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2012 Form 1040

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2012 Form 1040

2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 Employee business expenses. 2012 form 1040 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. 2012 form 1040 You can change your choice for each year's taxes. 2012 form 1040 To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. 2012 form 1040 S. 2012 form 1040 tax return. 2012 form 1040 However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. 2012 form 1040 See How To Figure the Credit , later. 2012 form 1040 To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. 2012 form 1040 Figure your tax both ways—claiming the credit and claiming the deduction. 2012 form 1040 Then fill out your return the way that benefits you more. 2012 form 1040 See Why Choose the Credit, later. 2012 form 1040 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. 2012 form 1040 If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. 2012 form 1040 You cannot deduct any of them. 2012 form 1040 Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. 2012 form 1040 You cannot take a credit for any of them. 2012 form 1040 See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. 2012 form 1040 There are exceptions to this general rule, which are described next. 2012 form 1040 Exceptions for foreign taxes not allowed as a credit. 2012 form 1040   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. 2012 form 1040 Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. 2012 form 1040 S. 2012 form 1040 tax purposes. 2012 form 1040 For more information, see Internal Revenue Code section 901(m). 2012 form 1040 The IRS intends to issue guidance that will explain this provision in greater detail. 2012 form 1040   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. 2012 form 1040 Foreign taxes that are not income taxes. 2012 form 1040   In most cases, only foreign income taxes qualify for the foreign tax credit. 2012 form 1040 Other taxes, such as foreign real and personal property taxes, do not qualify. 2012 form 1040 But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. 2012 form 1040   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. 2012 form 1040 However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). 2012 form 1040 Carrybacks and carryovers. 2012 form 1040   There is a limit on the credit you can claim in a tax year. 2012 form 1040 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. 2012 form 1040 If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. 2012 form 1040 That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. 2012 form 1040   For more information on the limit, see How To Figure the Credit , later. 2012 form 1040 For more information on carrybacks and carryovers, see Carryback and Carryover , later. 2012 form 1040 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. 2012 form 1040 You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. 2012 form 1040 Example. 2012 form 1040 You paid foreign taxes for the last 13 years and chose to deduct them on your U. 2012 form 1040 S. 2012 form 1040 income tax returns. 2012 form 1040 You were timely in both filing your returns and paying your U. 2012 form 1040 S. 2012 form 1040 tax liability. 2012 form 1040 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. 2012 form 1040 Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). 2012 form 1040 Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. 2012 form 1040 Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. 2012 form 1040 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. 2012 form 1040 In most cases, if the foreign tax rate is higher than the U. 2012 form 1040 S. 2012 form 1040 rate, there will be no U. 2012 form 1040 S. 2012 form 1040 tax on the foreign income. 2012 form 1040 If the foreign tax rate is lower than the U. 2012 form 1040 S. 2012 form 1040 rate, U. 2012 form 1040 S. 2012 form 1040 tax on the foreign income will be limited to the difference between the rates. 2012 form 1040 The foreign tax credit can only reduce U. 2012 form 1040 S. 2012 form 1040 taxes on foreign source income; it cannot reduce U. 2012 form 1040 S. 2012 form 1040 taxes on U. 2012 form 1040 S. 2012 form 1040 source income. 2012 form 1040 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. 2012 form 1040 This is because: A credit reduces your actual U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 (See Limit on credit under How To Figure the Credit, later. 2012 form 1040 ) Example 1. 2012 form 1040 For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. 2012 form 1040 None of the dividends are qualified dividends. 2012 form 1040 You file a joint return and can claim two $3,900 exemptions. 2012 form 1040 You had to pay $2,000 in foreign income taxes on the dividend income. 2012 form 1040 If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. 2012 form 1040 Your taxable income then is $57,500 and your tax is $7,736. 2012 form 1040 If you take the credit instead, your itemized deductions are only $13,000. 2012 form 1040 Your taxable income then is $59,500 and your tax before the credit is $8,036. 2012 form 1040 After the credit, however, your tax is only $6,036. 2012 form 1040 Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. 2012 form 1040 Example 2. 2012 form 1040 In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. 2012 form 1040 You report on your U. 2012 form 1040 S. 2012 form 1040 return this income as well as $56,000 of U. 2012 form 1040 S. 2012 form 1040 source wages and an allowable $49,000 partnership loss from a U. 2012 form 1040 S. 2012 form 1040 partnership. 2012 form 1040 Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. 2012 form 1040 You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. 2012 form 1040 If you deduct the foreign tax on your U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 You can take a credit of only $113 because of limits discussed later. 2012 form 1040 Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. 2012 form 1040 If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 “Tax year” refers to the tax year for which your U. 2012 form 1040 S. 2012 form 1040 return is filed, not the tax year for which your foreign return is filed. 2012 form 1040 Accrual method of accounting. 2012 form 1040   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. 2012 form 1040 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. 2012 form 1040   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. 2012 form 1040 Generally, this occurs on the last day of the tax year for which your foreign return is filed. 2012 form 1040 Contesting your foreign tax liability. 2012 form 1040   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. 2012 form 1040 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. 2012 form 1040 Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. 2012 form 1040 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 . 2012 form 1040 You may have to post a bond. 2012 form 1040   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. 2012 form 1040   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. 2012 form 1040 Cash method of accounting. 2012 form 1040   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. 2012 form 1040 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. 2012 form 1040 Choosing to take credit in the year taxes accrue. 2012 form 1040   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. 2012 form 1040 You make the choice by checking the box in Part II of Form 1116. 2012 form 1040 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. 2012 form 1040   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. 2012 form 1040 You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. 2012 form 1040   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. 2012 form 1040 Credit based on taxes paid in earlier year. 2012 form 1040   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. 2012 form 1040 Example. 2012 form 1040 Last year you took the credit based on taxes paid. 2012 form 1040 This year you chose to take the credit based on taxes accrued. 2012 form 1040 During the year you paid foreign income taxes owed for last year. 2012 form 1040 You also accrued foreign income taxes for this year that you did not pay by the end of the year. 2012 form 1040 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. 2012 form 1040 Foreign Currency and Exchange Rates U. 2012 form 1040 S. 2012 form 1040 income tax is imposed on income expressed in U. 2012 form 1040 S. 2012 form 1040 dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. 2012 form 1040 Therefore, fluctuations in the value of the foreign currency relative to the U. 2012 form 1040 S. 2012 form 1040 dollar may affect the foreign tax credit. 2012 form 1040 Translating foreign currency into U. 2012 form 1040 S. 2012 form 1040 dollars. 2012 form 1040   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. 2012 form 1040 S. 2012 form 1040 dollars. 2012 form 1040 How and when you do this depends on your functional currency. 2012 form 1040 In most cases, your functional currency is the U. 2012 form 1040 S. 2012 form 1040 dollar unless you are required to use the currency of a foreign country. 2012 form 1040   You must make all federal income tax determinations in your functional currency. 2012 form 1040 The U. 2012 form 1040 S. 2012 form 1040 dollar is the functional currency for all taxpayers except some qualified business units. 2012 form 1040 A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. 2012 form 1040 Unless you are self-employed, your functional currency is the U. 2012 form 1040 S. 2012 form 1040 dollar. 2012 form 1040   Even if you are self-employed and have a qualified business unit, your functional currency is the U. 2012 form 1040 S. 2012 form 1040 dollar if any of the following apply. 2012 form 1040 You conduct the business primarily in dollars. 2012 form 1040 The principal place of business is located in the United States. 2012 form 1040 You choose to or are required to use the dollar as your functional currency. 2012 form 1040 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. 2012 form 1040   If your functional currency is the U. 2012 form 1040 S. 2012 form 1040 dollar, you must immediately translate into dollars all items of income, expense, etc. 2012 form 1040 , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. 2012 form 1040 If there is more than one exchange rate, use the one that most properly reflects your income. 2012 form 1040 In most cases, you can get exchange rates from banks and U. 2012 form 1040 S. 2012 form 1040 Embassies. 2012 form 1040   If your functional currency is not the U. 2012 form 1040 S. 2012 form 1040 dollar, make all income tax determinations in your functional currency. 2012 form 1040 At the end of the year, translate the results, such as income or loss, into U. 2012 form 1040 S. 2012 form 1040 dollars to report on your income tax return. 2012 form 1040    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. 2012 form 1040   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. 2012 form 1040 If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. 2012 form 1040 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. 2012 form 1040   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). 2012 form 1040 Exception. 2012 form 1040   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. 2012 form 1040 This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. 2012 form 1040 The foreign taxes are paid on or after the first day of the tax year to which they relate. 2012 form 1040 The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. 2012 form 1040 The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). 2012 form 1040 (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. 2012 form 1040 )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. 2012 form 1040 Election to use exchange rate on date paid. 2012 form 1040   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. 2012 form 1040 If any of the accrued taxes are unpaid, you must translate them into U. 2012 form 1040 S. 2012 form 1040 dollars using the exchange rate on the last day of the U. 2012 form 1040 S. 2012 form 1040 tax year to which those taxes relate. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 dollar functional currency. 2012 form 1040 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. 2012 form 1040 The election is available for tax years beginning after 2004. 2012 form 1040 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. 2012 form 1040 Make the election by attaching a statement to the applicable tax return. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 dollar functional currency. 2012 form 1040 Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. 2012 form 1040 S. 2012 form 1040 foreign tax credit claimed. 2012 form 1040 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. 2012 form 1040 If a foreign tax redetermination occurs, a redetermination of your U. 2012 form 1040 S. 2012 form 1040 tax liability is required if any of the following conditions apply. 2012 form 1040 The accrued taxes when paid differ from the amounts claimed as a credit. 2012 form 1040 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. 2012 form 1040 If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. 2012 form 1040 You will not be allowed a credit for the unpaid taxes until you pay them. 2012 form 1040 When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. 2012 form 1040 S. 2012 form 1040 dollars using the exchange rate as of the date they were paid. 2012 form 1040 The foreign tax credit is allowed for the year to which the foreign tax relates. 2012 form 1040 See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. 2012 form 1040 The foreign taxes you paid are refunded in whole or in part. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 tax year. 2012 form 1040 In this case, you must adjust your U. 2012 form 1040 S. 2012 form 1040 tax in the tax year in which the accrued foreign taxes are paid. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 tax liability for each tax year affected by the redetermination. 2012 form 1040 In most cases, you must file Form 1040X, Amended U. 2012 form 1040 S. 2012 form 1040 Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. 2012 form 1040 S. 2012 form 1040 tax liability for the year or years affected. 2012 form 1040 See Contents of statement , later. 2012 form 1040 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. 2012 form 1040 There are other exceptions to this requirement. 2012 form 1040 They are discussed later under Due date of notification to IRS . 2012 form 1040 Contents of statement. 2012 form 1040   The statement must include all of the following. 2012 form 1040 Your name, address, and taxpayer identification number. 2012 form 1040 The tax year or years that are affected by the foreign tax redetermination. 2012 form 1040 The date or dates the foreign taxes were accrued, if applicable. 2012 form 1040 The date or dates the foreign taxes were paid. 2012 form 1040 The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. 2012 form 1040 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. 2012 form 1040   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. 2012 form 1040   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). 2012 form 1040 Due date of notification to IRS. 2012 form 1040   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. 2012 form 1040 There is no limit on the time the IRS has to redetermine and assess the correct U. 2012 form 1040 S. 2012 form 1040 tax due. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 taxes. 2012 form 1040 See Time Limit on Refund Claims , later. 2012 form 1040   Exceptions to this due date are explained in the next two paragraphs. 2012 form 1040 Multiple redeterminations of U. 2012 form 1040 S. 2012 form 1040 tax liability for same tax year. 2012 form 1040   Where more than one foreign tax redetermination requires a redetermination of U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. 2012 form 1040 S. 2012 form 1040 tax liability is required may occur after the due date for providing that notification. 2012 form 1040 In this situation, you may have to file more than one Form 1040X for that tax year. 2012 form 1040 Additional U. 2012 form 1040 S. 2012 form 1040 tax due eliminated by foreign tax credit carryback or carryover. 2012 form 1040   If a foreign tax redetermination requires a redetermination of U. 2012 form 1040 S. 2012 form 1040 tax liability that would otherwise result in an additional amount of U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 You must file the statement by the due date (with extensions) of that return. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 tax liability is required). 2012 form 1040 Failure-to-notify penalty. 2012 form 1040   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. 2012 form 1040   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. 2012 form 1040 S. 2012 form 1040 tax. 2012 form 1040 This penalty cannot be more than 25% of the tax due. 2012 form 1040 Foreign tax refund. 2012 form 1040   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. 2012 form 1040 S. 2012 form 1040 tax for the time before the date of the refund. 2012 form 1040   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. 2012 form 1040 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. 2012 form 1040 Interest also is owed from the time you receive a refund until you pay the additional tax due. 2012 form 1040 Foreign tax imposed on foreign refund. 2012 form 1040   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. 2012 form 1040 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. 2012 form 1040 Example. 2012 form 1040 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. 2012 form 1040 When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. 2012 form 1040 Time Limit on Refund Claims You have 10 years to file a claim for refund of U. 2012 form 1040 S. 2012 form 1040 tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. 2012 form 1040 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. 2012 form 1040 You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. 2012 form 1040 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). 2012 form 1040 The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. 2012 form 1040 See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. 2012 form 1040 Who Can Take the Credit? U. 2012 form 1040 S. 2012 form 1040 citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. 2012 form 1040 S. 2012 form 1040 tax on foreign source income may be able to take a foreign tax credit. 2012 form 1040 U. 2012 form 1040 S. 2012 form 1040 Citizens If you are a U. 2012 form 1040 S. 2012 form 1040 citizen, you are taxed by the United States on your worldwide income wherever you live. 2012 form 1040 You are normally entitled to take a credit for foreign taxes you pay or accrue. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 citizens. 2012 form 1040 If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. 2012 form 1040 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. 2012 form 1040 For information on alien status, see Publication 519. 2012 form 1040 Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 possession on income from foreign sources that is effectively connected with a trade or business in the United States. 2012 form 1040 But if you must pay tax to a foreign country or U. 2012 form 1040 S. 2012 form 1040 possession on income from U. 2012 form 1040 S. 2012 form 1040 sources only because you are a citizen or a resident of that country or U. 2012 form 1040 S. 2012 form 1040 possession, do not use that tax in figuring the amount of your credit. 2012 form 1040 For information on alien status and effectively connected income, see Publication 519. 2012 form 1040 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. 2012 form 1040 The tax must be imposed on you. 2012 form 1040 You must have paid or accrued the tax. 2012 form 1040 The tax must be the legal and actual foreign tax liability. 2012 form 1040 The tax must be an income tax (or a tax in lieu of an income tax). 2012 form 1040 Certain foreign taxes do not qualify for the credit even if the four tests are met. 2012 form 1040 See Foreign Taxes for Which You Cannot Take a Credit, later. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 possession. 2012 form 1040 For example, a tax that is deducted from your wages is considered to be imposed on you. 2012 form 1040 You cannot shift the right to claim the credit by contract or other means. 2012 form 1040 Foreign country. 2012 form 1040   A foreign country includes any foreign state and its political subdivisions. 2012 form 1040 Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. 2012 form 1040 U. 2012 form 1040 S. 2012 form 1040 possessions. 2012 form 1040   For foreign tax credit purposes, all qualified taxes paid to U. 2012 form 1040 S. 2012 form 1040 possessions are considered foreign taxes. 2012 form 1040 For this purpose, U. 2012 form 1040 S. 2012 form 1040 possessions include Puerto Rico and American Samoa. 2012 form 1040   When the term “foreign country” is used in this publication, it includes U. 2012 form 1040 S. 2012 form 1040 possessions unless otherwise stated. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 possession. 2012 form 1040 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. 2012 form 1040 Joint return. 2012 form 1040   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. 2012 form 1040 Combined income. 2012 form 1040   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. 2012 form 1040 901-2(f)(3)(iii). 2012 form 1040 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. 2012 form 1040   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. 2012 form 1040 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. 2012 form 1040 For more details, see paragraphs (f) and (h) of Regulations section 1. 2012 form 1040 901-2. 2012 form 1040 For similar rules applicable to prior tax years, see Regulations section 1. 2012 form 1040 901-2 (revised as of April 1, 2011). 2012 form 1040 Example. 2012 form 1040 You and your spouse reside in Country X, which imposes income tax on your combined incomes. 2012 form 1040 Both of you use the “u” as your functional currency. 2012 form 1040 Country X apportions tax based on income. 2012 form 1040 You had income of 30,000u and your spouse had income of 20,000u. 2012 form 1040 Your filing status on your U. 2012 form 1040 S. 2012 form 1040 income tax return is married filing separately. 2012 form 1040 You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. 2012 form 1040 S income tax return. 2012 form 1040 Your spouse can claim only 40% (20,000u/50,000u). 2012 form 1040 Partner or S corporation shareholder. 2012 form 1040   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. 2012 form 1040 These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. 2012 form 1040 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. 2012 form 1040 Beneficiary. 2012 form 1040   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. 2012 form 1040 This amount will be shown on the Schedule K-1 you receive from the estate or trust. 2012 form 1040 However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. 2012 form 1040 Mutual fund shareholder. 2012 form 1040   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. 2012 form 1040 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. 2012 form 1040 If you do not receive this information, you will need to contact the fund. 2012 form 1040 Controlled foreign corporation shareholder. 2012 form 1040   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. 2012 form 1040 If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. 2012 form 1040 Controlled foreign corporation. 2012 form 1040   A controlled foreign corporation is a foreign corporation in which U. 2012 form 1040 S. 2012 form 1040 shareholders own more than 50% of the voting power or value of the stock. 2012 form 1040 You are considered a U. 2012 form 1040 S. 2012 form 1040 shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. 2012 form 1040 See Internal Revenue Code sections 951(b) and 958(b) for more information. 2012 form 1040 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. 2012 form 1040 Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. 2012 form 1040 Foreign tax refund. 2012 form 1040   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. 2012 form 1040   For example, the United States has tax treaties with many countries allowing U. 2012 form 1040 S. 2012 form 1040 citizens and residents reductions in the rates of tax of those foreign countries. 2012 form 1040 However, some treaty countries require U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 Subsidy received. 2012 form 1040   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040   The term “subsidy” includes any type of benefit. 2012 form 1040 Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2012 form 1040 Shareholder receiving refund for corporate tax in integrated system. 2012 form 1040   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. 2012 form 1040 You may be able to claim a refund of these taxes from the foreign government. 2012 form 1040 You must include the refund (including any amount withheld) in your income in the year received. 2012 form 1040 Any tax withheld from the refund is a qualified foreign tax. 2012 form 1040 Example. 2012 form 1040 You are a shareholder of a French corporation. 2012 form 1040 You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. 2012 form 1040 The French government imposes a 15% withholding tax ($15) on the refund you received. 2012 form 1040 You receive a check for $85. 2012 form 1040 You include $100 in your income. 2012 form 1040 The $15 of tax withheld is a qualified foreign tax. 2012 form 1040 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. 2012 form 1040 Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. 2012 form 1040 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. 2012 form 1040 See Taxes in Lieu of Income Taxes , later. 2012 form 1040 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. 2012 form 1040 A foreign levy is an income tax only if it meets both of the following requirements. 2012 form 1040 It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. 2012 form 1040 The predominant character of the tax is that of an income tax in the U. 2012 form 1040 S. 2012 form 1040 sense. 2012 form 1040 A foreign levy may meet these requirements even if the foreign tax law differs from U. 2012 form 1040 S. 2012 form 1040 tax law. 2012 form 1040 The foreign law may include in income items that U. 2012 form 1040 S. 2012 form 1040 law does not include, or it may allow certain exclusions or deductions that U. 2012 form 1040 S. 2012 form 1040 law does not allow. 2012 form 1040 Specific economic benefit. 2012 form 1040   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. 2012 form 1040   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. 2012 form 1040   However, see the exception discussed later under Pension, unemployment, and disability fund payments . 2012 form 1040 Economic benefits. 2012 form 1040   Economic benefits include the following. 2012 form 1040 Goods. 2012 form 1040 Services. 2012 form 1040 Fees or other payments. 2012 form 1040 Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. 2012 form 1040 Discharges of contractual obligations. 2012 form 1040   In most cases, the right or privilege merely to engage in business is not an economic benefit. 2012 form 1040 Dual-capacity taxpayers. 2012 form 1040   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. 2012 form 1040 ” 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. 2012 form 1040    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. 2012 form 1040   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. 2012 form 1040    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. 2012 form 1040 For more information about these agreements, see Publication 54. 2012 form 1040 Soak-up taxes. 2012 form 1040   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. 2012 form 1040 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. 2012 form 1040 This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. 2012 form 1040 Penalties and interest. 2012 form 1040   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. 2012 form 1040 Taxes not based on income. 2012 form 1040   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. 2012 form 1040 Taxes based on assets, such as property taxes, do not qualify for the credit. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 A tax in lieu of an income tax does not have to be based on realized net income. 2012 form 1040 A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. 2012 form 1040 In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. 2012 form 1040 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. 2012 form 1040 The soak-up tax. 2012 form 1040 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. 2012 form 1040 Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. 2012 form 1040 Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. 2012 form 1040 S. 2012 form 1040 gross income. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 income under the foreign earned income exclusion or the foreign housing exclusion. 2012 form 1040 See Publication 54 for more information on the foreign earned income and housing exclusions. 2012 form 1040 Wages completely excluded. 2012 form 1040   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. 2012 form 1040 Wages partly excluded. 2012 form 1040   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. 2012 form 1040 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. 2012 form 1040   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. 2012 form 1040 Deductible expenses do not include the foreign housing deduction. 2012 form 1040   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). 2012 form 1040 If the foreign law taxes foreign earned income and some other income (for example, earned income from U. 2012 form 1040 S. 2012 form 1040 sources or a type of income not subject to U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 Example. 2012 form 1040 You are a U. 2012 form 1040 S. 2012 form 1040 citizen and a cash basis taxpayer, employed by Company X and living in Country A. 2012 form 1040 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. 2012 form 1040 To find that part, do the following. 2012 form 1040 First, find the amount of business expenses allocable to excluded wages and therefore not deductible. 2012 form 1040 To do this, multiply the otherwise deductible expenses by a fraction. 2012 form 1040 That fraction is the excluded wages over your foreign earned income. 2012 form 1040   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. 2012 form 1040 To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). 2012 form 1040 The result is $81,984. 2012 form 1040 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). 2012 form 1040 Finally, multiply the foreign tax you paid by the resulting fraction. 2012 form 1040   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. 2012 form 1040 Taxes on Income From Puerto Rico Exempt From U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 For information on figuring the reduction, see Publication 570. 2012 form 1040 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. 2012 form 1040 For more information on this exclusion, see Publication 570. 2012 form 1040 Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. 2012 form 1040 However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. 2012 form 1040 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. 2012 form 1040 However, you can claim an itemized deduction for these taxes. 2012 form 1040 See Choosing To Take Credit or Deduction , earlier. 2012 form 1040 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. 2012 form 1040 The following countries meet this description for 2013. 2012 form 1040 Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. 2012 form 1040 Cuba. 2012 form 1040 Iran. 2012 form 1040 Libya (but see Note later). 2012 form 1040 North Korea. 2012 form 1040 Sudan. 2012 form 1040 Syria. 2012 form 1040 Waiver of denial of the credit. 2012 form 1040   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. 2012 form 1040 S. 2012 form 1040 companies in the sanctioned country. 2012 form 1040 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. 2012 form 1040 Note. 2012 form 1040 Effective December 10, 2004, the President granted a waiver to Libya. 2012 form 1040 Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. 2012 form 1040 Limit on credit. 2012 form 1040   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. 2012 form 1040 You must fill out a separate Form 1116 for this income. 2012 form 1040 This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. 2012 form 1040 Example. 2012 form 1040 You lived and worked in Iran until August, when you were transferred to Italy. 2012 form 1040 You paid taxes to each country on the income earned in that country. 2012 form 1040 You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. 2012 form 1040 Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. 2012 form 1040 You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. 2012 form 1040 Figuring the credit when a sanction ends. 2012 form 1040    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. 2012 form 1040 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. 2012 form 1040 Example. 2012 form 1040 The sanctions against Country X ended on July 31. 2012 form 1040 On August 19, you receive a distribution from a mutual fund of Country X income. 2012 form 1040 The fund paid Country X income tax for you on the distribution. 2012 form 1040 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. 2012 form 1040 Amounts for the nonsanctioned period. 2012 form 1040   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. 2012 form 1040 Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. 2012 form 1040   Number of nonsanctioned days in year  Number of days in year Example. 2012 form 1040 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. 2012 form 1040 Sanctions against Country X ended on July 11, 2013. 2012 form 1040 You are unable to determine how much of the income or tax is for the nonsanctioned period. 2012 form 1040 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. 2012 form 1040 You would compute the income for the nonsanctioned period as follows. 2012 form 1040 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. 2012 form 1040 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. 2012 form 1040 Further information. 2012 form 1040   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. 2012 form 1040 This Cumulative Bulletin can be found in many libraries and IRS offices. 2012 form 1040 Table 1. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 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). 2012 form 1040 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. 2012 form 1040 If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 Withholding tax. 2012 form 1040   For this purpose, withholding tax includes any tax determined on a gross basis. 2012 form 1040 It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 2012 form 1040 Ex-dividend date. 2012 form 1040   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. 2012 form 1040 Example 1. 2012 form 1040 You bought common stock from a foreign corporation on November 3. 2012 form 1040 You sold the stock on November 19. 2012 form 1040 You received a dividend on this stock because you owned it on the ex-dividend date of November 5. 2012 form 1040 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). 2012 form 1040 Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. 2012 form 1040 Example 2. 2012 form 1040 The facts are the same as in Example 1 except that you sold the stock on November 14. 2012 form 1040 You held the stock for only 11 days. 2012 form 1040 You are not entitled to the credit. 2012 form 1040 Exception. 2012 form 1040   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. 2012 form 1040 See section 901(k)(4) of the Internal Revenue Code for more information. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 Withholding tax. 2012 form 1040   For this purpose, withholding tax includes any tax determined on a gross basis. 2012 form 1040 It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. 2012 form 1040 Exception for dealers. 2012 form 1040   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. 2012 form 1040 See section 901(I)(2) of the Internal Revenue Code for more information. 2012 form 1040 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. 2012 form 1040 A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. 2012 form 1040 S. 2012 form 1040 tax purposes but not for foreign tax purposes. 2012 form 1040 For more information, see Internal Revenue Code section 901(m). 2012 form 1040 The IRS intends to issue guidance that will explain this provision in greater detail. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 For details, see Regulations section 1. 2012 form 1040 901-3. 2012 form 1040 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. 2012 form 1040 See the instructions for line 12 in the Form 1116 instructions to figure this reduction. 2012 form 1040 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. 2012 form 1040 List of boycotting countries. 2012 form 1040   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. 2012 form 1040 As of November 2013, the following countries are listed. 2012 form 1040 Iraq. 2012 form 1040 Kuwait. 2012 form 1040 Lebanon. 2012 form 1040 Libya. 2012 form 1040 Qatar. 2012 form 1040 Saudi Arabia. 2012 form 1040 Syria. 2012 form 1040 United Arab Emirates. 2012 form 1040 Yemen. 2012 form 1040    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. 2012 form 1040   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. 2012 form 1040 The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. 2012 form 1040 Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. 2012 form 1040 Public inspection. 2012 form 1040   A determination and any related background file is open to public inspection. 2012 form 1040 However, your identity and certain other information will remain confidential. 2012 form 1040 Reporting requirements. 2012 form 1040   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. 2012 form 1040 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. 2012 form 1040 A partnership in which you are a partner. 2012 form 1040 A trust you are treated as owning. 2012 form 1040 Form 5713 required. 2012 form 1040   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. 2012 form 1040 See the Instructions for Form 5713 for information on when and where to file the form. 2012 form 1040 Penalty for failure to file. 2012 form 1040   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. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 tax liability (Form 1040, line 44) divided by your worldwide taxable income. 2012 form 1040 You may be entitled to carry over to other years taxes reduced under this rule. 2012 form 1040 See Internal Revenue Code section 907(f). 2012 form 1040 Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. 2012 form 1040 Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. 2012 form 1040 Taxes of U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 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. 2012 form 1040 See Penalty for not filing Form 5471 or Form 8865 , later. 2012 form 1040 U. 2012 form 1040 S. 2012 form 1040 persons controlling foreign corporations. 2012 form 1040   If you are a U. 2012 form 1040 S. 2012 form 1040 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. 2012 form 1040 S. 2012 form 1040 Persons With Respect To Certain Foreign Corporations. 2012 form 1040 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. 2012 form 1040 U. 2012 form 1040 S. 2012 form 1040 persons controlling foreign partnerships. 2012 form 1040   If you are a U. 2012 form 1040 S. 2012 form 1040 citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file
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The 2012 Form 1040

2012 form 1040 4. 2012 form 1040   Deductions Table of Contents Standard DeductionStandard Deduction for Dependents Itemized DeductionsMedical and Dental Expenses Most taxpayers have a choice of taking a standard deduction or itemizing their deductions. 2012 form 1040 You benefit from the standard deduction if your standard deduction is more than the total of your allowable itemized deductions. 2012 form 1040 If you have a choice, you should use the method that gives you the lower tax. 2012 form 1040 Standard Deduction The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. 2012 form 1040 Generally, the standard deduction amounts are adjusted each year for inflation. 2012 form 1040 In most cases, you can use Worksheet 4-1 to figure your standard deduction amount. 2012 form 1040 Persons not eligible for the standard deduction. 2012 form 1040   Your standard deduction is zero and you should itemize any deductions you have if: You are married and filing a separate return, and your spouse itemizes deductions, You are filing a tax return for a short tax year because of a change in your annual accounting period, or You are a nonresident or dual-status alien during the year. 2012 form 1040 You are considered a dual-status alien if you were both a nonresident alien and a resident alien during the year. 2012 form 1040   If you are a nonresident alien who is married to a U. 2012 form 1040 S. 2012 form 1040 citizen or resident alien at the end of the year, you can choose to be treated as a U. 2012 form 1040 S. 2012 form 1040 resident. 2012 form 1040 See Publication 519, U. 2012 form 1040 S. 2012 form 1040 Tax Guide for Aliens. 2012 form 1040 If you make this choice, you can take the standard deduction. 2012 form 1040 Decedent's final return. 2012 form 1040   The amount of the standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. 2012 form 1040 However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed. 2012 form 1040 Higher standard deduction for age (65 or older). 2012 form 1040   If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. 2012 form 1040 You are considered age 65 on the day before your 65th birthday. 2012 form 1040 Therefore, you can take a higher standard deduction for 2013 if you were born before January 2, 1949. 2012 form 1040 Higher standard deduction for blindness. 2012 form 1040   If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. 2012 form 1040 You qualify for this benefit if you are totally or partly blind. 2012 form 1040 Not totally blind. 2012 form 1040   If you are not totally blind, you must get a certified statement from an eye doctor (ophthalmologist or optometrist) that: You cannot see better than 20/200 in the better eye with glasses or contact lenses, or Your field of vision is not more than 20 degrees. 2012 form 1040   If your eye condition will never improve beyond these limits, the statement should include this fact. 2012 form 1040 You must keep the statement in your records. 2012 form 1040   If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify. 2012 form 1040 Spouse 65 or older or blind. 2012 form 1040   You can take the higher standard deduction if your spouse is age 65 or older or blind and: You file a joint return, or You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and an exemption for your spouse could not be claimed by another taxpayer. 2012 form 1040    You cannot claim the higher standard deduction for an individual other than yourself and your spouse. 2012 form 1040 Example. 2012 form 1040 This example illustrates how to determine your standard deduction using Worksheet 4-1. 2012 form 1040 Bill and Lisa are filing a joint return for 2013. 2012 form 1040 Both are over age 65. 2012 form 1040 Neither is blind, and neither can be claimed as a dependent. 2012 form 1040 They do not itemize deductions, so they use Worksheet 4-1. 2012 form 1040 Because they are married filing jointly, they enter $12,200 on line 1. 2012 form 1040 They check the “No” box on line 2, so they also enter $12,200 on line 4. 2012 form 1040 Because they are both over age 65, they enter $2,400 ($1,200 × 2) on line 5. 2012 form 1040 They enter $14,600 ($12,200 + $2,400) on line 6, so their standard deduction is $14,600. 2012 form 1040 Standard Deduction for Dependents The standard deduction for an individual for whom an exemption can be claimed on another person's tax return is generally limited to the greater of: $1,000, or The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $6,100). 2012 form 1040 However, the standard deduction may be higher if the individual is 65 or older or blind. 2012 form 1040 If an exemption for you (or your spouse if you are filing jointly) can be claimed on someone else's return, use Worksheet 4-1, if applicable, to determine your standard deduction. 2012 form 1040 Worksheet 4-1. 2012 form 1040 2013 Standard Deduction Worksheet Caution. 2012 form 1040 If you are married filing separately and your spouse itemizes deductions, or if you are a dual-status alien, do not complete this worksheet. 2012 form 1040 If you were born before January 2, 1949, and/or blind, check the correct number of boxes below. 2012 form 1040 Put the total number of boxes checked in box c and go to line 1. 2012 form 1040 a. 2012 form 1040 You   Born before  January 2, 1949     Blind b. 2012 form 1040 Your spouse, if claiming  spouse's exemption   Born before January 2, 1949     Blind c. 2012 form 1040 Total boxes checked             1. 2012 form 1040 Enter the amount shown below for your filing status. 2012 form 1040               Single or married filing separately — $6,100 Married filing jointly or Qualifying widow(er) — $12,200 Head of household — $8,950   1. 2012 form 1040           2. 2012 form 1040 Can you (or your spouse if filing jointly) be claimed as a dependent on someone else's return?  No. 2012 form 1040 Skip line 3; enter the amount from line 1 on line 4. 2012 form 1040   Yes. 2012 form 1040 Go to line 3. 2012 form 1040         3. 2012 form 1040 Is your earned income* more than $650?               Yes. 2012 form 1040 Add $350 to your earned income. 2012 form 1040 Enter the total   3. 2012 form 1040         No. 2012 form 1040 Enter $1,000 4. 2012 form 1040 Enter the smaller of line 1 or line 3 4. 2012 form 1040   5. 2012 form 1040 If born before January 2, 1949, or blind, multiply the number in box c by $1,200 ($1,500 if single or head of household). 2012 form 1040 Enter the result here. 2012 form 1040 Otherwise, enter -0- 5. 2012 form 1040   6. 2012 form 1040 Add lines 4 and 5. 2012 form 1040 This is your standard deduction for 2013. 2012 form 1040 6. 2012 form 1040   * Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. 2012 form 1040 It also includes any amount received as a scholarship that you must include in your income. 2012 form 1040 Generally, your earned income is the total of the amount(s) you reported on Form 1040, lines 7, 12, and 18, minus the amount, if any, on line 27 (or the amount you reported on Form 1040A, line 7). 2012 form 1040 Itemized Deductions Some individuals should itemize their deductions because it will save them money. 2012 form 1040 Others should itemize because they do not qualify for the standard deduction. 2012 form 1040 See the discussion under Standard Deduction , earlier, to decide if it would be to your advantage to itemize deductions. 2012 form 1040 You may be subject to a limit on some of your itemized deductions if your adjusted gross income is more than $150,000. 2012 form 1040 For more information, see Overall limitation, later. 2012 form 1040 Medical and dental expenses, some taxes, certain interest expenses, charitable contributions, casualty and theft losses, and certain other miscellaneous expenses may be itemized as deductions on Schedule A (Form 1040). 2012 form 1040 You may benefit from itemizing your deductions on Schedule A (Form 1040) if you: Cannot take the standard deduction, Had uninsured medical or dental expenses that are more than 10% of your adjusted gross income (or more than 7. 2012 form 1040 5% of your adjusted gross income if either you or your spouse is age 65 or older), Paid interest on your home, Paid real estate or personal property taxes, Paid mortgage insurance premiums, Paid state and local income or general sales taxes, Had large unreimbursed employee business expenses or other miscellaneous deductions, Had large uninsured casualty or theft losses, Made large contributions to qualified charities (see Publication 526, Charitable Contributions), or Have total itemized deductions that are more than the standard deduction that applies to you. 2012 form 1040 See the Schedule A (Form 1040) instructions for more information. 2012 form 1040 Overall limitation. 2012 form 1040   You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than: $150,000, if married filing separately, $250,000, if single, $275,000, if head of household, or $300,000, if married filing jointly or qualifying widow(er). 2012 form 1040  If your adjusted gross income exceeds the applicable amount, you will use the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040) to figure your total itemized deductions. 2012 form 1040 Medical and Dental Expenses You can deduct certain medical and dental expenses you paid for yourself, your spouse, and your dependent(s) if you itemize your deductions on Schedule A (Form 1040). 2012 form 1040 Table 4-1 shows some common items that you can or cannot include in figuring your medical expense deduction. 2012 form 1040 For more information, see the following discussions of selected items, which are presented in alphabetical order. 2012 form 1040 A more extensive list of items and further details can be found in Publication 502, Medical and Dental Expenses. 2012 form 1040 Table 4-1. 2012 form 1040 Medical and Dental Expenses Checklist You can include: You cannot include: Bandages Capital expenses for equipment or improvements to your home needed for medical care (see Publication 502) Certain weight-loss expenses for obesity Diagnostic devices Expenses of an organ donor Eye surgery—to promote the correct function of the eye Guide dogs or other animals aiding the blind, deaf, and disabled Hospital services fees (lab work, therapy, nursing services, surgery, etc. 2012 form 1040 ) Lead-based paint removal (see Publication 502) Long-term care contracts, qualified (see Publication 502) Meals and lodging provided by a hospital during medical treatment Medical and hospital insurance premiums Medical services fees (from doctors, dentists, surgeons, specialists, and other medical practitioners) Medicare Part D premiums Oxygen equipment and oxygen Part of life-care fee paid to retirement home designated for medical care Prescription medicines (prescribed by a doctor) and insulin Psychiatric and psychological treatment Social security tax, Medicare tax, FUTA, and state employment tax for worker providing medical care (see Publication 502) Special items (artificial limbs, false teeth, eyeglasses, contact lenses, hearing aids, crutches, wheelchair, etc. 2012 form 1040 ) Special education for mentally or physically disabled persons (see Publication 502) Stop-smoking programs Transportation for needed medical care Treatment at a drug or alcohol center (includes meals and lodging provided by the center) Wages for nursing services (see Publication 502) Contributions to Archer MSAs (see Publication 969) Bottled water Diaper service Expenses for your general health (even if following your doctor's advice) such as: —Health club dues —Household help (even if recommended by a doctor) —Social activities, such as dancing or swimming lessons —Trip for general health improvement Flexible spending account reimbursements for medical expenses (if contributions were on a pretax basis) (see Publication 502) Funeral, burial, or cremation expenses Health savings account payments for medical expenses (see Publication 502) Illegal operation or treatment Life insurance or income protection policies, or policies providing payment for loss of life, limb, sight, etc. 2012 form 1040 Medical insurance included in a car insurance policy covering all persons injured in or by your car Medicine you buy without a prescription Nursing care for a healthy baby Prescription drugs you brought in (or ordered shipped) from another country, in most cases (see Publication 502) Surgery for purely cosmetic reasons (see Publication 502) Toothpaste, toiletries, cosmetics, etc. 2012 form 1040 Teeth whitening Weight-loss expenses not for the treatment of obesity or other disease You can deduct only the amount of your medical and dental expenses that is more than 10% of your adjusted gross income (or that is more than 7. 2012 form 1040 5% of your adjusted gross income if you or your spouse is age 65 or older). 2012 form 1040 What to include. 2012 form 1040   Generally, you can include only the medical and dental expenses you paid this year, regardless of when the services were provided. 2012 form 1040 If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. 2012 form 1040 If you use a pay-by-phone or online account to pay your medical expenses, the date reported on the statement of the financial institution showing when payment was made is the date of payment. 2012 form 1040 You can include medical expenses you charge to your credit card in the year the charge is made. 2012 form 1040 It does not matter when you actually pay the amount charged. 2012 form 1040 Home Improvements You can include in medical expenses amounts you pay for home improvements if their main purpose is medical care for you, your spouse, or your dependent. 2012 form 1040 Only reasonable costs to accommodate a home to your disabled condition (or that of your spouse or your dependent(s) who live with you) are considered medical care. 2012 form 1040 Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses. 2012 form 1040 Publication 502 contains additional information and examples, including a capital expense worksheet, to assist you in figuring the amount of the capital expense that you can include in your medical expenses. 2012 form 1040 Also, see Publication 502 for information about deductible operating and upkeep expenses related to such capital expense items, and for information about improvements, for medical reasons, to property rented by a person with disabilities. 2012 form 1040 Household Help You cannot include in medical expenses the cost of household help, even if such help is recommended by a doctor. 2012 form 1040 This is a personal expense that is not deductible. 2012 form 1040 However, you may be able to include certain expenses paid to a person providing nursing-type services. 2012 form 1040 For more information, see Nursing Services , later. 2012 form 1040 Also, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. 2012 form 1040 For more information, see Qualified long-term care services under Long-Term Care, later. 2012 form 1040 Hospital Services You can include in medical expenses amounts you pay for the cost of inpatient care at a hospital or similar institution if a principal reason for being there is to receive medical care. 2012 form 1040 This includes amounts paid for meals and lodging. 2012 form 1040 Also, see Meals and Lodging , later. 2012 form 1040 Long-Term Care You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts. 2012 form 1040 Qualified long-term care services. 2012 form 1040   Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined later) that are: Required by a chronically ill individual, and Provided under a plan of care prescribed by a licensed health care practitioner. 2012 form 1040 Chronically ill individual. 2012 form 1040    An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions. 2012 form 1040 He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. 2012 form 1040 Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. 2012 form 1040 He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. 2012 form 1040 Maintenance and personal care services. 2012 form 1040    Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment). 2012 form 1040 Qualified long-term care insurance contracts. 2012 form 1040   A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. 2012 form 1040 The contract must: Be guaranteed renewable, Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses. 2012 form 1040   The amount of qualified long-term care premiums you can include is limited. 2012 form 1040 You can include the following as medical expenses on Schedule A (Form 1040). 2012 form 1040 Qualified long-term care premiums up to the following amounts. 2012 form 1040 Age 40 or under – $360. 2012 form 1040 Age 41 to 50 – $680. 2012 form 1040 Age 51 to 60 – $1,360. 2012 form 1040 Age 61 to 70 – $3,640. 2012 form 1040 Age 71 or over – $4,550. 2012 form 1040 Unreimbursed expenses for qualified long-term care services. 2012 form 1040 Note. 2012 form 1040 The limit on premiums is for each person. 2012 form 1040 Meals and Lodging You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if your main reason for being there is to receive medical care. 2012 form 1040 You may be able to include in medical expenses the cost of lodging (but not meals) not provided in a hospital or similar institution. 2012 form 1040 You can include the cost of such lodging while away from home if all of the following requirements are met. 2012 form 1040 The lodging is primarily for, and essential to, medical care. 2012 form 1040 The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital. 2012 form 1040 The lodging is not lavish or extravagant under the circumstances. 2012 form 1040 There is no significant element of personal pleasure, recreation, or vacation in the travel away from home. 2012 form 1040 The amount you include in medical expenses for lodging cannot be more than $50 per night for each person. 2012 form 1040 You can include lodging for a person traveling with the person receiving the medical care. 2012 form 1040 For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. 2012 form 1040 (Meals are not included. 2012 form 1040 ) Nursing home. 2012 form 1040   You can include in medical expenses the cost of medical care in a nursing home or a home for the aged for yourself, your spouse, or your dependent(s). 2012 form 1040 This includes the cost of meals and lodging in the home if a main reason for being there is to get medical care. 2012 form 1040   Do not include the cost of meals and lodging if the reason for being in the home is personal. 2012 form 1040 However, you can include in medical expenses the part of the cost that is for medical or nursing care. 2012 form 1040 Medical Insurance Premiums You can include in medical expenses insurance premiums you pay for policies that cover medical care. 2012 form 1040 Policies can provide payment for: Hospitalization, surgical fees, X-rays, Prescription drugs and insulin, Dental care, Replacement of lost or damaged contact lenses, and Qualified long-term care insurance contracts (subject to the additional limits included in the discussion on qualified long-term care insurance contracts under Long-Term Care , earlier). 2012 form 1040 If you have a policy that provides payments for other than medical care, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. 2012 form 1040 The cost of the medical portion must be separately stated in the insurance contract or given to you in a separate statement. 2012 form 1040 Medicare Part A. 2012 form 1040   If you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare Part A. 2012 form 1040 The payroll tax paid for Medicare Part A is not a medical expense. 2012 form 1040 If you are not covered under social security (or were not a government employee who paid Medicare tax), you can enroll voluntarily in Medicare Part A. 2012 form 1040 In this situation you can include the premiums you paid for Medicare Part A as a medical expense. 2012 form 1040 Medicare Part B. 2012 form 1040   Medicare Part B is a supplemental medical insurance. 2012 form 1040 Premiums you pay for Medicare Part B are a medical expense. 2012 form 1040 If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid. 2012 form 1040 If you were over age 65 or disabled when you first enrolled, check with your local Social Security Administration office, or go to their website at www. 2012 form 1040 SSA. 2012 form 1040 gov, to find out your premium. 2012 form 1040 Medicare Part D. 2012 form 1040   Medicare Part D is a voluntary prescription drug insurance program for persons with Medicare Part A or Part B. 2012 form 1040 You can include as a medical expense premiums you pay for Medicare Part D. 2012 form 1040 Prepaid insurance premiums. 2012 form 1040   Insurance premiums you pay before you are age 65 for medical care for yourself, your spouse, or your dependents after you reach age 65 are medical care expenses in the year paid if they are: Payable in equal yearly installments, or more often, and Payable for at least 10 years, or until you reach age 65 (but not for less than 5 years). 2012 form 1040 Medicines You can include in medical expenses amounts you pay for prescribed medicines and drugs. 2012 form 1040 A prescribed drug is one that requires a prescription by a doctor for its use by an individual. 2012 form 1040 You can also include amounts you pay for insulin. 2012 form 1040 Except for insulin, you cannot include in medical expenses amounts you pay for a drug that is not prescribed. 2012 form 1040 Imported medicines and drugs. 2012 form 1040   If you import medicines or drugs from other countries, see Medicines and Drugs From Other Countries, under What Expenses Are Not Includible, in Publication 502. 2012 form 1040 Nursing Services You can include in medical expenses wages and other amounts you pay for nursing services. 2012 form 1040 The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. 2012 form 1040 This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. 2012 form 1040 These services can be provided in your home or another care facility. 2012 form 1040 Generally, only the amount spent for nursing services is a medical expense. 2012 form 1040 If the attendant also provides personal and household services, amounts paid to the attendant must be divided between the time spent performing household and personal services and the time spent for nursing services. 2012 form 1040 However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. 2012 form 1040 See Maintenance and personal care services under Qualified long-term care services, earlier. 2012 form 1040 Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow you to work may qualify for the child and dependent care credit. 2012 form 1040 See Child and Dependent Care Credit , later, and Publication 503, Child and Dependent Care Expenses. 2012 form 1040 You can also include in medical expenses part of the amount you pay for that attendant's meals. 2012 form 1040 Divide the food expense among the household members to find the cost of the attendant's food. 2012 form 1040 Then divide that cost in the same manner as in the preceding paragraph. 2012 form 1040 If you had to pay additional amounts for household upkeep because of the attendant, you can include the extra amounts with your medical expenses. 2012 form 1040 This includes extra rent or utilities you pay because you moved to a larger apartment to provide space for the attendant. 2012 form 1040 Employment taxes. 2012 form 1040   You can include as a medical expense social security tax, FUTA, Medicare tax, and state employment taxes you pay for a nurse, attendant, or other person who provides medical care. 2012 form 1040 If the attendant also provides personal and household services, you can include as a medical expense only the amount of employment taxes paid for medical services as explained earlier under Nursing Services. 2012 form 1040 For information on employment tax responsibilities of household employers, see Publication 926, Household Employer's Tax Guide. 2012 form 1040 Transportation You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care. 2012 form 1040 Car expenses. 2012 form 1040    You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. 2012 form 1040 You cannot include depreciation, insurance, general repair, or maintenance expenses. 2012 form 1040   If you do not want to use your actual expenses for 2013, you can use the standard medical mileage rate of 24 cents a mile. 2012 form 1040   You can also include parking fees and tolls. 2012 form 1040 You can add these fees and tolls to your medical expenses whether you use actual expenses or use the standard mileage rate. 2012 form 1040 You can also include:    Bus, taxi, train, or plane fares or ambulance service, and Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone. 2012 form 1040 Do not include transportation expenses if, for purely personal reasons, you choose to travel to another city for an operation or other medical care prescribed by your doctor. 2012 form 1040 Prev  Up  Next   Home   More Online Publications