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Free Tax For 2012

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Free Tax For 2012

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

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SOI Publications Archive

Here you'll find PDFs of SOI's historical publications. Beginning in 1916, Congress mandated the annual publication of statistics related to “the operation of the internal revenue laws.”

In 2009, SOI began digitizing nearly 500 print publications (and more than 50,000 pages) from its library. As a result of this effort, a wealth of historical tax data is now easily accessible in electronic format. The archive includes publications from 1916 through 1999. Publications for 2000 to present are available from the Tax Stats landing page here.

The oldest report available here was published in 1863. The Report of the Commissioner of Internal Revenue for 1863 contains information on the collection of revenue by source and district of collection. From 1863 to today, the Annual Report of the Commissioner of Internal Revenue, later called the IRS Data Book, presents an annual overview of IRS operations.

Early SOI publications, from 1916 to 1933, compiled all available tax information into one publication, the annual Statistics of Income Report. Beginning in 1934, SOI reported tax information for individuals and businesses separately, published as Parts 1 and 2 of the Statistics of Income Report, respectively. Beginning in the 1950s, these reports were replaced with annual and special reports, usually focused on single taxpayer groups.

In 1981, SOI introduced the SOI Bulletin, replacing many of its earlier reports with a quarterly publication that contains summary articles and tables on a wide range of tax topics.

All of the archive files are Adobe Acrobat PDFs. A free Adobe Acrobat reader is available for download, if needed. Please note: any reports or years of publications that are listed but not links are in the process of being digitized and will be uploaded as soon as they become available. Don't hesitate to contact us for any requests.

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1916–1933 Statistics of Income Reports

From 1916 to 1933, the Statistics of Income Report provided information on income taxes paid by individuals, corporations, partnerships, estates and trusts, as well as information on gift and estate taxes.

 

1934–1999 Tax Information from Individuals

This section contains archived reports on:

  • Individual income tax returns
  • Sales of capital assets
  • Estate and gift taxes
  • Personal wealth
  • Income tax returns of trusts or estates
  • Data by small area 
1929–1999 Tax Information from Businesses

Here you'll find archived reports on:

  • Corporations
  • Partnerships
  • Sole proprietorships
  • Farmers' cooperatives 
  • Foreign corporations
1863–1999 IRS Data Books

The IRS Data Book provides annual data on collecting revenue, issuing refunds, enforcing tax law, assisting taxpayers, and the IRS budget and workforce.

 

1946–1999 Tax-Exempt Organization Reports

Here you'll find archived reports on the activities and finances of charities and private foundations.

 

Special Papers

Some archived publications were originally created in response to special requests, may have been produced for only 1 or 2 years, or present historical summaries of SOI's operations—you'll find these articles here.


 

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Page Last Reviewed or Updated: 22-Jan-2013

The Free Tax For 2012

Free tax for 2012 3. Free tax for 2012   SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Free tax for 2012 Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. Free tax for 2012 In addition, you will contribute matching or nonelective contributions. Free tax for 2012 SIMPLE plans can only be maintained on a calendar-year basis. Free tax for 2012 A SIMPLE plan can be set up in either of the following ways. Free tax for 2012 Using SIMPLE IRAs (SIMPLE IRA plan). Free tax for 2012 As part of a 401(k) plan (SIMPLE 401(k) plan). Free tax for 2012 Many financial institutions will help you set up a SIMPLE plan. Free tax for 2012 SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Free tax for 2012 Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. Free tax for 2012 For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. Free tax for 2012 Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. Free tax for 2012 You meet the employee limit. Free tax for 2012 You do not maintain another qualified plan unless the other plan is for collective bargaining employees. Free tax for 2012 Employee limit. Free tax for 2012   You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Free tax for 2012 Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Free tax for 2012 Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). Free tax for 2012   Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. Free tax for 2012 Grace period for employers who cease to meet the 100-employee limit. Free tax for 2012   If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. Free tax for 2012   A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Free tax for 2012 Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. Free tax for 2012 Coverage under the plan has not significantly changed during the grace period. Free tax for 2012 The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. Free tax for 2012    The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. Free tax for 2012 Other qualified plan. Free tax for 2012   The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. Free tax for 2012 Exception. Free tax for 2012   If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. Free tax for 2012 Who Can Participate in a SIMPLE IRA Plan? Eligible employee. Free tax for 2012   Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. Free tax for 2012 The term “employee” includes a self-employed individual who received earned income. Free tax for 2012   You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. Free tax for 2012 For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. Free tax for 2012 However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. Free tax for 2012 Excludable employees. Free tax for 2012   The following employees do not need to be covered under a SIMPLE IRA plan. Free tax for 2012 Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Free tax for 2012 Nonresident alien employees who have received no U. Free tax for 2012 S. Free tax for 2012 source wages, salaries, or other personal services compensation from you. Free tax for 2012 Compensation. Free tax for 2012   Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Free tax for 2012 Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. Free tax for 2012 If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. Free tax for 2012 How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Free tax for 2012 Each form is a model savings incentive match plan for employees (SIMPLE) plan document. Free tax for 2012 Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. Free tax for 2012 Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. Free tax for 2012 Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. Free tax for 2012 The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Free tax for 2012 Keep the original form. Free tax for 2012 Do not file it with the IRS. Free tax for 2012 Other uses of the forms. Free tax for 2012   If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. Free tax for 2012 Meeting employer notification requirements for the SIMPLE IRA plan. Free tax for 2012 Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. Free tax for 2012 Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. Free tax for 2012 Deadline for setting up a SIMPLE IRA plan. Free tax for 2012   You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. Free tax for 2012 This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. Free tax for 2012 If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. Free tax for 2012 A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. Free tax for 2012 Setting up a SIMPLE IRA. Free tax for 2012   SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. Free tax for 2012 A SIMPLE IRA must be set up for each eligible employee. Free tax for 2012 Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. Free tax for 2012   A SIMPLE IRA cannot be a Roth IRA. Free tax for 2012 Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Free tax for 2012 Deadline for setting up a SIMPLE IRA. Free tax for 2012   A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. Free tax for 2012 See Time limits for contributing funds , later, under Contribution Limits. Free tax for 2012 Credit for startup costs. Free tax for 2012   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. Free tax for 2012 For more information, see Credit for startup costs under Reminders, earlier. Free tax for 2012 Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. Free tax for 2012 The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. Free tax for 2012 Your decision to make either matching contributions or nonelective contributions (discussed later). Free tax for 2012 A summary description provided by the financial institution. Free tax for 2012 Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. Free tax for 2012 Election period. Free tax for 2012   The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). Free tax for 2012 However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. Free tax for 2012   A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. Free tax for 2012 For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Free tax for 2012 Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. Free tax for 2012 Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. Free tax for 2012 You, as the employer, must make either matching contributions or nonelective contributions, defined later. Free tax for 2012 No other contributions can be made to the SIMPLE IRA plan. Free tax for 2012 These contributions, which you can deduct, must be made timely. Free tax for 2012 See Time limits for contributing funds , later. Free tax for 2012 Salary reduction contributions. Free tax for 2012   The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. Free tax for 2012 These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. Free tax for 2012 You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. Free tax for 2012   If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. Free tax for 2012 Catch-up contributions. Free tax for 2012   A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Free tax for 2012 The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. Free tax for 2012 Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. Free tax for 2012 However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Free tax for 2012 The catch-up contribution limit. Free tax for 2012 The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. Free tax for 2012 Employer matching contributions. Free tax for 2012   You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. Free tax for 2012 This requirement does not apply if you make nonelective contributions as discussed later. Free tax for 2012 Example. Free tax for 2012 In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Free tax for 2012 Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Free tax for 2012 You make 3% matching contributions. Free tax for 2012 The total contribution you make for John is $2,000, figured as follows. Free tax for 2012 Salary reduction contributions ($25,000 × . Free tax for 2012 05) $1,250 Employer matching contribution ($25,000 × . Free tax for 2012 03) 750 Total contributions $2,000     The total contribution you make for yourself is $5,200, figured as follows. Free tax for 2012 Salary reduction contributions ($40,000 × . Free tax for 2012 10) $4,000 Employer matching contribution ($40,000 × . Free tax for 2012 03) 1,200 Total contributions $5,200 Lower percentage. Free tax for 2012   If you choose a matching contribution less than 3%, the percentage must be at least 1%. Free tax for 2012 You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Free tax for 2012 You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. Free tax for 2012 Nonelective contributions. Free tax for 2012   Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. Free tax for 2012 If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Free tax for 2012 Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). Free tax for 2012   If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Free tax for 2012 Example 1. Free tax for 2012 In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Free tax for 2012 Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Free tax for 2012 You make a 2% nonelective contribution. Free tax for 2012 Both of you are under age 50. Free tax for 2012 The total contribution you make for Jane is $4,320, figured as follows. Free tax for 2012 Salary reduction contributions ($36,000 × . Free tax for 2012 10) $3,600 2% nonelective contributions ($36,000 × . Free tax for 2012 02) 720 Total contributions $4,320     The total contribution you make for yourself is $6,000, figured as follows. Free tax for 2012 Salary reduction contributions ($50,000 × . Free tax for 2012 10) $5,000 2% nonelective contributions ($50,000 × . Free tax for 2012 02) 1,000 Total contributions $6,000 Example 2. Free tax for 2012 Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. Free tax for 2012 Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . Free tax for 2012 02) 1,500 Total contributions $13,500 Time limits for contributing funds. Free tax for 2012   You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. Free tax for 2012 You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Free tax for 2012 Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. Free tax for 2012 When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. Free tax for 2012 You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. Free tax for 2012 Example 1. Free tax for 2012 Your tax year is the fiscal year ending June 30. Free tax for 2012 Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. Free tax for 2012 Example 2. Free tax for 2012 You are a sole proprietor whose tax year is the calendar year. Free tax for 2012 Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. Free tax for 2012 Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Free tax for 2012 For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. Free tax for 2012 Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Free tax for 2012 (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. Free tax for 2012 ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. Free tax for 2012 SIMPLE IRA plan contributions are not subject to federal income tax withholding. Free tax for 2012 However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Free tax for 2012 Matching and nonelective contributions are not subject to these taxes. Free tax for 2012 Reporting on Form W-2. Free tax for 2012   Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. Free tax for 2012 You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Free tax for 2012 You must also include them in box 12. Free tax for 2012 Mark the “Retirement plan” checkbox in box 13. Free tax for 2012 For more information, see the Form W-2 instructions. Free tax for 2012 Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Free tax for 2012 Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. Free tax for 2012 However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. Free tax for 2012 Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Free tax for 2012 Early withdrawals generally are subject to a 10% additional tax. Free tax for 2012 However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. Free tax for 2012 More information. Free tax for 2012   See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. Free tax for 2012 More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. Free tax for 2012 SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. Free tax for 2012 A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. Free tax for 2012 However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. Free tax for 2012 Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. Free tax for 2012 If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. Free tax for 2012 See Catch-up contributions , earlier under Contribution Limits. Free tax for 2012 You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. Free tax for 2012 No other contributions can be made to the trust. Free tax for 2012 No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. Free tax for 2012 The employee's rights to any contributions are nonforfeitable. Free tax for 2012 No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). Free tax for 2012 Compensation is defined earlier in this chapter. Free tax for 2012 Employee notification. Free tax for 2012   The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. Free tax for 2012 See Notification Requirement in this chapter. Free tax for 2012 Credit for startup costs. Free tax for 2012   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. Free tax for 2012 For more information, see Credit for startup costs under Reminders, earlier. Free tax for 2012 Note on Forms. Free tax for 2012   Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. Free tax for 2012 To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. Free tax for 2012 Prev  Up  Next   Home   More Online Publications