the dollar as your functional currency. 1040nr ez The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted. 1040nr ez   If your functional currency is the U. 1040nr ez S. 1040nr ez dollar, you must immediately translate into dollars all items of income, expense, etc. 1040nr ez , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. 1040nr ez If there is more than one exchange rate, use the one that most properly reflects your income. 1040nr ez In most cases, you can get exchange rates from banks and U. 1040nr ez S. 1040nr ez Embassies. 1040nr ez   If your functional currency is not the U. 1040nr ez S. 1040nr ez dollar, make all income tax determinations in your functional currency. 1040nr ez At the end of the year, translate the results, such as income or loss, into U. 1040nr ez S. 1040nr ez dollars to report on your income tax return. 1040nr ez    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. 1040nr ez   Use the rate of exchange in effect on the date you paid the foreign taxes to the foreign country unless you meet the exception discussed next. 1040nr ez If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. 1040nr ez If you make foreign estimated tax payments, you use the rate of exchange in effect for the date on which you made the estimated tax payment. 1040nr ez   The exchange rate rules discussed here apply even if the foreign taxes are paid or accrued with respect to a foreign tax credit splitting event (discussed later). 1040nr ez Exception. 1040nr ez   If you claim the credit for foreign taxes on an accrual basis, in most cases you must use the average exchange rate for the tax year to which the taxes relate. 1040nr ez This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. 1040nr ez The foreign taxes are paid on or after the first day of the tax year to which they relate. 1040nr ez The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. 1040nr ez The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). 1040nr ez (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. 1040nr ez )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. 1040nr ez Election to use exchange rate on date paid. 1040nr ez   If you have accrued foreign taxes that you are otherwise required to convert using the average exchange rate, you may elect to use the exchange rate in effect on the date the foreign taxes are paid if the taxes are denominated in a nonfunctional foreign currency. 1040nr ez If any of the accrued taxes are unpaid, you must translate them into U. 1040nr ez S. 1040nr ez dollars using the exchange rate on the last day of the U. 1040nr ez S. 1040nr ez tax year to which those taxes relate. 1040nr ez You may make the election for all nonfunctional currency foreign income taxes or only those nonfunctional currency foreign income taxes that are attributable to qualified business units with a U. 1040nr ez S. 1040nr ez dollar functional currency. 1040nr ez Once made, the election applies to the tax year for which made and all subsequent tax years unless revoked with the consent of the IRS. 1040nr ez The election is available for tax years beginning after 2004. 1040nr ez It must be made by the due date (including extensions) for filing the tax return for the first tax year to which the election applies. 1040nr ez Make the election by attaching a statement to the applicable tax return. 1040nr ez The statement must identify whether the election is made for all foreign taxes or only for foreign taxes attributable to qualified business units with a U. 1040nr ez S. 1040nr ez dollar functional currency. 1040nr ez Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. 1040nr ez S. 1040nr ez foreign tax credit claimed. 1040nr ez The year in which to claim the credit remains the year to which the foreign taxes paid or accrued relate, even if the change in foreign tax liability occurs in a later year. 1040nr ez If a foreign tax redetermination occurs, a redetermination of your U. 1040nr ez S. 1040nr ez tax liability is required if any of the following conditions apply. 1040nr ez The accrued taxes when paid differ from the amounts claimed as a credit. 1040nr ez The accrued taxes you claimed as a credit in one tax year are not paid within 2 years after the end of that tax year. 1040nr ez If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. 1040nr ez You will not be allowed a credit for the unpaid taxes until you pay them. 1040nr ez When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. 1040nr ez S. 1040nr ez dollars using the exchange rate as of the date they were paid. 1040nr ez The foreign tax credit is allowed for the year to which the foreign tax relates. 1040nr ez See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. 1040nr ez The foreign taxes you paid are refunded in whole or in part. 1040nr ez For taxes taken into account when accrued but translated into dollars on the date of payment, the dollar value of the accrued tax differs from the dollar value of the tax paid because of fluctuations in the exchange rate between the date of accrual and the date of payment. 1040nr ez However, no redetermination is required if the change in foreign tax liability for each foreign country is solely attributable to exchange rate fluctuations and is less than the smaller of: $10,000, or 2% of the total dollar amount of the foreign tax initially accrued for that foreign country for the U. 1040nr ez S. 1040nr ez tax year. 1040nr ez In this case, you must adjust your U. 1040nr ez S. 1040nr ez tax in the tax year in which the accrued foreign taxes are paid. 1040nr ez Notice to the Internal Revenue Service (IRS) of Redetermination You are required to notify the IRS about a foreign tax credit redetermination that affects your U. 1040nr ez S. 1040nr ez tax liability for each tax year affected by the redetermination. 1040nr ez In most cases, you must file Form 1040X, Amended U. 1040nr ez S. 1040nr ez Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. 1040nr ez S. 1040nr ez tax liability for the year or years affected. 1040nr ez See Contents of statement , later. 1040nr ez You are not required to attach Form 1116 for a tax year affected by a redetermination if: The amount of your creditable taxes paid or accrued during the tax year is not more than $300 ($600 if married filing a joint return) as a result of the foreign tax redetermination, and You meet the requirements listed under Exemption from foreign tax credit limit under How To Figure the Credit, later. 1040nr ez There are other exceptions to this requirement. 1040nr ez They are discussed later under Due date of notification to IRS . 1040nr ez Contents of statement. 1040nr ez   The statement must include all of the following. 1040nr ez Your name, address, and taxpayer identification number. 1040nr ez The tax year or years that are affected by the foreign tax redetermination. 1040nr ez The date or dates the foreign taxes were accrued, if applicable. 1040nr ez The date or dates the foreign taxes were paid. 1040nr ez The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. 1040nr ez Information sufficient to determine any interest due from or owing to you, including the amount of any interest paid to you by the foreign government and the dates received. 1040nr ez   In the case of any foreign taxes that were not paid before the date two years after the close of the tax year to which those taxes relate, you must provide the amount of those taxes in foreign currency and the exchange rate that was used to translate that amount when originally claimed as a credit. 1040nr ez   If any foreign tax was refunded in whole or in part, you must provide the date and amount (in foreign currency) of each refund, the exchange rate that was used to translate each amount when originally claimed as a credit, and the exchange rate for the date the refund was received (for purposes of computing foreign currency gain or loss under Internal Revenue Code section 988). 1040nr ez Due date of notification to IRS. 1040nr ez   If you pay less foreign tax than you originally claimed a credit for, in most cases you must file a notification by the due date (with extensions) of your original return for your tax year in which the foreign tax redetermination occurred. 1040nr ez There is no limit on the time the IRS has to redetermine and assess the correct U. 1040nr ez S. 1040nr ez tax due. 1040nr ez If you pay more foreign tax than you originally claimed a credit for, you have 10 years to file a claim for refund of U. 1040nr ez S. 1040nr ez taxes. 1040nr ez See Time Limit on Refund Claims , later. 1040nr ez   Exceptions to this due date are explained in the next two paragraphs. 1040nr ez Multiple redeterminations of U. 1040nr ez S. 1040nr ez tax liability for same tax year. 1040nr ez   Where more than one foreign tax redetermination requires a redetermination of U. 1040nr ez S. 1040nr ez tax liability for the same tax year and those redeterminations occur in the same tax year or within two consecutive tax years, you can file for that tax year one notification (Form 1040X with a Form 1116 and the required statement) that reflects all those tax redeterminations. 1040nr ez If you choose to file one notification, the due date for that notification is the due date of the original return (with extensions) for the year in which the first foreign tax redetermination that reduced your foreign tax liability occurred. 1040nr ez However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. 1040nr ez S. 1040nr ez tax liability is required may occur after the due date for providing that notification. 1040nr ez In this situation, you may have to file more than one Form 1040X for that tax year. 1040nr ez Additional U. 1040nr ez S. 1040nr ez tax due eliminated by foreign tax credit carryback or carryover. 1040nr ez   If a foreign tax redetermination requires a redetermination of U. 1040nr ez S. 1040nr ez tax liability that would otherwise result in an additional amount of U. 1040nr ez S. 1040nr ez tax due, but the additional tax is eliminated by a carryback or carryover of an unused foreign tax, you do not have to amend your tax return for the year affected by the redetermination. 1040nr ez Instead, you can notify the IRS by attaching a statement to the original return for the tax year in which the foreign tax redetermination occurred. 1040nr ez You must file the statement by the due date (with extensions) of that return. 1040nr ez The statement must show the amount of the unused foreign taxes paid or accrued and a detailed schedule showing the computation of the carryback or carryover (including the amounts carried back or over to the year for which a redetermination on U. 1040nr ez S. 1040nr ez tax liability is required). 1040nr ez Failure-to-notify penalty. 1040nr ez   If you fail to notify the IRS of a foreign tax redetermination and cannot show reasonable cause for the failure, you may have to pay a penalty. 1040nr ez   For each month, or part of a month, that the failure continues, you pay a penalty of 5% of the tax due resulting from a redetermination of your U. 1040nr ez S. 1040nr ez tax. 1040nr ez This penalty cannot be more than 25% of the tax due. 1040nr ez Foreign tax refund. 1040nr ez   If you receive a foreign tax refund without interest from the foreign government, you will not have to pay interest on the amount of tax due resulting from the adjustment to your U. 1040nr ez S. 1040nr ez tax for the time before the date of the refund. 1040nr ez   However, if you receive a foreign tax refund with interest, you must pay interest to the IRS up to the amount of the interest paid to you by the foreign government. 1040nr ez The interest you must pay cannot be more than the interest you would have had to pay on taxes that were unpaid for any other reason for the same period. 1040nr ez Interest also is owed from the time you receive a refund until you pay the additional tax due. 1040nr ez Foreign tax imposed on foreign refund. 1040nr ez   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. 1040nr ez However, when you refigure the foreign tax credit taken for the original foreign tax, reduce the amount of the refund by the foreign tax paid on the refund. 1040nr ez Example. 1040nr ez You paid a foreign income tax of $3,000 in 2011, and received a foreign tax refund of $500 in 2013 on which a foreign tax of $100 was imposed. 1040nr ez When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. 1040nr ez Time Limit on Refund Claims You have 10 years to file a claim for refund of U. 1040nr ez S. 1040nr ez tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. 1040nr ez The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the taxes were actually paid or accrued. 1040nr ez You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. 1040nr ez The 10-year period applies to claims for refund or credit based on: Fixing math errors in figuring qualified foreign taxes, Reporting qualified foreign taxes not originally reported on the return, or Any other change in the size of the credit (including one caused by correcting the foreign tax credit limit). 1040nr ez The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. 1040nr ez See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. 1040nr ez Who Can Take the Credit? U. 1040nr ez S. 1040nr ez citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. 1040nr ez S. 1040nr ez tax on foreign source income may be able to take a foreign tax credit. 1040nr ez U. 1040nr ez S. 1040nr ez Citizens If you are a U. 1040nr ez S. 1040nr ez citizen, you are taxed by the United States on your worldwide income wherever you live. 1040nr ez You are normally entitled to take a credit for foreign taxes you pay or accrue. 1040nr ez Resident Aliens If you are a resident alien of the United States, you can take a credit for foreign taxes subject to the same general rules as U. 1040nr ez S. 1040nr ez citizens. 1040nr ez If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. 1040nr ez Usually, you can take a credit only for those foreign taxes imposed on income you actually or constructively received while you had resident alien status. 1040nr ez For information on alien status, see Publication 519. 1040nr ez Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. 1040nr ez However, you may be able to take the credit if: You were a bona fide resident of Puerto Rico during your entire tax year, or You pay or accrue tax to a foreign country or U. 1040nr ez S. 1040nr ez possession on income from foreign sources that is effectively connected with a trade or business in the United States. 1040nr ez But if you must pay tax to a foreign country or U. 1040nr ez S. 1040nr ez possession on income from U. 1040nr ez S. 1040nr ez sources only because you are a citizen or a resident of that country or U. 1040nr ez S. 1040nr ez possession, do not use that tax in figuring the amount of your credit. 1040nr ez For information on alien status and effectively connected income, see Publication 519. 1040nr ez What Foreign Taxes Qualify for the Credit? In most cases, the following four tests must be met for any foreign tax to qualify for the credit. 1040nr ez The tax must be imposed on you. 1040nr ez You must have paid or accrued the tax. 1040nr ez The tax must be the legal and actual foreign tax liability. 1040nr ez The tax must be an income tax (or a tax in lieu of an income tax). 1040nr ez Certain foreign taxes do not qualify for the credit even if the four tests are met. 1040nr ez See Foreign Taxes for Which You Cannot Take a Credit, later. 1040nr ez Tax Must Be Imposed on You You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U. 1040nr ez S. 1040nr ez possession. 1040nr ez For example, a tax that is deducted from your wages is considered to be imposed on you. 1040nr ez You cannot shift the right to claim the credit by contract or other means. 1040nr ez Foreign country. 1040nr ez   A foreign country includes any foreign state and its political subdivisions. 1040nr ez Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. 1040nr ez U. 1040nr ez S. 1040nr ez possessions. 1040nr ez   For foreign tax credit purposes, all qualified taxes paid to U. 1040nr ez S. 1040nr ez possessions are considered foreign taxes. 1040nr ez For this purpose, U. 1040nr ez S. 1040nr ez possessions include Puerto Rico and American Samoa. 1040nr ez   When the term “foreign country” is used in this publication, it includes U. 1040nr ez S. 1040nr ez possessions unless otherwise stated. 1040nr ez You Must Have Paid or Accrued the Tax In most cases, you can claim the credit only if you paid or accrued the foreign tax to a foreign country or U. 1040nr ez S. 1040nr ez possession. 1040nr ez However, the paragraphs that follow describe some instances in which you can claim the credit even if you did not directly pay or accrue the tax yourself. 1040nr ez Joint return. 1040nr ez   If you file a joint return, you can claim the credit based on the total foreign income taxes paid or accrued by you and your spouse. 1040nr ez Combined income. 1040nr ez   If foreign tax is imposed on the combined income of two or more persons (for example, spouses), the tax is allocated among, and considered paid by, these persons on a pro rata basis in proportion to each person's portion of the combined income, as determined under foreign law and Regulations section 1. 1040nr ez 901-2(f)(3)(iii). 1040nr ez Combined income with respect to each foreign tax that is imposed on a combined basis (and combined income subject to tax exemption or preferential tax rates) is computed separately, and the tax on that combined income is allocated separately. 1040nr ez   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. 1040nr ez However, you can choose to apply the new rules to foreign taxes paid or accrued in tax years beginning after December 31, 2010, and before February 15, 2012. 1040nr ez For more details, see paragraphs (f) and (h) of Regulations section 1. 1040nr ez 901-2. 1040nr ez For similar rules applicable to prior tax years, see Regulations section 1. 1040nr ez 901-2 (revised as of April 1, 2011). 1040nr ez Example. 1040nr ez You and your spouse reside in Country X, which imposes income tax on your combined incomes. 1040nr ez Both of you use the “u” as your functional currency. 1040nr ez Country X apportions tax based on income. 1040nr ez You had income of 30,000u and your spouse had income of 20,000u. 1040nr ez Your filing status on your U. 1040nr ez S. 1040nr ez income tax return is married filing separately. 1040nr ez You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. 1040nr ez S income tax return. 1040nr ez Your spouse can claim only 40% (20,000u/50,000u). 1040nr ez Partner or S corporation shareholder. 1040nr ez   If you are a member of a partnership, or a shareholder in an S corporation, you can claim the credit based on your proportionate share of the foreign income taxes paid or accrued by the partnership or the S corporation. 1040nr ez These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. 1040nr ez However, if you are a shareholder in an S corporation that in turn owns stock in a foreign corporation, you cannot claim a credit for your share of foreign taxes paid by the foreign corporation. 1040nr ez Beneficiary. 1040nr ez   If you are a beneficiary of an estate or trust, you may be able to claim the credit based on your proportionate share of foreign income taxes paid or accrued by the estate or trust. 1040nr ez This amount will be shown on the Schedule K-1 you receive from the estate or trust. 1040nr ez However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. 1040nr ez Mutual fund shareholder. 1040nr ez   If you are a shareholder of a mutual fund or other regulated investment company (RIC), you may be able to claim the credit based on your share of foreign income taxes paid by the fund if it chooses to pass the credit on to its shareholders. 1040nr ez You should receive from the mutual fund or other RIC a Form 1099-DIV, or similar statement, showing your share of the foreign income, and your share of the foreign taxes paid. 1040nr ez If you do not receive this information, you will need to contact the fund. 1040nr ez Controlled foreign corporation shareholder. 1040nr ez   If you are a shareholder of a controlled foreign corporation and choose to be taxed at corporate rates on the amount you must include in gross income from that corporation, you can claim the credit based on your share of foreign taxes paid or accrued by the controlled foreign corporation. 1040nr ez If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. 1040nr ez Controlled foreign corporation. 1040nr ez   A controlled foreign corporation is a foreign corporation in which U. 1040nr ez S. 1040nr ez shareholders own more than 50% of the voting power or value of the stock. 1040nr ez You are considered a U. 1040nr ez S. 1040nr ez shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. 1040nr ez See Internal Revenue Code sections 951(b) and 958(b) for more information. 1040nr ez Tax Must Be the Legal and Actual Foreign Tax Liability The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. 1040nr ez Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. 1040nr ez Foreign tax refund. 1040nr ez   You cannot take a foreign tax credit for income taxes paid to a foreign country if it is reasonably certain the amount would be refunded, credited, rebated, abated, or forgiven if you made a claim. 1040nr ez   For example, the United States has tax treaties with many countries allowing U. 1040nr ez S. 1040nr ez citizens and residents reductions in the rates of tax of those foreign countries. 1040nr ez However, some treaty countries require U. 1040nr ez S. 1040nr ez citizens and residents to pay the tax figured without regard to the lower treaty rates and then claim a refund for the amount by which the tax actually paid is more than the amount of tax figured using the lower treaty rate. 1040nr ez The qualified foreign tax is the amount figured using the lower treaty rate and not the amount actually paid, because the excess tax is refundable. 1040nr ez Subsidy received. 1040nr ez   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. 1040nr ez This rule applies even if the subsidy is given to a person related to you, or persons who participated with you in a transaction or a related transaction. 1040nr ez A subsidy can be provided by any means but must be determined, directly or indirectly, in relation to the amount of tax, or to the base used to figure the tax. 1040nr ez   The term “subsidy” includes any type of benefit. 1040nr ez Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 1040nr ez Shareholder receiving refund for corporate tax in integrated system. 1040nr ez   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. 1040nr ez You may be able to claim a refund of these taxes from the foreign government. 1040nr ez You must include the refund (including any amount withheld) in your income in the year received. 1040nr ez Any tax withheld from the refund is a qualified foreign tax. 1040nr ez Example. 1040nr ez You are a shareholder of a French corporation. 1040nr ez You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. 1040nr ez The French government imposes a 15% withholding tax ($15) on the refund you received. 1040nr ez You receive a check for $85. 1040nr ez You include $100 in your income. 1040nr ez The $15 of tax withheld is a qualified foreign tax. 1040nr ez Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) In most cases, only income, war profits, and excess profits taxes (income taxes) qualify for the foreign tax credit. 1040nr ez Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. 1040nr ez Furthermore, foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax. 1040nr ez See Taxes in Lieu of Income Taxes , later. 1040nr ez Income Tax Simply because the levy is called an income tax by the foreign taxing authority does not make it an income tax for this purpose. 1040nr ez A foreign levy is an income tax only if it meets both of the following requirements. 1040nr ez It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. 1040nr ez The predominant character of the tax is that of an income tax in the U. 1040nr ez S. 1040nr ez sense. 1040nr ez A foreign levy may meet these requirements even if the foreign tax law differs from U. 1040nr ez S. 1040nr ez tax law. 1040nr ez The foreign law may include in income items that U. 1040nr ez S. 1040nr ez law does not include, or it may allow certain exclusions or deductions that U. 1040nr ez S. 1040nr ez law does not allow. 1040nr ez Specific economic benefit. 1040nr ez   In most cases, you get a specific economic benefit if you receive, or are considered to receive, an economic benefit from the foreign country imposing the levy, and: If there is a generally imposed income tax, the economic benefit is not available on substantially the same terms to all persons subject to the income tax, or If there is no generally imposed income tax, the economic benefit is not available on substantially the same terms to the population of the foreign country in general. 1040nr ez   You are considered to receive a specific economic benefit if you have a business transaction with a person who receives a specific economic benefit from the foreign country and, under the terms and conditions of the transaction, you receive directly or indirectly all or part of the benefit. 1040nr ez   However, see the exception discussed later under Pension, unemployment, and disability fund payments . 1040nr ez Economic benefits. 1040nr ez   Economic benefits include the following. 1040nr ez Goods. 1040nr ez Services. 1040nr ez Fees or other payments. 1040nr ez Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. 1040nr ez Discharges of contractual obligations. 1040nr ez   In most cases, the right or privilege merely to engage in business is not an economic benefit. 1040nr ez Dual-capacity taxpayers. 1040nr ez   If you are subject to a foreign country's levy and you also receive a specific economic benefit from that foreign country, you are a “dual-capacity taxpayer. 1040nr ez ” As a dual-capacity taxpayer, you cannot claim a credit for any part of the foreign levy, unless you establish that the amount paid under a distinct element of the foreign levy is a tax, rather than a compulsory payment for a direct or indirect specific economic benefit. 1040nr ez    For more information on how to establish amounts paid under separate elements of a levy, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Pension, unemployment, and disability fund payments. 1040nr ez   A foreign tax imposed on an individual to pay for retirement, old-age, death, survivor, unemployment, illness, or disability benefits, or for substantially similar purposes, is not payment for a specific economic benefit if the amount of the tax does not depend on the age, life expectancy, or similar characteristics of that individual. 1040nr ez    No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. 1040nr ez For more information about these agreements, see Publication 54. 1040nr ez Soak-up taxes. 1040nr ez   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. 1040nr ez A tax is a soak-up tax to the extent that liability for it depends on the availability of a credit for it against income tax imposed by another country. 1040nr ez This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. 1040nr ez Penalties and interest. 1040nr ez   Amounts paid to a foreign government to satisfy a liability for interest, fines, penalties, or any similar obligation are not taxes and do not qualify for the credit. 1040nr ez Taxes not based on income. 1040nr ez   Foreign taxes based on gross receipts or the number of units produced, rather than on realized net income, do not qualify unless they are imposed in lieu of an income tax, as discussed next. 1040nr ez Taxes based on assets, such as property taxes, do not qualify for the credit. 1040nr ez Taxes in Lieu of Income Taxes A tax paid or accrued to a foreign country qualifies for the credit if it is imposed in lieu of an income tax otherwise generally imposed. 1040nr ez A foreign levy is a tax in lieu of an income tax only if: It is not payment for a specific economic benefit as discussed earlier, and The tax is imposed in place of, and not in addition to, an income tax otherwise generally imposed. 1040nr ez A tax in lieu of an income tax does not have to be based on realized net income. 1040nr ez A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. 1040nr ez In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. 1040nr ez However, if the foreign country imposes a soak-up tax in lieu of an income tax, the amount that does not qualify for foreign tax credit is the lesser of the following amounts. 1040nr ez The soak-up tax. 1040nr ez The foreign tax you paid that is more than the amount you would have paid if you had been subject to the generally imposed income tax. 1040nr ez Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. 1040nr ez These are: Taxes on excluded income, Taxes for which you can only take an itemized deduction, Taxes on foreign mineral income, Taxes from international boycott operations, A portion of taxes on combined foreign oil and gas income, Taxes of U. 1040nr ez S. 1040nr ez persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. 1040nr ez Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. 1040nr ez S. 1040nr ez gross income. 1040nr ez Foreign Earned Income and Housing Exclusions You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U. 1040nr ez S. 1040nr ez income under the foreign earned income exclusion or the foreign housing exclusion. 1040nr ez See Publication 54 for more information on the foreign earned income and housing exclusions. 1040nr ez Wages completely excluded. 1040nr ez   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. 1040nr ez Wages partly excluded. 1040nr ez   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. 1040nr ez You find the amount allocable to your excluded wages by multiplying the foreign tax paid or accrued on foreign earned income received or accrued during the tax year by a fraction. 1040nr ez   The numerator of the fraction is your foreign earned income and housing amounts excluded under the foreign earned income and housing exclusions for the tax year minus otherwise deductible expenses definitely related and properly apportioned to that income. 1040nr ez Deductible expenses do not include the foreign housing deduction. 1040nr ez   The denominator is your total foreign earned income received or accrued during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 1040nr ez If the foreign law taxes foreign earned income and some other income (for example, earned income from U. 1040nr ez S. 1040nr ez sources or a type of income not subject to U. 1040nr ez S. 1040nr ez tax), and the taxes on the other income cannot be segregated, the denominator of the fraction is the total amount of income subject to the foreign tax minus deductible expenses allocable to that income. 1040nr ez Example. 1040nr ez You are a U. 1040nr ez S. 1040nr ez citizen and a cash basis taxpayer, employed by Company X and living in Country A. 1040nr ez Your records show the following: Foreign earned income received $125,000 Unreimbursed business travel expenses 20,000 Income tax paid to Country A 30,000 Exclusion of foreign earned  income and housing allowance 97,600     Because you can exclude part of your wages, you cannot claim a credit for part of the foreign taxes. 1040nr ez To find that part, do the following. 1040nr ez First, find the amount of business expenses allocable to excluded wages and therefore not deductible. 1040nr ez To do this, multiply the otherwise deductible expenses by a fraction. 1040nr ez That fraction is the excluded wages over your foreign earned income. 1040nr ez   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. 1040nr ez To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). 1040nr ez The result is $81,984. 1040nr ez Then, find the denominator of the fraction by subtracting all your deductible expenses from all your foreign earned income ($125,000 − $20,000 = $105,000). 1040nr ez Finally, multiply the foreign tax you paid by the resulting fraction. 1040nr ez   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. 1040nr ez Taxes on Income From Puerto Rico Exempt From U. 1040nr ez S. 1040nr ez Tax If you have income from Puerto Rican sources that is not taxable, you must reduce your foreign taxes paid or accrued by the taxes allocable to the exempt income. 1040nr ez For information on figuring the reduction, see Publication 570. 1040nr ez Possession Exclusion If you are a bona fide resident of American Samoa and exclude income from sources in American Samoa, you cannot take a credit for the taxes you pay or accrue on the excluded income. 1040nr ez For more information on this exclusion, see Publication 570. 1040nr ez Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. 1040nr ez However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. 1040nr ez Taxes for Which You Can Only Take an Itemized Deduction You cannot claim a foreign tax credit for foreign income taxes paid or accrued under the following circumstances. 1040nr ez However, you can claim an itemized deduction for these taxes. 1040nr ez See Choosing To Take Credit or Deduction , earlier. 1040nr ez Taxes Imposed By Sanctioned Countries (Section 901(j) Income) You cannot claim a foreign tax credit for income taxes paid or accrued to any country if the income giving rise to the tax is for a period (the sanction period) during which: The Secretary of State has designated the country as one that repeatedly provides support for acts of international terrorism, The United States has severed or does not conduct diplomatic relations with the country, or The United States does not recognize the country's government, and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act. 1040nr ez The following countries meet this description for 2013. 1040nr ez Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. 1040nr ez Cuba. 1040nr ez Iran. 1040nr ez Libya (but see Note later). 1040nr ez North Korea. 1040nr ez Sudan. 1040nr ez Syria. 1040nr ez Waiver of denial of the credit. 1040nr ez   A waiver can be granted to a sanctioned country if the President of the United States determines that granting the waiver is in the national interest of the United States and will expand trade and investment opportunities for U. 1040nr ez S. 1040nr ez companies in the sanctioned country. 1040nr ez The President must report to Congress his intentions to grant the waiver and his reasons for granting the waiver not less than 30 days before the date on which the waiver is granted. 1040nr ez Note. 1040nr ez Effective December 10, 2004, the President granted a waiver to Libya. 1040nr ez Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. 1040nr ez Limit on credit. 1040nr ez   In figuring the foreign tax credit limit, discussed later, income from a sanctioned country is a separate category of foreign income unless a Presidential waiver is granted. 1040nr ez You must fill out a separate Form 1116 for this income. 1040nr ez This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. 1040nr ez Example. 1040nr ez You lived and worked in Iran until August, when you were transferred to Italy. 1040nr ez You paid taxes to each country on the income earned in that country. 1040nr ez You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. 1040nr ez Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. 1040nr ez You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. 1040nr ez Figuring the credit when a sanction ends. 1040nr ez    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. 1040nr ez For any of these countries, you can claim a foreign tax credit for the taxes paid or accrued to that country on the income for the period that begins after the end of the sanction period or the date the Presidential waiver was granted. 1040nr ez Example. 1040nr ez The sanctions against Country X ended on July 31. 1040nr ez On August 19, you receive a distribution from a mutual fund of Country X income. 1040nr ez The fund paid Country X income tax for you on the distribution. 1040nr ez Because the distribution was made after the sanction ended, you may include the foreign tax paid on the distribution to compute your foreign tax credit. 1040nr ez Amounts for the nonsanctioned period. 1040nr ez   If a sanction period ends (or a Presidential waiver is granted) during your tax year and you are not able to determine the actual income and taxes for that period, you can allocate amounts to that period based on the number of days in the period that fall in your tax year. 1040nr ez Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. 1040nr ez   Number of nonsanctioned days in year  Number of days in year Example. 1040nr ez You are a calendar year filer and received $20,000 of income from Country X in 2013 on which you paid tax of $4,500. 1040nr ez Sanctions against Country X ended on July 11, 2013. 1040nr ez You are unable to determine how much of the income or tax is for the nonsanctioned period. 1040nr ez Because your tax year starts on January 1, and the Country X sanction ended on July 11, 2013, 173 days of your tax year are in the nonsanctioned period. 1040nr ez You would compute the income for the nonsanctioned period as follows. 1040nr ez 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. 1040nr ez 173 365 × $4,500 = $2,133 To figure your foreign tax credit, you would use $9,479 as the income from Country X and $2,133 as the tax. 1040nr ez Further information. 1040nr ez   The rules for figuring the foreign tax credit after a country's sanction period ends are more fully explained in Revenue Ruling 92-62, Cumulative Bulletin 1992-2, page 193. 1040nr ez This Cumulative Bulletin can be found in many libraries and IRS offices. 1040nr ez Table 1. 1040nr ez Countries Removed From the Sanction List or Granted Presidential Waiver   Sanction Period Country Starting Date Ending Date Iraq February 1, 1991 June 27, 2004 Libya January 1, 1987 December 9, 2004* *Presidential waiver granted for qualified income taxes arising after December 9, 2004. 1040nr ez Taxes Imposed on Certain Dividends You cannot claim a foreign tax credit for withholding tax (defined later ) on dividends paid or accrued if either of the following applies to the dividends. 1040nr ez The dividends are on stock you held for less than 16 days during the 31-day period that begins 15 days before the ex-dividend date (defined later). 1040nr ez The dividends are for a period or periods totaling more than 366 days on preferred stock you held for less than 46 days during the 91-day period that begins 45 days before the ex-dividend date. 1040nr ez If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. 1040nr ez When figuring how long you held the stock, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. 1040nr ez Regardless of how long you held the stock, you cannot claim the credit to the extent you have an obligation under a short sale or otherwise to make payments related to the dividend for positions in substantially similar or related property. 1040nr ez Withholding tax. 1040nr ez   For this purpose, withholding tax includes any tax determined on a gross basis. 1040nr ez It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 1040nr ez Ex-dividend date. 1040nr ez   The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. 1040nr ez Example 1. 1040nr ez You bought common stock from a foreign corporation on November 3. 1040nr ez You sold the stock on November 19. 1040nr ez You received a dividend on this stock because you owned it on the ex-dividend date of November 5. 1040nr ez To claim the credit, you must have held the stock for at least 16 days within the 31-day period that began on October 21 (15 days before the ex-dividend date). 1040nr ez Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. 1040nr ez Example 2. 1040nr ez The facts are the same as in Example 1 except that you sold the stock on November 14. 1040nr ez You held the stock for only 11 days. 1040nr ez You are not entitled to the credit. 1040nr ez Exception. 1040nr ez   If you are a securities dealer who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes paid on dividends regardless of how long you held the stock or whether you were obligated to make payments for positions in substantially similar or related property. 1040nr ez See section 901(k)(4) of the Internal Revenue Code for more information. 1040nr ez Taxes Withheld on Income or Gain (Other Than Dividends) For income or gain (other than dividends) paid or accrued on property, you cannot claim a foreign tax credit for withholding tax (defined later): If you have not held the property for at least 16 days during the 31-day period that begins 15 days before the date on which the right to receive the payment arises, or To the extent you have to make related payments on positions in substantially similar or related property. 1040nr ez When figuring how long you held the property, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. 1040nr ez Withholding tax. 1040nr ez   For this purpose, withholding tax includes any tax determined on a gross basis. 1040nr ez It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 1040nr ez Exception for dealers. 1040nr ez   If you are a dealer in property who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes withheld on income or gain from that property regardless of how long you held it or whether you have to make related payments on positions in substantially similar or related property. 1040nr ez See section 901(I)(2) of the Internal Revenue Code for more information. 1040nr ez Covered Asset Acquisition ???You cannot take a credit for the disqualified portion of any foreign tax paid or accrued in connection with a covered asset acquisition. 1040nr ez A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. 1040nr ez S. 1040nr ez tax purposes but not for foreign tax purposes. 1040nr ez For more information, see Internal Revenue Code section 901(m). 1040nr ez The IRS intends to issue guidance that will explain this provision in greater detail. 1040nr ez Taxes in Connection With the Purchase or Sale of Oil or Gas You cannot claim a foreign tax credit for taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of purchase or sale. 1040nr ez Taxes on Foreign Mineral Income You must reduce any taxes paid or accrued to a foreign country or possession on mineral income from that country or possession if you were allowed a deduction for percentage depletion for any part of the mineral income. 1040nr ez For details, see Regulations section 1. 1040nr ez 901-3. 1040nr ez Taxes From International Boycott Operations If you participate in or cooperate with an international boycott during the tax year, your foreign taxes resulting from boycott activities will reduce the total taxes available for credit. 1040nr ez See the instructions for line 12 in the Form 1116 instructions to figure this reduction. 1040nr ez In most cases, this rule does not apply to employees with wages who are working and living in boycotting countries, or to retirees with pensions who are living in these countries. 1040nr ez List of boycotting countries. 1040nr ez   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. 1040nr ez As of November 2013, the following countries are listed. 1040nr ez Iraq. 1040nr ez Kuwait. 1040nr ez Lebanon. 1040nr ez Libya. 1040nr ez Qatar. 1040nr ez Saudi Arabia. 1040nr ez Syria. 1040nr ez United Arab Emirates. 1040nr ez Yemen. 1040nr ez    For information concerning changes to the list, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Determinations of whether the boycott rule applies. 1040nr ez   You may request a determination from the Internal Revenue Service as to whether a particular operation constitutes participation in or cooperation with an international boycott. 1040nr ez The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. 1040nr ez Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. 1040nr ez Public inspection. 1040nr ez   A determination and any related background file is open to public inspection. 1040nr ez However, your identity and certain other information will remain confidential. 1040nr ez Reporting requirements. 1040nr ez   You must file a report with the IRS if you or any of the following persons have operations in or related to a boycotting country or with the government, a company, or a national of a boycotting country. 1040nr ez A foreign corporation in which you own 10% or more of the voting power of all voting stock but only if you own the stock of the foreign corporation directly or through foreign entities. 1040nr ez A partnership in which you are a partner. 1040nr ez A trust you are treated as owning. 1040nr ez Form 5713 required. 1040nr ez   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. 1040nr ez See the Instructions for Form 5713 for information on when and where to file the form. 1040nr ez Penalty for failure to file. 1040nr ez   If you willfully fail to make a report, in addition to other penalties, you may be fined $25,000 or imprisoned for no more than one year, or both. 1040nr ez Taxes on Combined Foreign Oil and Gas Income You must reduce your foreign taxes by a portion of any foreign taxes imposed on combined foreign oil and gas income. 1040nr ez The amount of the reduction is the amount by which your foreign oil and gas taxes exceed the amount of your combined foreign oil and gas income multiplied by a fraction equal to your pre-credit U. 1040nr ez S. 1040nr ez tax liability (Form 1040, line 44) divided by your worldwide taxable income. 1040nr ez You may be entitled to carry over to other years taxes reduced under this rule. 1040nr ez See Internal Revenue Code section 907(f). 1040nr ez Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. 1040nr ez Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. 1040nr ez Taxes of U. 1040nr ez S. 1040nr ez Persons Controlling Foreign Corporations and Partnerships If you had control of a foreign corporation or a foreign partnership for the annual accounting period of that corporation or partnership that ended with or within your tax year, you may have to file an annual information return. 1040nr ez If you do not file the required information return, you may have to reduce the foreign taxes that may be used for the foreign tax credit. 1040nr ez See Penalty for not filing Form 5471 or Form 8865 , later. 1040nr ez U. 1040nr ez S. 1040nr ez persons controlling foreign corporations. 1040nr ez   If you are a U. 1040nr ez S. 1040nr ez citizen or resident who had control of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of that corporation, you may have to file an annual information return on Form 5471, Information Return of U. 1040nr ez S. 1040nr ez Persons With Respect To Certain Foreign Corporations. 1040nr ez Under this rule, you generally had control of a foreign corporation if at any time during your tax year you owned: Stock possessing more than 50% of the total combined voting power of all classes of stock entitled to vote, or More than 50% of the total value of shares of all classes of stock of the foreign corporation. 1040nr ez U. 1040nr ez S. 1040nr ez persons controlling foreign partnerships. 1040nr ez   If you are a U. 1040nr ez S. 1040nr ez citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file