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2011 1040

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2011 1040

2011 1040 Publication 3991 - Introductory Material Table of Contents Introduction Introduction All of the changes discussed in this publication resulted from the Job Creation and Worker Assistance Act of 2002. 2011 1040 This publication highlights tax law changes that took effect retroactively for 2001 and others that take effect in 2002 and later years. 2011 1040 The chapters are divided into separate sections based on when the changes take effect. 2011 1040 For example, this publication covers the following topics. 2011 1040 Tax benefits for the area of New York City damaged in terrorist attacks on September 11, 2001. 2011 1040 New deduction available for educator expenses. 2011 1040 Limit on the use of the non-accrual experience method of accounting. 2011 1040 Pension changes such as the new tax credit for certain pension plan startup costs, an increased SEP contribution limit, figuring 403(b) catch-up contributions, and a provision for deemed IRAs. 2011 1040 Extension of the welfare-to-work credit and work opportunity credit. 2011 1040 New 5-year carryback rule for net operating losses (NOLs). 2011 1040 See the discussion of each topic for more information. 2011 1040 Certain changes had a major effect on two of the publications we issued for 2001. 2011 1040 We published supplements to those two publications and they have been included in this publication as follows. 2011 1040 Chapter 4 contains the supplement to Publication 463, Travel, Entertainment, Gift, and Car Expenses. 2011 1040 This discusses the increase in the amount of depreciation deduction for certain automobiles. 2011 1040 Chapter 5 contains the supplement to Publication 946, How To Depreciate Property. 2011 1040 This discusses the special depreciation allowance for property acquired after September 10, 2001. 2011 1040 Adjusting your withholding or estimated tax payments for 2002. 2011 1040   If your tax for 2002 will be more or less than your 2001 tax, you may need to adjust your withholding or estimated tax payments accordingly. 2011 1040 If your tax will decrease, you can get the benefit of lower taxes throughout the year. 2011 1040 If you will owe more tax, you can avoid a penalty when you file your tax return. 2011 1040   See the following table for forms and publications that will help you adjust your withholding or estimated tax payments. 2011 1040 See chapter 6 for information on ordering forms and publications. 2011 1040 To adjust your. 2011 1040 . 2011 1040 . 2011 1040 . 2011 1040 Get Form. 2011 1040 . 2011 1040 . 2011 1040 And Publication. 2011 1040 . 2011 1040 . 2011 1040 Withholding W–4, Employee's Withholding Allowance Certificate 919, How Do I Adjust My Tax Withholding? Estimated tax payments 1040–ES, Estimated Tax for Individuals 505, Tax Withholding and Estimated Tax Photographs of missing children. 2011 1040   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 2011 1040 Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2011 1040 You can help bring these children home by looking at the photographs and calling 1–800–THE–LOST (1–800–843–5678) if you recognize a child. 2011 1040 Comments and suggestions. 2011 1040   We welcome your comments about this publication. 2011 1040   You can e-mail us while visiting our web site at www. 2011 1040 irs. 2011 1040 gov. 2011 1040   You can write to us at the following address: Internal Revenue Service Technical Publications Branch W:CAR:MP:FP:P 1111 Constitution Ave. 2011 1040 NW Washington, DC 20224   We respond to many letters by telephone. 2011 1040 Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2011 1040 Prev  Up  Next   Home   More Online Publications
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  • Automotive Manufacturers and Dispute Resolution Programs
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The 2011 1040

2011 1040 5. 2011 1040   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 2011 1040 S. 2011 1040 PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 2011 1040 S. 2011 1040 possessions, and How to report deductions. 2011 1040 Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 2011 1040 Items Related to Excluded Income U. 2011 1040 S. 2011 1040 citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 2011 1040 If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2011 1040 This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 2011 1040 You can deduct only those expenses connected with earning includible income. 2011 1040 These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 2011 1040 These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 2011 1040 For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 2011 1040 If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 2011 1040 Example. 2011 1040 In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 2011 1040 You did not have a housing exclusion. 2011 1040 Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 2011 1040 In 2013, you received a $12,000 bonus for work you did abroad in 2012. 2011 1040 You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 2011 1040 Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 2011 1040 This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 2011 1040 Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 2011 1040 S. 2011 1040 tax purposes and is not the dependent of another U. 2011 1040 S. 2011 1040 taxpayer. 2011 1040 You also can claim exemptions for individuals who qualify as your dependents. 2011 1040 To be your dependent, the individual must be a U. 2011 1040 S. 2011 1040 citizen, U. 2011 1040 S. 2011 1040 national, U. 2011 1040 S. 2011 1040 resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 2011 1040 Children. 2011 1040   Children usually are citizens or residents of the same country as their parents. 2011 1040 If you were a U. 2011 1040 S. 2011 1040 citizen when your child was born, your child generally is a U. 2011 1040 S. 2011 1040 citizen. 2011 1040 This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 2011 1040   If you have a legally adopted child who is not a U. 2011 1040 S. 2011 1040 citizen, U. 2011 1040 S. 2011 1040 resident, or U. 2011 1040 S. 2011 1040 national, the child meets the citizen requirement if you are a U. 2011 1040 S. 2011 1040 citizen or U. 2011 1040 S. 2011 1040 national and the child lived with you as a member of your household all year. 2011 1040 Social security number. 2011 1040   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 2011 1040 To get a social security number for a dependent, apply at a Social Security office or U. 2011 1040 S. 2011 1040 consulate. 2011 1040 You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 2011 1040   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 2011 1040 Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 2011 1040   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 2011 1040 To apply for an ITIN, file Form W-7 with the IRS. 2011 1040 It usually takes 6 to 10 weeks to get an ITIN. 2011 1040 Enter your dependent's ITIN wherever an SSN is requested on your tax return. 2011 1040 More information. 2011 1040   For more information about exemptions, see Publication 501. 2011 1040 Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 2011 1040 Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 2011 1040 You can deduct contributions to a U. 2011 1040 S. 2011 1040 organization that transfers funds to a charitable foreign organization if the U. 2011 1040 S. 2011 1040 organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 2011 1040 S. 2011 1040 organization. 2011 1040 Canadian, Mexican, and Israeli charities. 2011 1040   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 2011 1040 Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 2011 1040 See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 2011 1040 Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 2011 1040 Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 2011 1040 See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 2011 1040 Foreign moves. 2011 1040   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 2011 1040 A foreign move does not include a move back to the United States or its possessions. 2011 1040 Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 2011 1040 If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 2011 1040 Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 2011 1040 Year to which expense is connected. 2011 1040   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 2011 1040 It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 2011 1040   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 2011 1040 The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 2011 1040 The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 2011 1040 Amount allocable to excluded income. 2011 1040   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 2011 1040 The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 2011 1040 Example. 2011 1040 On November 1, 2012, you transfer to Monaco. 2011 1040 Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 2011 1040 In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 2011 1040 You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 2011 1040 The reimbursement is included in your income. 2011 1040 Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 2011 1040 Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 2011 1040 Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 2011 1040 You have no housing exclusion. 2011 1040 The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 2011 1040 To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 2011 1040 The result, $5,562, is your nondeductible amount. 2011 1040    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 2011 1040 In the preceding example, this year was 2012. 2011 1040 You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 2011 1040 Move between foreign countries. 2011 1040   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 2011 1040 New place of work in U. 2011 1040 S. 2011 1040   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 2011 1040 If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 2011 1040 Storage expenses. 2011 1040   These expenses are attributable to work you do during the year in which you incur the storage expenses. 2011 1040 You cannot deduct the amount allocable to excluded income. 2011 1040 Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 2011 1040 By then, you should have all the information needed to properly figure the moving expense deduction. 2011 1040 See Extensions under When To File and Pay in chapter 1. 2011 1040 If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 2011 1040 You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 2011 1040 Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 2011 1040 If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 2011 1040 You cannot claim it on the return for the second year. 2011 1040 Forms To File Report your moving expenses on Form 3903. 2011 1040 Report your moving expense deduction on line 26 of Form 1040. 2011 1040 If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 2011 1040 For more information about figuring moving expenses, see Publication 521. 2011 1040 Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 2011 1040 In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 2011 1040 Do not reduce your compensation by the foreign housing deduction. 2011 1040 If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 2011 1040 This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2011 1040 Other modifications are also required. 2011 1040 For more information on IRAs, see Publication 590. 2011 1040 Taxes of Foreign Countries and U. 2011 1040 S. 2011 1040 Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 2011 1040 S. 2011 1040 possession. 2011 1040 Taken as a deduction, foreign income taxes reduce your taxable income. 2011 1040 Taken as a credit, foreign income taxes reduce your tax liability. 2011 1040 You must treat all foreign income taxes the same way. 2011 1040 If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 2011 1040 However, you may be able to deduct other foreign taxes. 2011 1040 See Deduction for Other Foreign Taxes, later. 2011 1040 There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 2011 1040 In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 2011 1040 S. 2011 1040 tax liability, rather than as a deduction in figuring taxable income. 2011 1040 However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 2011 1040 S. 2011 1040 income is small, a lower final tax may result from deducting the foreign income taxes. 2011 1040 In any event, you should figure your tax liability both ways and then use the one that is better for you. 2011 1040 You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 2011 1040 Foreign income taxes. 2011 1040   These are generally income taxes you pay to any foreign country or possession of the United States. 2011 1040 Foreign income taxes on U. 2011 1040 S. 2011 1040 return. 2011 1040   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 2011 1040 These amounts cannot be included as withheld income taxes on Form 1040, line 62. 2011 1040 Foreign taxes paid on excluded income. 2011 1040   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 2011 1040 Foreign earned income exclusion. 2011 1040 Foreign housing exclusion. 2011 1040 Possession exclusion. 2011 1040 If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 2011 1040   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 2011 1040 You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 2011 1040 The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 2011 1040 The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 2011 1040   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 2011 1040    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 2011 1040 Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 2011 1040 Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 2011 1040 Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 2011 1040 The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 2011 1040 The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 2011 1040 You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 2011 1040 Subsidies. 2011 1040   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 2011 1040 This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 2011 1040   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2011 1040 A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 2011 1040 Limit The foreign tax credit is limited to the part of your total U. 2011 1040 S. 2011 1040 tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 2011 1040 The allowable foreign tax credit cannot be more than your actual foreign tax liability. 2011 1040 Exemption from limit. 2011 1040   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 2011 1040 Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 2011 1040 ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 2011 1040 Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 2011 1040 You elect this procedure. 2011 1040 If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 2011 1040 Separate limit. 2011 1040   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 2011 1040 Figuring the limit. 2011 1040   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 2011 1040 Do not take any excluded amount into account. 2011 1040   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 2011 1040   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 2011 1040 The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 2011 1040 The denominator (bottom number) of the fraction is your gross income from all sources. 2011 1040 For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 2011 1040 You must use special rules for deducting interest expenses. 2011 1040 For more information on allocating and apportioning your deductions, see Publication 514. 2011 1040 Exemptions. 2011 1040   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 2011 1040 Recapture of foreign losses. 2011 1040   If you have an overall foreign loss and the loss reduces your U. 2011 1040 S. 2011 1040 source income (resulting in a reduction of your U. 2011 1040 S. 2011 1040 tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 2011 1040 This is done by treating a part of your taxable income from foreign sources in later years as U. 2011 1040 S. 2011 1040 source income. 2011 1040 This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 2011 1040 Recapture of domestic losses. 2011 1040   If you have an overall domestic loss (resulting in no U. 2011 1040 S. 2011 1040 tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 2011 1040 You must recapture the loss in later years when you have U. 2011 1040 S. 2011 1040 source taxable income. 2011 1040 This is done by treating a part of your taxable income from U. 2011 1040 S. 2011 1040 sources in later years as foreign source income. 2011 1040 This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 2011 1040 Foreign tax credit carryback and carryover. 2011 1040   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 2011 1040   More information on figuring the foreign tax credit can be found in Publication 514. 2011 1040 Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 2011 1040 You can deduct only foreign income taxes paid on income that is subject to U. 2011 1040 S. 2011 1040 tax. 2011 1040 You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 2011 1040 Foreign earned income exclusion. 2011 1040 Foreign housing exclusion. 2011 1040 Possession exclusion. 2011 1040 Example. 2011 1040 You are a U. 2011 1040 S. 2011 1040 citizen and qualify to exclude your foreign earned income. 2011 1040 Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 2011 1040 You received dividends from Country X of $2,000 on which you paid income tax of $600. 2011 1040 You can deduct the $600 tax payment because the dividends relating to it are subject to U. 2011 1040 S. 2011 1040 tax. 2011 1040 Because you exclude your wages, you cannot deduct the income tax of $10,000. 2011 1040 If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 2011 1040 Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 2011 1040 You take this deduction on Schedule A (Form 1040). 2011 1040 You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 2011 1040 On the other hand, you generally can deduct personal property taxes when you pay them to U. 2011 1040 S. 2011 1040 possessions. 2011 1040 But if you claim the possession exclusion, see Publication 570. 2011 1040 The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 2011 1040 You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 2011 1040 How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 2011 1040 If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 2011 1040 Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2011 1040 Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 2011 1040 If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 2011 1040 You figure that amount by subtracting from the total deduction the amount related to excluded income. 2011 1040 Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2011 1040 Attach a statement to your return showing how you figured the deductible amount. 2011 1040 Example 1. 2011 1040 You are a U. 2011 1040 S. 2011 1040 citizen employed as an accountant. 2011 1040 Your tax home is in Germany for the entire tax year. 2011 1040 You meet the physical presence test. 2011 1040 Your foreign earned income for the year was $122,000 and your investment income was $10,380. 2011 1040 After excluding $97,600, your AGI is $34,780. 2011 1040 You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 2011 1040 These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 2011 1040 You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 2011 1040 You must fill out Form 2106. 2011 1040 On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 2011 1040 You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 2011 1040 You carry the remaining total of $450 to line 21 of Schedule A. 2011 1040 Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 2011 1040 On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 2011 1040 Enter $254 on line 27 of Schedule A. 2011 1040 Example 2. 2011 1040 You are a U. 2011 1040 S. 2011 1040 citizen, have a tax home in Spain, and meet the physical presence test. 2011 1040 You are self-employed and personal services produce the business income. 2011 1040 Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 2011 1040 You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 2011 1040 Since your excluded income is 83. 2011 1040 47% of your total income, 83. 2011 1040 47% of your business expenses are not deductible. 2011 1040 Report your total income and expenses on Schedule C (Form 1040). 2011 1040 On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 2011 1040 47% × $66,895) business expenses attributable to the exclusion. 2011 1040 In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 2011 1040 Example 3. 2011 1040 Assume in Example 2 that both capital and personal services combine to produce the business income. 2011 1040 No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 2011 1040 Your exclusion of $15,011 is 12. 2011 1040 84% of your gross income ($15,011 ÷ $116,931). 2011 1040 Because you excluded 12. 2011 1040 84% of your total income, $8,589 (. 2011 1040 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 2011 1040 Example 4. 2011 1040 You are a U. 2011 1040 S. 2011 1040 citizen, have a tax home in Brazil, and meet the physical presence test. 2011 1040 You are self-employed and both capital and personal services combine to produce business income. 2011 1040 Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 2011 1040 A reasonable allowance for the services you performed for the business is $77,000. 2011 1040 Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 2011 1040 The $77,000 is foreign earned income. 2011 1040 If you choose to exclude the $77,000, you exclude 52. 2011 1040 74% of your gross income ($77,000 ÷ $146,000), and 52. 2011 1040 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 2011 1040 Show your total income and expenses on Schedule C (Form 1040). 2011 1040 On Form 2555, exclude $77,000 and show $90,713 on line 44. 2011 1040 Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 2011 1040 Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 2011 1040 In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 2011 1040 If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 2011 1040 To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 2011 1040 See Choosing the Exclusion in chapter 4. 2011 1040 Example 5. 2011 1040 You are a U. 2011 1040 S. 2011 1040 citizen, have a tax home in Panama, and meet the bona fide residence test. 2011 1040 You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 2011 1040 Capital investment is not material in producing the partnership's income. 2011 1040 Under the terms of the partnership agreement, you are to receive 50% of the net profits. 2011 1040 The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 2011 1040 Of the net profits of $145,750, you received $72,875 as your distributive share. 2011 1040 You choose to exclude $97,600 of your share of the gross income. 2011 1040 Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 2011 1040 80 × $49,125). 2011 1040 Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 2011 1040 On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 2011 1040 Your exclusion on Form 2555 is $58,300. 2011 1040 In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 2011 1040 Prev  Up  Next   Home   More Online Publications