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Software For 1040nr

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Software For 1040nr

Software for 1040nr 3. Software for 1040nr   Claiming the Special Depreciation Allowance Table of Contents Introduction What Is Qualified Property?Qualified Reuse and Recycling Property Qualified Cellulosic Biofuel Plant Property Qualified Disaster Assistance Property Certain Qualified Property Acquired After December 31, 2007 Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance How Much Can You Deduct? How Can You Elect Not To Claim an Allowance? When Must You Recapture an Allowance? Introduction You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. Software for 1040nr The allowance applies only for the first year you place the property in service. Software for 1040nr For qualified property placed in service in 2013, you can take an additional 50% special allowance. Software for 1040nr The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. Software for 1040nr This chapter explains what is qualified property. Software for 1040nr It also includes rules regarding how to figure an allowance, how to elect not to claim an allowance, and when you must recapture an allowance. Software for 1040nr Corporations can elect to accelerate certain minimum tax credits in lieu of claiming the special depreciation allowance for eligible qualified property. Software for 1040nr See Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance , later. Software for 1040nr See chapter 6 for information about getting publications and forms. Software for 1040nr What Is Qualified Property? Your property is qualified property if it is one of the following. Software for 1040nr Qualified reuse and recycling property. Software for 1040nr Qualified cellulosic biofuel plant property. Software for 1040nr Qualified disaster assistance property. Software for 1040nr Certain qualified property acquired after December 31, 2007. Software for 1040nr The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation allowance. Software for 1040nr Qualified Reuse and Recycling Property You can take a 50% special depreciation allowance for qualified reuse and recycling property. Software for 1040nr Qualified reuse and recycling property is any machinery or equipment (not including buildings or real estate), along with any appurtenance, that is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials (as defined in section 168(m)(3)(B) of the Internal Revenue Code). Software for 1040nr Qualified reuse and recycling property also includes software necessary to operate such equipment. Software for 1040nr The property must meet the following requirements. Software for 1040nr The property must be depreciated under MACRS. Software for 1040nr The property must have a useful life of at least 5 years. Software for 1040nr The original use of the property must begin with you after August 31, 2008. Software for 1040nr You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) after August 31, 2008, with no binding written contract for the acquisition in effect before September 1, 2008. Software for 1040nr The property must be placed in service for use in your trade or business after August 31, 2008. Software for 1040nr Excepted Property Qualified reuse and recycling property does not include any of the following. Software for 1040nr Any rolling stock or other equipment used to transport reuse or recyclable materials. Software for 1040nr Property required to be depreciated using the Alternative Depreciation System (ADS). Software for 1040nr For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Software for 1040nr Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies. Software for 1040nr Property for which you elected not to claim any special depreciation allowance (discussed later). Software for 1040nr Property placed in service and disposed of in the same tax year. Software for 1040nr Property converted from business use to personal use in the same tax year acquired. Software for 1040nr Property converted from personal use to business use in the same or later tax year may be qualified reuse and recycling property. Software for 1040nr Qualified Cellulosic Biofuel Plant Property You can take a 50% special depreciation allowance for qualified cellulosic biofuel plant property. Software for 1040nr Cellulosic biofuel is any liquid fuel which is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. Software for 1040nr Examples include bagasse (from sugar cane), corn stalks, and switchgrass. Software for 1040nr The property must meet the following requirements. Software for 1040nr The property is used in the United States solely to produce cellulosic biofuel. Software for 1040nr The original use of the property must begin with you after December 20, 2006. Software for 1040nr You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) after December 20, 2006, with no binding written contract for acquisition in effect before December 21, 2006. Software for 1040nr The property must be placed in service for use in your trade or business or for the production of income after October 3, 2008, and before January 3, 2013. Software for 1040nr Note. Software for 1040nr For property placed in service after January 2, 2013, and before January 1, 2014, you can take a 50% special depreciation allowance for qualified second generation biofuel plant property that is used solely in the United States to produce second generation biofuel (as defined in section 40(b)(6)(E)). Software for 1040nr The other requirements for qualified second generation biofuel plant property to be eligible for the special depreciation allowance are identical to the requirements discussed for Qualified Cellulosic Biofuel Plant Property above. Software for 1040nr Special Rules Sale-leaseback. Software for 1040nr   If you sold qualified cellulosic biofuel plant property you placed in service after October 3, 2008, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. Software for 1040nr   The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before December 21, 2006. Software for 1040nr Syndicated leasing transactions. Software for 1040nr   If qualified cellulosic biofuel plant property is originally placed in service by a lessor after October 3, 2008, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. Software for 1040nr   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months. Software for 1040nr Excepted Property Qualified cellulosic biofuel plant property does not include any of the following. Software for 1040nr Property placed in service and disposed of in the same tax year. Software for 1040nr Property converted from business use to personal use in the same tax year it is acquired. Software for 1040nr Property converted from personal use to business use in the same or later tax year may be qualified cellulosic biomass ethanol plant property. Software for 1040nr Property required to be depreciated using the Alternative Depreciation System (ADS). Software for 1040nr For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Software for 1040nr Property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code. Software for 1040nr Property for which you elected not to claim any special depreciation allowance (discussed later). Software for 1040nr Property for which a deduction was taken under section 179C for certain qualified refinery property. Software for 1040nr Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies. Software for 1040nr Qualified Disaster Assistance Property You can take a 50% special depreciation allowance for qualified disaster assistance property placed in service in federally declared disaster areas in which the disaster occurred in 2009. Software for 1040nr A list of the federally declared disaster areas is available at the FEMA website at www. Software for 1040nr fema. Software for 1040nr gov. Software for 1040nr Your property is qualified disaster assistance property if it meets the following requirements. Software for 1040nr The property is nonresidential real property or residential real property placed in service before January 1, 2014, in a federally declared disaster area in which the disaster occurred in 2009. Software for 1040nr You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) on or after the applicable disaster date, with no binding written contract for the acquisition in effect before the applicable disaster date. Software for 1040nr The property must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the applicable federally declared disaster. Software for 1040nr The property must be similar in nature to, and located in the same county as, the rehabilitated or replaced property. Software for 1040nr The original use of the property within the applicable disaster area must have begun with you on or after the applicable disaster date. Software for 1040nr The property is placed in service by you on or before the date which is the last day of the fourth calendar year. Software for 1040nr Substantially all (80% or more) of the use of the property must be in the active conduct of your trade or business in a federally declared disaster area, occurring in 2009. Software for 1040nr It is not excepted property (explained later in Excepted Property ). Software for 1040nr Special Rules Sale-leaseback. Software for 1040nr   If you sold qualified disaster assistance property you placed in service after the applicable disaster date and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. Software for 1040nr   The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before the applicable disaster date. Software for 1040nr Syndicated leasing transactions. Software for 1040nr   If qualified disaster assistance property is originally placed in service by a lessor after the applicable disaster date, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. Software for 1040nr   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months. Software for 1040nr Excepted Property Qualified disaster assistance property does not include any of the following. Software for 1040nr Property required to be depreciated using the Alternative Depreciation System (ADS). Software for 1040nr For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Software for 1040nr Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code. Software for 1040nr Any qualified revitalization building (defined later) placed in service before January 1, 2010, for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures. Software for 1040nr Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises. Software for 1040nr Any property for which the special allowance under section 168(k) or section 1400N(d) of the Internal Revenue Code applies. Software for 1040nr Property for which you elected not to claim any special depreciation allowance (discussed later). Software for 1040nr Property placed in service and disposed of in the same tax year. Software for 1040nr Property converted from business use to personal use in the same tax year acquired. Software for 1040nr Property converted from personal use to business use in the same or later tax year may be qualified disaster assistance property. Software for 1040nr Any gambling or animal racing property (defined later). Software for 1040nr Qualified revitalization building. Software for 1040nr   This is a commercial building and its structural components that you placed in service in a renewal community before January 1, 2010. Software for 1040nr If the building is new, the original use of the building must begin with you. Software for 1040nr If the building is not new, you must substantially rehabilitate the building and then place it in service. Software for 1040nr For more information, including definitions of substantially rehabilitated building and qualified revitalization expenditure, see section 1400I(b) of the Internal Revenue Code. Software for 1040nr Gambling or animal racing property. Software for 1040nr   Gambling or animal racing property includes the following personal and real property. Software for 1040nr Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing. Software for 1040nr Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing. Software for 1040nr Certain Qualified Property Acquired After December 31, 2007 You can take a 50% special depreciation deduction allowance for certain qualified property acquired after December 31, 2007. Software for 1040nr Your property is qualified property if it meets the following requirements. Software for 1040nr It is one of the following types of property. Software for 1040nr Tangible property depreciated under MACRS with a recovery period of 20 years or less. Software for 1040nr Water utility property. Software for 1040nr Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Software for 1040nr (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Software for 1040nr ) Qualified leasehold improvement property (defined under Qualified leasehold improvement property later). Software for 1040nr You must have acquired the property after December 31, 2007, with no binding written contract for the acquisition in effect before January 1, 2008. Software for 1040nr The property must be placed in service for use in your trade or business or for the production of income before January 1, 2014 (before January 1, 2015, for certain property with a long production period and certain aircraft (defined next)). Software for 1040nr The original use of the property must begin with you after December 31, 2007. Software for 1040nr It is not excepted property (explained later in Excepted property). Software for 1040nr Qualified leasehold improvement property. Software for 1040nr    Generally, this is any improvement to an interior part of a building that is nonresidential real property, if all the following requirements are met. Software for 1040nr The improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the building. Software for 1040nr That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. Software for 1040nr The improvement is placed in service more than 3 years after the date the building was first placed in service by any person. Software for 1040nr The improvement is section 1250 property. Software for 1040nr See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of section 1250 property. Software for 1040nr   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. Software for 1040nr The enlargement of the building. Software for 1040nr Any elevator or escalator. Software for 1040nr Any structural component benefiting a common area. Software for 1040nr The internal structural framework of the building. Software for 1040nr   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. Software for 1040nr However, a lease between related persons is not treated as a lease. Software for 1040nr Related persons. Software for 1040nr   For this purpose, the following are related persons. Software for 1040nr Members of an affiliated group. Software for 1040nr An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Software for 1040nr A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation. Software for 1040nr Two corporations that are members of the same controlled group. Software for 1040nr A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Software for 1040nr The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Software for 1040nr The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Software for 1040nr A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Software for 1040nr Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding stock of each corporation. Software for 1040nr A corporation and a partnership if the same persons own both of the following. Software for 1040nr 80% or more of the value of the outstanding stock of the corporation. Software for 1040nr 80% or more of the capital or profits interest in the partnership. Software for 1040nr The executor and beneficiary of any estate. Software for 1040nr Long Production Period Property To be qualified property, long production period property must meet the following requirements. Software for 1040nr It must meet the requirements in (2)-(5), above. Software for 1040nr The property has a recovery period of at least 10 years or is transportation property. Software for 1040nr Transportation property is tangible personal property used in the trade or business of transporting persons or property. Software for 1040nr The property is subject to section 263A of the Internal Revenue Code. Software for 1040nr The property has an estimated production period exceeding 1 year and an estimated production cost exceeding $1,000,000. Software for 1040nr Noncommercial Aircraft To be qualified property, noncommercial aircraft must meet the following requirements. Software for 1040nr It must meet the requirements in (2)-(5), above. Software for 1040nr The aircraft must not be tangible personal property used in the trade or business of transporting persons or property (except for agricultural or firefighting purposes). Software for 1040nr The aircraft must be purchased (as discussed under Property Acquired by Purchase in chapter 2 ) by a purchaser who at the time of the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the cost or $100,000. Software for 1040nr The aircraft must have an estimated production period exceeding four months and a cost exceeding $200,000. Software for 1040nr Special Rules Sale-leaseback. Software for 1040nr   If you sold qualified property you placed in service after December 31, 2007, and leased it back within 3 months after you originally placed in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. Software for 1040nr   The property will not qualify for the special depreciation allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before January 1, 2008. Software for 1040nr Syndicated leasing transactions. Software for 1040nr   If qualified property is originally placed in service by a lessor after December 31, 2007, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. Software for 1040nr   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of the last sale if the property is sold within 3 months after the final unit is placed in service and the period between the time the first and last units are placed in service does not exceed 12 months. Software for 1040nr Excepted Property Qualified property does not include any of the following. Software for 1040nr Property placed in service and disposed of in the same tax year. Software for 1040nr Property converted from business use to personal use in the same tax year acquired. Software for 1040nr Property converted from personal use to business use in the same or later tax year may be qualified property. Software for 1040nr Property required to be depreciated under the Alternative Depreciation System (ADS). Software for 1040nr This includes listed property used 50% or less in a qualified business use. Software for 1040nr For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Software for 1040nr Qualified restaurant property (as defined in section 168(e)(7) of the Internal Revenue Code). Software for 1040nr Qualified retail improvement property (as defined in section 168(e)(8) of the Internal Revenue Code). Software for 1040nr Property for which you elected not to claim any special depreciation allowance (discussed later). Software for 1040nr Property for which you elected to accelerate certain credits in lieu of the special depreciation allowance (discussed next). Software for 1040nr Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance An election made by a corporation to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, continues to apply to round 2 extension property (as defined in section 168(k)(4)(I)(iv)), unless the corporation made an election not to apply the section 168(k)(4) election to round 2 extension property for its first tax year ending after December 31, 2010. Software for 1040nr For 2013, round 2 extension property generally is long production period and noncommercial aircraft if acquired after March 31, 2008, and placed in service after December 31, 2012, but before January 1, 2014. Software for 1040nr An election made by a corporation to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, continues to apply to round 3 extension property (as defined in section 168(k)(4)(J)(iv)), unless the corporation makes an election not to apply the section 168(k)(4) election to round 3 extension property. Software for 1040nr If a corporation did not make a section 168(k)(4) election for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, the corporation may elect for its first tax year ending after December 31, 2012, to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for only round 3 extension property. Software for 1040nr If you make an election to accelerate these credits in lieu of claiming the special depreciation allowance for eligible property, you must not take the 50% special depreciation allowance for the property and must depreciate the basis in the property under MACRS using the straight line method. Software for 1040nr See Which Depreciation Method Applies in chapter 4 . Software for 1040nr Once made, the election cannot be revoked without IRS consent. Software for 1040nr Additional guidance. Software for 1040nr   For additional guidance on the election to accelerate the research or minimum tax credit in lieu of claiming the special depreciation allowance, see Rev. Software for 1040nr Proc. Software for 1040nr 2008-65 on page 1082 of Internal Revenue Bulletin 2008-44, available at www. Software for 1040nr irs. Software for 1040nr gov/pub/irs-irbs/irb08-44. Software for 1040nr pdf, Rev. Software for 1040nr Proc. Software for 1040nr 2009-16 on page 449 of Internal Revenue Bulletin 2009-06, available at www. Software for 1040nr irs. Software for 1040nr gov/pub/irs-irbs/irb09-06. Software for 1040nr pdf, and Rev. Software for 1040nr Proc. Software for 1040nr 2009-33 on page 150 of Internal Revenue Bulletin 2009-29, available at www. Software for 1040nr irs. Software for 1040nr gov/pub/irs-irbs/irb09-29. Software for 1040nr pdf. Software for 1040nr Also, see Form 3800, General Business Credit; Form 8827, Credit for Prior Year Minimum Tax — Corporations; and related instructions. Software for 1040nr   Additional guidance regarding the election to accelerate the minimum tax credit in lieu of claiming the special depreciation allowance for round 2 extension property and round 3 extension property may also be available in later Internal Revenue Bulletins available at www. Software for 1040nr irs. Software for 1040nr gov/irb. Software for 1040nr How Much Can You Deduct? Figure the special depreciation allowance by multiplying the depreciable basis of qualified reuse and recycling property, qualified cellulosic biofuel plant property, qualified disaster assistance property, and certain qualified property acquired after December 31, 2007, by 50%. Software for 1040nr For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. Software for 1040nr For qualified property that is listed property, enter the special allowance on line 25 in Part V of Form 4562. Software for 1040nr If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance. Software for 1040nr Depreciable basis. Software for 1040nr   This is the property's cost or other basis multiplied by the percentage of business/investment use, reduced by the total amount of any credits and deductions allocable to the property. Software for 1040nr   The following are examples of some credits and deductions that reduce depreciable basis. Software for 1040nr Any section 179 deduction. Software for 1040nr Any deduction for removal of barriers to the disabled and the elderly. Software for 1040nr Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Software for 1040nr Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code. Software for 1040nr   For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Software for 1040nr   For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . Software for 1040nr For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . Software for 1040nr Depreciating the remaining cost. Software for 1040nr   After you figure your special depreciation allowance for your qualified property, you can use the remaining cost to figure your regular MACRS depreciation deduction (discussed in chapter 4 . Software for 1040nr Therefore, you must reduce the depreciable basis of the property by the special depreciation allowance before figuring your regular MACRS depreciation deduction. Software for 1040nr Example. Software for 1040nr On November 1, 2013, Tom Brown bought and placed in service in his business qualified property that cost $450,000. Software for 1040nr He did not elect to claim a section 179 deduction. Software for 1040nr He deducts 50% of the cost ($225,000) as a special depreciation allowance for 2013. Software for 1040nr He uses the remaining $225,000 of cost to figure his regular MACRS depreciation deduction for 2013 and later years. Software for 1040nr Like-kind exchanges and involuntary conversions. Software for 1040nr   If you acquire qualified property in a like-kind exchange or involuntary conversion, the carryover basis of the acquired property is eligible for a special depreciation allowance. Software for 1040nr After you figure your special allowance, you can use the remaining carryover basis to figure your regular MACRS depreciation deduction. Software for 1040nr In the year you claim the allowance (the year you place in service the property received in the exchange or dispose of involuntarily converted property), you must reduce the carryover basis of the property by the allowance before figuring your regular MACRS depreciation deduction. Software for 1040nr See Figuring the Deduction for Property Acquired in a Nontaxable Exchange , in chapter 4 under How Is the Depreciation Deduction Figured . Software for 1040nr The excess basis (the part of the acquired property's basis that exceeds its carryover basis) is also eligible for a special depreciation allowance. Software for 1040nr How Can You Elect Not To Claim an Allowance? You can elect, for any class of property, not to deduct any special allowances for all property in such class placed in service during the tax year. Software for 1040nr To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election. Software for 1040nr When to make election. Software for 1040nr   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Software for 1040nr   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Software for 1040nr Attach the election statement to the amended return. Software for 1040nr On the amended return, write “Filed pursuant to section 301. Software for 1040nr 9100-2. Software for 1040nr ” Revoking an election. Software for 1040nr   Once you elect not to deduct a special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Software for 1040nr A request to revoke the election is a request for a letter ruling. Software for 1040nr If you elect not to have any special allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Software for 1040nr When Must You Recapture an Allowance? When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Software for 1040nr See When Do You Recapture MACRS Depreciation in chapter 4 or more information. Software for 1040nr Recapture of allowance deducted for qualified GO Zone property. Software for 1040nr   If, in any year after the year you claim the special depreciation allowance for qualified GO Zone property (including specified GO Zone extension property), the property ceases to be used in the GO Zone, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Software for 1040nr For additional guidance, see Notice 2008-25 on page 484 of Internal Revenue Bulletin 2008-9. Software for 1040nr Qualified cellulosic biomass ethanol plant property and qualified cellulosic biofuel plant property. Software for 1040nr   If, in any year after the year you claim the special depreciation allowance for any qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, the property ceases to be qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Software for 1040nr Recapture of allowance for qualified Recovery Assistance property. Software for 1040nr   If, in any year after the year you claim the special depreciation allowance for qualified Recovery Assistance property, the property ceases to be used in the Kansas disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Software for 1040nr For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32. Software for 1040nr Recapture of allowance for qualified disaster assistance property. Software for 1040nr   If, in any year after the year you claim the special depreciation allowance for qualified disaster assistance property, the property ceases to be used in the applicable disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Software for 1040nr   For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32. Software for 1040nr Prev  Up  Next   Home   More Online Publications
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Software for 1040nr 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. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr Employee business expenses. Software for 1040nr 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. Software for 1040nr You can change your choice for each year's taxes. Software for 1040nr To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. Software for 1040nr S. Software for 1040nr tax return. Software for 1040nr However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. Software for 1040nr See How To Figure the Credit , later. Software for 1040nr To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. Software for 1040nr Figure your tax both ways—claiming the credit and claiming the deduction. Software for 1040nr Then fill out your return the way that benefits you more. Software for 1040nr See Why Choose the Credit, later. Software for 1040nr 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. Software for 1040nr If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. Software for 1040nr You cannot deduct any of them. Software for 1040nr Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. Software for 1040nr You cannot take a credit for any of them. Software for 1040nr See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. Software for 1040nr There are exceptions to this general rule, which are described next. Software for 1040nr Exceptions for foreign taxes not allowed as a credit. Software for 1040nr   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. Software for 1040nr Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. Software for 1040nr S. Software for 1040nr tax purposes. Software for 1040nr For more information, see Internal Revenue Code section 901(m). Software for 1040nr The IRS intends to issue guidance that will explain this provision in greater detail. Software for 1040nr   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. Software for 1040nr Foreign taxes that are not income taxes. Software for 1040nr   In most cases, only foreign income taxes qualify for the foreign tax credit. Software for 1040nr Other taxes, such as foreign real and personal property taxes, do not qualify. Software for 1040nr But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. Software for 1040nr   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. Software for 1040nr However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). Software for 1040nr Carrybacks and carryovers. Software for 1040nr   There is a limit on the credit you can claim in a tax year. Software for 1040nr 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. Software for 1040nr If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. Software for 1040nr That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. Software for 1040nr   For more information on the limit, see How To Figure the Credit , later. Software for 1040nr For more information on carrybacks and carryovers, see Carryback and Carryover , later. Software for 1040nr 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. Software for 1040nr You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. Software for 1040nr Example. Software for 1040nr You paid foreign taxes for the last 13 years and chose to deduct them on your U. Software for 1040nr S. Software for 1040nr income tax returns. Software for 1040nr You were timely in both filing your returns and paying your U. Software for 1040nr S. Software for 1040nr tax liability. Software for 1040nr 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. Software for 1040nr Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). Software for 1040nr Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. Software for 1040nr Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. Software for 1040nr 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. Software for 1040nr In most cases, if the foreign tax rate is higher than the U. Software for 1040nr S. Software for 1040nr rate, there will be no U. Software for 1040nr S. Software for 1040nr tax on the foreign income. Software for 1040nr If the foreign tax rate is lower than the U. Software for 1040nr S. Software for 1040nr rate, U. Software for 1040nr S. Software for 1040nr tax on the foreign income will be limited to the difference between the rates. Software for 1040nr The foreign tax credit can only reduce U. Software for 1040nr S. Software for 1040nr taxes on foreign source income; it cannot reduce U. Software for 1040nr S. Software for 1040nr taxes on U. Software for 1040nr S. Software for 1040nr source income. Software for 1040nr 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. Software for 1040nr This is because: A credit reduces your actual U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr (See Limit on credit under How To Figure the Credit, later. Software for 1040nr ) Example 1. Software for 1040nr For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. Software for 1040nr None of the dividends are qualified dividends. Software for 1040nr You file a joint return and can claim two $3,900 exemptions. Software for 1040nr You had to pay $2,000 in foreign income taxes on the dividend income. Software for 1040nr If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. Software for 1040nr Your taxable income then is $57,500 and your tax is $7,736. Software for 1040nr If you take the credit instead, your itemized deductions are only $13,000. Software for 1040nr Your taxable income then is $59,500 and your tax before the credit is $8,036. Software for 1040nr After the credit, however, your tax is only $6,036. Software for 1040nr Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. Software for 1040nr Example 2. Software for 1040nr In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. Software for 1040nr You report on your U. Software for 1040nr S. Software for 1040nr return this income as well as $56,000 of U. Software for 1040nr S. Software for 1040nr source wages and an allowable $49,000 partnership loss from a U. Software for 1040nr S. Software for 1040nr partnership. Software for 1040nr Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. Software for 1040nr You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. Software for 1040nr If you deduct the foreign tax on your U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr You can take a credit of only $113 because of limits discussed later. Software for 1040nr Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. Software for 1040nr If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr “Tax year” refers to the tax year for which your U. Software for 1040nr S. Software for 1040nr return is filed, not the tax year for which your foreign return is filed. Software for 1040nr Accrual method of accounting. Software for 1040nr   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. Software for 1040nr 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. Software for 1040nr   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. Software for 1040nr Generally, this occurs on the last day of the tax year for which your foreign return is filed. Software for 1040nr Contesting your foreign tax liability. Software for 1040nr   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. Software for 1040nr 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. Software for 1040nr Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. Software for 1040nr 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 . Software for 1040nr You may have to post a bond. Software for 1040nr   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. Software for 1040nr   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. Software for 1040nr Cash method of accounting. Software for 1040nr   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. Software for 1040nr 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. Software for 1040nr Choosing to take credit in the year taxes accrue. Software for 1040nr   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. Software for 1040nr You make the choice by checking the box in Part II of Form 1116. Software for 1040nr 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. Software for 1040nr   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. Software for 1040nr You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. Software for 1040nr   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. Software for 1040nr Credit based on taxes paid in earlier year. Software for 1040nr   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. Software for 1040nr Example. Software for 1040nr Last year you took the credit based on taxes paid. Software for 1040nr This year you chose to take the credit based on taxes accrued. Software for 1040nr During the year you paid foreign income taxes owed for last year. Software for 1040nr You also accrued foreign income taxes for this year that you did not pay by the end of the year. Software for 1040nr 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. Software for 1040nr Foreign Currency and Exchange Rates U. Software for 1040nr S. Software for 1040nr income tax is imposed on income expressed in U. Software for 1040nr S. Software for 1040nr dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. Software for 1040nr Therefore, fluctuations in the value of the foreign currency relative to the U. Software for 1040nr S. Software for 1040nr dollar may affect the foreign tax credit. Software for 1040nr Translating foreign currency into U. Software for 1040nr S. Software for 1040nr dollars. Software for 1040nr   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. Software for 1040nr S. Software for 1040nr dollars. Software for 1040nr How and when you do this depends on your functional currency. Software for 1040nr In most cases, your functional currency is the U. Software for 1040nr S. Software for 1040nr dollar unless you are required to use the currency of a foreign country. Software for 1040nr   You must make all federal income tax determinations in your functional currency. Software for 1040nr The U. Software for 1040nr S. Software for 1040nr dollar is the functional currency for all taxpayers except some qualified business units. Software for 1040nr A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. Software for 1040nr Unless you are self-employed, your functional currency is the U. Software for 1040nr S. Software for 1040nr dollar. Software for 1040nr   Even if you are self-employed and have a qualified business unit, your functional currency is the U. Software for 1040nr S. Software for 1040nr dollar if any of the following apply. Software for 1040nr You conduct the business primarily in dollars. Software for 1040nr The principal place of business is located in the United States. Software for 1040nr You choose to or are required to use the dollar as your functional currency. Software for 1040nr 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. Software for 1040nr   If your functional currency is the U. Software for 1040nr S. Software for 1040nr dollar, you must immediately translate into dollars all items of income, expense, etc. Software for 1040nr , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Software for 1040nr If there is more than one exchange rate, use the one that most properly reflects your income. Software for 1040nr In most cases, you can get exchange rates from banks and U. Software for 1040nr S. Software for 1040nr Embassies. Software for 1040nr   If your functional currency is not the U. Software for 1040nr S. Software for 1040nr dollar, make all income tax determinations in your functional currency. Software for 1040nr At the end of the year, translate the results, such as income or loss, into U. Software for 1040nr S. Software for 1040nr dollars to report on your income tax return. Software for 1040nr    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. Software for 1040nr   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. Software for 1040nr If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. Software for 1040nr 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. Software for 1040nr   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). Software for 1040nr Exception. Software for 1040nr   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. Software for 1040nr This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. Software for 1040nr The foreign taxes are paid on or after the first day of the tax year to which they relate. Software for 1040nr The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. Software for 1040nr The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). Software for 1040nr (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. Software for 1040nr )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. Software for 1040nr Election to use exchange rate on date paid. Software for 1040nr   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. Software for 1040nr If any of the accrued taxes are unpaid, you must translate them into U. Software for 1040nr S. Software for 1040nr dollars using the exchange rate on the last day of the U. Software for 1040nr S. Software for 1040nr tax year to which those taxes relate. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr dollar functional currency. Software for 1040nr 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. Software for 1040nr The election is available for tax years beginning after 2004. Software for 1040nr 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. Software for 1040nr Make the election by attaching a statement to the applicable tax return. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr dollar functional currency. Software for 1040nr Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. Software for 1040nr S. Software for 1040nr foreign tax credit claimed. Software for 1040nr 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. Software for 1040nr If a foreign tax redetermination occurs, a redetermination of your U. Software for 1040nr S. Software for 1040nr tax liability is required if any of the following conditions apply. Software for 1040nr The accrued taxes when paid differ from the amounts claimed as a credit. Software for 1040nr 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. Software for 1040nr If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. Software for 1040nr You will not be allowed a credit for the unpaid taxes until you pay them. Software for 1040nr When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. Software for 1040nr S. Software for 1040nr dollars using the exchange rate as of the date they were paid. Software for 1040nr The foreign tax credit is allowed for the year to which the foreign tax relates. Software for 1040nr See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. Software for 1040nr The foreign taxes you paid are refunded in whole or in part. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr tax year. Software for 1040nr In this case, you must adjust your U. Software for 1040nr S. Software for 1040nr tax in the tax year in which the accrued foreign taxes are paid. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr tax liability for each tax year affected by the redetermination. Software for 1040nr In most cases, you must file Form 1040X, Amended U. Software for 1040nr S. Software for 1040nr Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. Software for 1040nr S. Software for 1040nr tax liability for the year or years affected. Software for 1040nr See Contents of statement , later. Software for 1040nr 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. Software for 1040nr There are other exceptions to this requirement. Software for 1040nr They are discussed later under Due date of notification to IRS . Software for 1040nr Contents of statement. Software for 1040nr   The statement must include all of the following. Software for 1040nr Your name, address, and taxpayer identification number. Software for 1040nr The tax year or years that are affected by the foreign tax redetermination. Software for 1040nr The date or dates the foreign taxes were accrued, if applicable. Software for 1040nr The date or dates the foreign taxes were paid. Software for 1040nr The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. Software for 1040nr 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. Software for 1040nr   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. Software for 1040nr   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). Software for 1040nr Due date of notification to IRS. Software for 1040nr   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. Software for 1040nr There is no limit on the time the IRS has to redetermine and assess the correct U. Software for 1040nr S. Software for 1040nr tax due. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr taxes. Software for 1040nr See Time Limit on Refund Claims , later. Software for 1040nr   Exceptions to this due date are explained in the next two paragraphs. Software for 1040nr Multiple redeterminations of U. Software for 1040nr S. Software for 1040nr tax liability for same tax year. Software for 1040nr   Where more than one foreign tax redetermination requires a redetermination of U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. Software for 1040nr S. Software for 1040nr tax liability is required may occur after the due date for providing that notification. Software for 1040nr In this situation, you may have to file more than one Form 1040X for that tax year. Software for 1040nr Additional U. Software for 1040nr S. Software for 1040nr tax due eliminated by foreign tax credit carryback or carryover. Software for 1040nr   If a foreign tax redetermination requires a redetermination of U. Software for 1040nr S. Software for 1040nr tax liability that would otherwise result in an additional amount of U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr You must file the statement by the due date (with extensions) of that return. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr tax liability is required). Software for 1040nr Failure-to-notify penalty. Software for 1040nr   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. Software for 1040nr   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. Software for 1040nr S. Software for 1040nr tax. Software for 1040nr This penalty cannot be more than 25% of the tax due. Software for 1040nr Foreign tax refund. Software for 1040nr   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. Software for 1040nr S. Software for 1040nr tax for the time before the date of the refund. Software for 1040nr   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. Software for 1040nr 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. Software for 1040nr Interest also is owed from the time you receive a refund until you pay the additional tax due. Software for 1040nr Foreign tax imposed on foreign refund. Software for 1040nr   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. Software for 1040nr 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. Software for 1040nr Example. Software for 1040nr 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. Software for 1040nr When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. Software for 1040nr Time Limit on Refund Claims You have 10 years to file a claim for refund of U. Software for 1040nr S. Software for 1040nr tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. Software for 1040nr 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. Software for 1040nr You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. Software for 1040nr 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). Software for 1040nr The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. Software for 1040nr See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. Software for 1040nr Who Can Take the Credit? U. Software for 1040nr S. Software for 1040nr citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. Software for 1040nr S. Software for 1040nr tax on foreign source income may be able to take a foreign tax credit. Software for 1040nr U. Software for 1040nr S. Software for 1040nr Citizens If you are a U. Software for 1040nr S. Software for 1040nr citizen, you are taxed by the United States on your worldwide income wherever you live. Software for 1040nr You are normally entitled to take a credit for foreign taxes you pay or accrue. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr citizens. Software for 1040nr If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. Software for 1040nr 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. Software for 1040nr For information on alien status, see Publication 519. Software for 1040nr Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr possession on income from foreign sources that is effectively connected with a trade or business in the United States. Software for 1040nr But if you must pay tax to a foreign country or U. Software for 1040nr S. Software for 1040nr possession on income from U. Software for 1040nr S. Software for 1040nr sources only because you are a citizen or a resident of that country or U. Software for 1040nr S. Software for 1040nr possession, do not use that tax in figuring the amount of your credit. Software for 1040nr For information on alien status and effectively connected income, see Publication 519. Software for 1040nr 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. Software for 1040nr The tax must be imposed on you. Software for 1040nr You must have paid or accrued the tax. Software for 1040nr The tax must be the legal and actual foreign tax liability. Software for 1040nr The tax must be an income tax (or a tax in lieu of an income tax). Software for 1040nr Certain foreign taxes do not qualify for the credit even if the four tests are met. Software for 1040nr See Foreign Taxes for Which You Cannot Take a Credit, later. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr possession. Software for 1040nr For example, a tax that is deducted from your wages is considered to be imposed on you. Software for 1040nr You cannot shift the right to claim the credit by contract or other means. Software for 1040nr Foreign country. Software for 1040nr   A foreign country includes any foreign state and its political subdivisions. Software for 1040nr Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. Software for 1040nr U. Software for 1040nr S. Software for 1040nr possessions. Software for 1040nr   For foreign tax credit purposes, all qualified taxes paid to U. Software for 1040nr S. Software for 1040nr possessions are considered foreign taxes. Software for 1040nr For this purpose, U. Software for 1040nr S. Software for 1040nr possessions include Puerto Rico and American Samoa. Software for 1040nr   When the term “foreign country” is used in this publication, it includes U. Software for 1040nr S. Software for 1040nr possessions unless otherwise stated. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr possession. Software for 1040nr 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. Software for 1040nr Joint return. Software for 1040nr   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. Software for 1040nr Combined income. Software for 1040nr   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. Software for 1040nr 901-2(f)(3)(iii). Software for 1040nr 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. Software for 1040nr   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. Software for 1040nr 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. Software for 1040nr For more details, see paragraphs (f) and (h) of Regulations section 1. Software for 1040nr 901-2. Software for 1040nr For similar rules applicable to prior tax years, see Regulations section 1. Software for 1040nr 901-2 (revised as of April 1, 2011). Software for 1040nr Example. Software for 1040nr You and your spouse reside in Country X, which imposes income tax on your combined incomes. Software for 1040nr Both of you use the “u” as your functional currency. Software for 1040nr Country X apportions tax based on income. Software for 1040nr You had income of 30,000u and your spouse had income of 20,000u. Software for 1040nr Your filing status on your U. Software for 1040nr S. Software for 1040nr income tax return is married filing separately. Software for 1040nr You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. Software for 1040nr S income tax return. Software for 1040nr Your spouse can claim only 40% (20,000u/50,000u). Software for 1040nr Partner or S corporation shareholder. Software for 1040nr   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. Software for 1040nr These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. Software for 1040nr 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. Software for 1040nr Beneficiary. Software for 1040nr   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. Software for 1040nr This amount will be shown on the Schedule K-1 you receive from the estate or trust. Software for 1040nr However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. Software for 1040nr Mutual fund shareholder. Software for 1040nr   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. Software for 1040nr 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. Software for 1040nr If you do not receive this information, you will need to contact the fund. Software for 1040nr Controlled foreign corporation shareholder. Software for 1040nr   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. Software for 1040nr If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. Software for 1040nr Controlled foreign corporation. Software for 1040nr   A controlled foreign corporation is a foreign corporation in which U. Software for 1040nr S. Software for 1040nr shareholders own more than 50% of the voting power or value of the stock. Software for 1040nr You are considered a U. Software for 1040nr S. Software for 1040nr shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. Software for 1040nr See Internal Revenue Code sections 951(b) and 958(b) for more information. Software for 1040nr 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. Software for 1040nr Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. Software for 1040nr Foreign tax refund. Software for 1040nr   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. Software for 1040nr   For example, the United States has tax treaties with many countries allowing U. Software for 1040nr S. Software for 1040nr citizens and residents reductions in the rates of tax of those foreign countries. Software for 1040nr However, some treaty countries require U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr Subsidy received. Software for 1040nr   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr   The term “subsidy” includes any type of benefit. Software for 1040nr Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. Software for 1040nr Shareholder receiving refund for corporate tax in integrated system. Software for 1040nr   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. Software for 1040nr You may be able to claim a refund of these taxes from the foreign government. Software for 1040nr You must include the refund (including any amount withheld) in your income in the year received. Software for 1040nr Any tax withheld from the refund is a qualified foreign tax. Software for 1040nr Example. Software for 1040nr You are a shareholder of a French corporation. Software for 1040nr You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. Software for 1040nr The French government imposes a 15% withholding tax ($15) on the refund you received. Software for 1040nr You receive a check for $85. Software for 1040nr You include $100 in your income. Software for 1040nr The $15 of tax withheld is a qualified foreign tax. Software for 1040nr 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. Software for 1040nr Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. Software for 1040nr 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. Software for 1040nr See Taxes in Lieu of Income Taxes , later. Software for 1040nr 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. Software for 1040nr A foreign levy is an income tax only if it meets both of the following requirements. Software for 1040nr It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. Software for 1040nr The predominant character of the tax is that of an income tax in the U. Software for 1040nr S. Software for 1040nr sense. Software for 1040nr A foreign levy may meet these requirements even if the foreign tax law differs from U. Software for 1040nr S. Software for 1040nr tax law. Software for 1040nr The foreign law may include in income items that U. Software for 1040nr S. Software for 1040nr law does not include, or it may allow certain exclusions or deductions that U. Software for 1040nr S. Software for 1040nr law does not allow. Software for 1040nr Specific economic benefit. Software for 1040nr   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. Software for 1040nr   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. Software for 1040nr   However, see the exception discussed later under Pension, unemployment, and disability fund payments . Software for 1040nr Economic benefits. Software for 1040nr   Economic benefits include the following. Software for 1040nr Goods. Software for 1040nr Services. Software for 1040nr Fees or other payments. Software for 1040nr Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. Software for 1040nr Discharges of contractual obligations. Software for 1040nr   In most cases, the right or privilege merely to engage in business is not an economic benefit. Software for 1040nr Dual-capacity taxpayers. Software for 1040nr   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. Software for 1040nr ” 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. Software for 1040nr    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. Software for 1040nr   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. Software for 1040nr    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. Software for 1040nr For more information about these agreements, see Publication 54. Software for 1040nr Soak-up taxes. Software for 1040nr   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. Software for 1040nr 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. Software for 1040nr This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. Software for 1040nr Penalties and interest. Software for 1040nr   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. Software for 1040nr Taxes not based on income. Software for 1040nr   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. Software for 1040nr Taxes based on assets, such as property taxes, do not qualify for the credit. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr A tax in lieu of an income tax does not have to be based on realized net income. Software for 1040nr A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. Software for 1040nr In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. Software for 1040nr 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. Software for 1040nr The soak-up tax. Software for 1040nr 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. Software for 1040nr Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. Software for 1040nr Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. Software for 1040nr S. Software for 1040nr gross income. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr income under the foreign earned income exclusion or the foreign housing exclusion. Software for 1040nr See Publication 54 for more information on the foreign earned income and housing exclusions. Software for 1040nr Wages completely excluded. Software for 1040nr   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. Software for 1040nr Wages partly excluded. Software for 1040nr   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. Software for 1040nr 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. Software for 1040nr   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. Software for 1040nr Deductible expenses do not include the foreign housing deduction. Software for 1040nr   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). Software for 1040nr If the foreign law taxes foreign earned income and some other income (for example, earned income from U. Software for 1040nr S. Software for 1040nr sources or a type of income not subject to U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr Example. Software for 1040nr You are a U. Software for 1040nr S. Software for 1040nr citizen and a cash basis taxpayer, employed by Company X and living in Country A. Software for 1040nr 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. Software for 1040nr To find that part, do the following. Software for 1040nr First, find the amount of business expenses allocable to excluded wages and therefore not deductible. Software for 1040nr To do this, multiply the otherwise deductible expenses by a fraction. Software for 1040nr That fraction is the excluded wages over your foreign earned income. Software for 1040nr   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. Software for 1040nr To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). Software for 1040nr The result is $81,984. Software for 1040nr 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). Software for 1040nr Finally, multiply the foreign tax you paid by the resulting fraction. Software for 1040nr   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. Software for 1040nr Taxes on Income From Puerto Rico Exempt From U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr For information on figuring the reduction, see Publication 570. Software for 1040nr 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. Software for 1040nr For more information on this exclusion, see Publication 570. Software for 1040nr Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. Software for 1040nr However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. Software for 1040nr 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. Software for 1040nr However, you can claim an itemized deduction for these taxes. Software for 1040nr See Choosing To Take Credit or Deduction , earlier. Software for 1040nr 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. Software for 1040nr The following countries meet this description for 2013. Software for 1040nr Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. Software for 1040nr Cuba. Software for 1040nr Iran. Software for 1040nr Libya (but see Note later). Software for 1040nr North Korea. Software for 1040nr Sudan. Software for 1040nr Syria. Software for 1040nr Waiver of denial of the credit. Software for 1040nr   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. Software for 1040nr S. Software for 1040nr companies in the sanctioned country. Software for 1040nr 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. Software for 1040nr Note. Software for 1040nr Effective December 10, 2004, the President granted a waiver to Libya. Software for 1040nr Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. Software for 1040nr Limit on credit. Software for 1040nr   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. Software for 1040nr You must fill out a separate Form 1116 for this income. Software for 1040nr This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. Software for 1040nr Example. Software for 1040nr You lived and worked in Iran until August, when you were transferred to Italy. Software for 1040nr You paid taxes to each country on the income earned in that country. Software for 1040nr You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. Software for 1040nr Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. Software for 1040nr You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. Software for 1040nr Figuring the credit when a sanction ends. Software for 1040nr    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. Software for 1040nr 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. Software for 1040nr Example. Software for 1040nr The sanctions against Country X ended on July 31. Software for 1040nr On August 19, you receive a distribution from a mutual fund of Country X income. Software for 1040nr The fund paid Country X income tax for you on the distribution. Software for 1040nr 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. Software for 1040nr Amounts for the nonsanctioned period. Software for 1040nr   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. Software for 1040nr Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. Software for 1040nr   Number of nonsanctioned days in year  Number of days in year Example. Software for 1040nr 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. Software for 1040nr Sanctions against Country X ended on July 11, 2013. Software for 1040nr You are unable to determine how much of the income or tax is for the nonsanctioned period. Software for 1040nr 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. Software for 1040nr You would compute the income for the nonsanctioned period as follows. Software for 1040nr 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. Software for 1040nr 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. Software for 1040nr Further information. Software for 1040nr   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. Software for 1040nr This Cumulative Bulletin can be found in many libraries and IRS offices. Software for 1040nr Table 1. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr 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). Software for 1040nr 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. Software for 1040nr If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr Withholding tax. Software for 1040nr   For this purpose, withholding tax includes any tax determined on a gross basis. Software for 1040nr It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Software for 1040nr Ex-dividend date. Software for 1040nr   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. Software for 1040nr Example 1. Software for 1040nr You bought common stock from a foreign corporation on November 3. Software for 1040nr You sold the stock on November 19. Software for 1040nr You received a dividend on this stock because you owned it on the ex-dividend date of November 5. Software for 1040nr 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). Software for 1040nr Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. Software for 1040nr Example 2. Software for 1040nr The facts are the same as in Example 1 except that you sold the stock on November 14. Software for 1040nr You held the stock for only 11 days. Software for 1040nr You are not entitled to the credit. Software for 1040nr Exception. Software for 1040nr   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. Software for 1040nr See section 901(k)(4) of the Internal Revenue Code for more information. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr Withholding tax. Software for 1040nr   For this purpose, withholding tax includes any tax determined on a gross basis. Software for 1040nr It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Software for 1040nr Exception for dealers. Software for 1040nr   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. Software for 1040nr See section 901(I)(2) of the Internal Revenue Code for more information. Software for 1040nr 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. Software for 1040nr A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. Software for 1040nr S. Software for 1040nr tax purposes but not for foreign tax purposes. Software for 1040nr For more information, see Internal Revenue Code section 901(m). Software for 1040nr The IRS intends to issue guidance that will explain this provision in greater detail. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr For details, see Regulations section 1. Software for 1040nr 901-3. Software for 1040nr 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. Software for 1040nr See the instructions for line 12 in the Form 1116 instructions to figure this reduction. Software for 1040nr 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. Software for 1040nr List of boycotting countries. Software for 1040nr   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. Software for 1040nr As of November 2013, the following countries are listed. Software for 1040nr Iraq. Software for 1040nr Kuwait. Software for 1040nr Lebanon. Software for 1040nr Libya. Software for 1040nr Qatar. Software for 1040nr Saudi Arabia. Software for 1040nr Syria. Software for 1040nr United Arab Emirates. Software for 1040nr Yemen. Software for 1040nr    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. Software for 1040nr   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. Software for 1040nr The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. Software for 1040nr Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. Software for 1040nr Public inspection. Software for 1040nr   A determination and any related background file is open to public inspection. Software for 1040nr However, your identity and certain other information will remain confidential. Software for 1040nr Reporting requirements. Software for 1040nr   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. Software for 1040nr 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. Software for 1040nr A partnership in which you are a partner. Software for 1040nr A trust you are treated as owning. Software for 1040nr Form 5713 required. Software for 1040nr   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. Software for 1040nr See the Instructions for Form 5713 for information on when and where to file the form. Software for 1040nr Penalty for failure to file. Software for 1040nr   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. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr tax liability (Form 1040, line 44) divided by your worldwide taxable income. Software for 1040nr You may be entitled to carry over to other years taxes reduced under this rule. Software for 1040nr See Internal Revenue Code section 907(f). Software for 1040nr Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. Software for 1040nr Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. Software for 1040nr Taxes of U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr 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. Software for 1040nr See Penalty for not filing Form 5471 or Form 8865 , later. Software for 1040nr U. Software for 1040nr S. Software for 1040nr persons controlling foreign corporations. Software for 1040nr   If you are a U. Software for 1040nr S. Software for 1040nr 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. Software for 1040nr S. Software for 1040nr Persons With Respect To Certain Foreign Corporations. Software for 1040nr 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. Software for 1040nr U. Software for 1040nr S. Software for 1040nr persons controlling foreign partnerships. Software for 1040nr   If you are a U. Software for 1040nr S. Software for 1040nr citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file