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H&r Block Taxes 2011

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H&r Block Taxes 2011

H&r block taxes 2011 Listed Property Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Listed Property DefinedPassenger Automobile Defined Dwelling Unit Other Property Used for Transportation Computers and Related Peripheral Equipment Predominant Use TestMeeting the Predominant Use Test Qualified Business Use Method of Allocating Use Applying the Predominant Use Test Deductions After Recovery Period Leased PropertyLessor Lessee What Records Must Be KeptAdequate Records Reporting Information on Form 4562 Deductions in Later Years Appendix Topics - This chapter discusses: Listed property defined The predominant use test What records must be kept Useful Items - You may want to see: Publication 463 Travel, Entertainment, and Gift Expenses 587 Business Use of Your Home (Including Use by Day-Care Providers) 917 Business Use of a Car 946 How To Depreciate Property Form (and Instructions) 2106–EZ Unreimbursed Employee Business Expenses 2106 Employee Business Expenses 4255 Recapture of Investment Credit 4562 Depreciation and Amortization This chapter discusses some special rules and recordkeeping requirements for listed property. H&r block taxes 2011 For complete coverage of the rules, including the rules concerning passenger automobiles, see Publication 946. H&r block taxes 2011 If listed property is not used predominantly (more than 50%) in a qualified business use as discussed inPredominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method. H&r block taxes 2011 Listed Property Defined Listed property is any of the following: Any passenger automobile (defined later), Any other property used for transportation, Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment), Any computer and related peripheral equipment, defined later, unless it is used only at a regular business establishment and owned or leased by the person operating the establishment. H&r block taxes 2011 A regular business establishment includes a portion of a dwelling unit (defined later), if, and only if, that portion is used both regularly and exclusively for business as discussed in Publication 587. H&r block taxes 2011 Any cellular telephone (or similar telecommunication equipment) placed in service or leased in a tax year beginning after 1989. H&r block taxes 2011 Passenger Automobile Defined A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). H&r block taxes 2011 It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile. H&r block taxes 2011 A passenger automobile does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business, and A vehicle used directly in the trade or business of transporting persons or property for compensation or hire. H&r block taxes 2011 Dwelling Unit A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. H&r block taxes 2011 It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis. H&r block taxes 2011 Other Property Used for Transportation Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods. H&r block taxes 2011 Listed property does not include: Any vehicle which, by reason of its design, is not likely to be used more than a minimal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes, Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks, Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses, Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is officially authorized, and Any vehicle, such as a taxicab, if substantially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by unrelated persons. H&r block taxes 2011 Computers and Related Peripheral Equipment A computer is a programmable electronically activated device that: Is capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention, and Consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. H&r block taxes 2011 Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. H&r block taxes 2011 Computer or peripheral equipment does not include: Any equipment which is an integral part of property which is not a computer, Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games. H&r block taxes 2011 Predominant Use Test If “listed property,” defined earlier, placed in service after June 18, 1984, is not used predominantly (more than 50%) in a qualified business use during any tax year: The section 179 deduction on the property is not allowable, and You must depreciate the property using the straight line method. H&r block taxes 2011 Listed property placed in service before 1987. H&r block taxes 2011   For listed property placed in service before 1987, depreciate the property over the following period: Class of Property Listed Property Recovery Period 3-year property 5 years 5-year property 12 years 10-year property 25 years 18-year real property 40 years 19-year real property 40 years If you must use the above recovery periods for listed property not used predominantly in a trade or business, use the percentages from Table 16 titled Listed Property Not Used Predominantly (Other Than 18- or 19-year Real Property), and Table 17 for 18- or 19-year real property, near the end of this publication in the Appendix. H&r block taxes 2011 Listed property placed in service after 1986. H&r block taxes 2011   For information on listed property placed in service after 1986, see Publication 946. H&r block taxes 2011 Meeting the Predominant Use Test Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. H&r block taxes 2011 You must allocate the use of any item of listed property used for more than one purpose during the tax year among its various uses. H&r block taxes 2011 The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. H&r block taxes 2011 However, the combined total of business and investment use is taken into account to figure your depreciation deduction for the property. H&r block taxes 2011 Note: Property does not stop being predominantly used in a qualified business use because of a transfer at death. H&r block taxes 2011 Example. H&r block taxes 2011 Sarah Bradley uses a home computer 50% of the time to manage her investments. H&r block taxes 2011 She also uses the computer 40% of the time in her part-time consumer research business. H&r block taxes 2011 Sarah's home computer is listed property because it is not used at a regular business establishment. H&r block taxes 2011 Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a qualified business use for the tax year. H&r block taxes 2011 Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. H&r block taxes 2011 Her combined rate of business/investment use for determining her depreciation deduction is 90%. H&r block taxes 2011 Qualified Business Use A qualified business use is any use in your trade or business. H&r block taxes 2011 However, it does not include: The use of property held merely to produce income (investment use), The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the property), The use of property as compensation for the performance of services by a 5% owner or related person, or The use of property as compensation for the performance of services by any person (other than a5% owner or related person) unless the value of the use is included in that person's gross income for the use of the property and income tax is withheld on that amount where required. H&r block taxes 2011 See Employees, later. H&r block taxes 2011 5% owner. H&r block taxes 2011   A 5% owner of a business, other than a corporation, is any person who owns more than 5% of the capital or profits interest in the business. H&r block taxes 2011   A 5% owner of a corporation is any person who owns, or is considered to own: More than 5% of the outstanding stock of the corporation, or Stock possessing more than 5% of the total combined voting power of all stock in the corporation. H&r block taxes 2011 Related person. H&r block taxes 2011   A related person is anyone related to a taxpayer as discussed under Related persons, in chapter 2 under Nonqualifying Property in Publication 946. H&r block taxes 2011 Entertainment Use The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordinary and necessary business expenses. H&r block taxes 2011 See Publication 463. H&r block taxes 2011 Leasing or Compensatory Use of Aircraft If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use. H&r block taxes 2011 Commuting The use of a vehicle for commuting is not business use, regardless of whether work is performed during the trip. H&r block taxes 2011 Use of Your Passenger Automobile by Another Person If someone else uses your automobile, that use is not business use unless: That use is directly connected with your business, The value of the use is property reported by you as income to the other person and tax is withheld on the income where required, or The value of the use results in a payment of fair market rent. H&r block taxes 2011 Any payment to you for the use of the automobile is treated as a rent payment for 3). H&r block taxes 2011 Employees Any use by an employee of his or her own listed property (or listed property rented by an employee) in performing services as an employee is not business use unless: The use is for the employer's convenience, and The use is required as a condition of employment. H&r block taxes 2011 Use for the employer's convenience. H&r block taxes 2011   Whether the use of listed property is for the employer's convenience must be determined from all the facts. H&r block taxes 2011 The use is for the employer's convenience if it is for a substantial business reason of the employer. H&r block taxes 2011 The use of listed property during the employee's regular working hours to carry on the employer's business is generally for the employer's convenience. H&r block taxes 2011 Use required as a condition of employment. H&r block taxes 2011   Whether the use of listed property is a condition of employment depends on all the facts and circumstances. H&r block taxes 2011 The use of property must be required for the employee to perform duties properly. H&r block taxes 2011 The employer need not explicitly require the employee to use the property. H&r block taxes 2011 A mere statement by the employer that the use of the property is a condition of employment is not sufficient. H&r block taxes 2011 Example 1. H&r block taxes 2011 Virginia Sycamore is employed as a courier with We Deliver which provides local courier services. H&r block taxes 2011 She owns and uses a motorcycle to deliver packages to downtown offices. H&r block taxes 2011 We Deliver explicitly requires all delivery persons to own a small car or motorcycle for use in their employment. H&r block taxes 2011 The company reimburses delivery persons for their costs. H&r block taxes 2011 Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. H&r block taxes 2011 Example 2. H&r block taxes 2011 Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. H&r block taxes 2011 He must travel to these sites on a regular basis. H&r block taxes 2011 Uplift does not furnish an automobile or explicitly require him to use his own automobile. H&r block taxes 2011 However, it reimburses him for any costs he incurs in traveling to the various sites. H&r block taxes 2011 The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. H&r block taxes 2011 Method of Allocating Use For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. H&r block taxes 2011 You determine the percentage of qualified business use by dividing the number of miles the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all purposes (including business miles) during the year. H&r block taxes 2011 For other items of listed property, allocate the property's use on the basis of the most appropriate unit of time. H&r block taxes 2011 For example, you can determine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the computer is used for all purposes (including business hours) during the year. H&r block taxes 2011 Applying the Predominant Use Test You must apply the predominant use test for an item of listed property each year of the recovery period. H&r block taxes 2011 First Recovery Year If any item of listed property is not used predominantly in a qualified business use in the year it is placed in service: The property is not eligible for a section 179 deduction, and The depreciation deduction must be figured using the straight line method. H&r block taxes 2011 Note: The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. H&r block taxes 2011 It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. H&r block taxes 2011 Years After the First Recovery Year If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subsequent tax year during the recovery period, the following rules apply: Figure depreciation using the straight line method. H&r block taxes 2011 Do this for each year, beginning with the year you no longer use the property predominantly in a qualified business use, and Figure any excess depreciation on the property and add it to: Your gross income, and The adjusted basis of your property. H&r block taxes 2011 See Recapture of excess depreciation, next. H&r block taxes 2011 Recapture of excess depreciation. H&r block taxes 2011   You must include any excess depreciation in your gross income for the first tax year the property is not predominantly used in a qualified business use. H&r block taxes 2011 Any excess depreciation must also be added to the adjusted basis of your property. H&r block taxes 2011 Excess depreciation is the excess (if any) of: The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not predominantly used in a qualified business use, over The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. H&r block taxes 2011 This means you figure your depreciation using the percentages fromTable 16 or 17. H&r block taxes 2011 For information on investment credit recapture, see the instructions for Form 4255. H&r block taxes 2011 Deductions After Recovery Period When listed property (other than passenger automobiles) is used for business, investment, and personal purposes, no deduction is ever allowable for the personal use. H&r block taxes 2011 In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. H&r block taxes 2011 To make this determination, figure the depreciation for earlier tax years as if your property were used 100% for business or investment purposes, beginning with the first tax year in which some or all use is for business or investment. H&r block taxes 2011 See Car Used 50% or Less for Business in Publication 917. H&r block taxes 2011 Leased Property The limitations on cost recovery deductions apply to the rental of listed property. H&r block taxes 2011 The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). H&r block taxes 2011 SeeLeasing a Car in Publication 917 for a discussion of leased passenger automobiles. H&r block taxes 2011 Lessor The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. H&r block taxes 2011 A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. H&r block taxes 2011 This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. H&r block taxes 2011 Occasional or incidental leasing activity is insufficient. H&r block taxes 2011 For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. H&r block taxes 2011 An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. H&r block taxes 2011 Lessee A lessee of listed property (other than passenger automobiles), must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use. H&r block taxes 2011 Inclusion amount for property leased before 1987. H&r block taxes 2011   You determine the inclusion amount for property leased after June 18, 1984 and before 1987 by multiplying the fair market value of the property by both the average business/investment use percentage and the applicable percentage. H&r block taxes 2011 You can find the applicable percentages for listed property that is 5- or 10-year recovery property in Tables 19 or 20 in Appendix A of Publication 946. H&r block taxes 2011   The lease term for listed property other than 18- or 19-year real property, and residential rental or nonresidential real property, includes options to renew. H&r block taxes 2011 For 18- or 19-year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. H&r block taxes 2011 You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease. H&r block taxes 2011 Special rules. H&r block taxes 2011   The lessee adds the inclusion amount to gross income in the next tax year if: The lease term begins within 9 months before the close of the lessee's tax year, The lessee does not use the property predominantly in a qualified business use during that portion of the tax year, and The lease term continues into the lessee's next tax year. H&r block taxes 2011 The lessee determines the inclusion amount by taking into account the average of the business/investment use for both tax years and the applicable percentage for the tax year the lease term begins. H&r block taxes 2011   If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclusion amount as the number of days in the lease term bears to 365. H&r block taxes 2011 Maximum inclusion amount. H&r block taxes 2011   The inclusion amount cannot be more than the sum of the deductible amounts of rent allocable to the lessee's tax year in which the amount must be included in gross income. H&r block taxes 2011 What Records Must Be Kept You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements. H&r block taxes 2011 How long to keep records. H&r block taxes 2011   For listed property, records must be kept for as long as any excess depreciation can be recaptured (included in income). H&r block taxes 2011 Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. H&r block taxes 2011 It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. H&r block taxes 2011 However, your records should back up your receipts in an orderly manner. H&r block taxes 2011 Elements of Expenditure or Use The records or other documentary evidence must support: The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses, The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year, The date of the expenditure or use, and The business or investment purpose for the expenditure or use. H&r block taxes 2011 Written documents of your expenditure or use are generally better evidence than oral statements alone. H&r block taxes 2011 A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. H&r block taxes 2011 A daily log is not required. H&r block taxes 2011 However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later. H&r block taxes 2011 Timeliness The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. H&r block taxes 2011 An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business: The statement is submitted by an employee to the employer, or The statement is submitted by an independent contractor to the client or customer. H&r block taxes 2011 For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use. H&r block taxes 2011 Business Purpose Supported An adequate record of business purpose must generally be in the form of a written statement. H&r block taxes 2011 However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. H&r block taxes 2011 A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. H&r block taxes 2011 For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. H&r block taxes 2011 Business Use Supported An adequate record contains enough information on each element of every business or investment use. H&r block taxes 2011 The amount of detail required to support the use depends on the facts and circumstances. H&r block taxes 2011 For example, a taxpayer whose only business use of a truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. H&r block taxes 2011 Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program. H&r block taxes 2011 Separate or Combined Expenditures or Uses Each use by you is normally considered a separate use. H&r block taxes 2011 However, repeated uses can be combined as a single item. H&r block taxes 2011 Each expenditure is recorded as a separate item and not combined with other expenditures. H&r block taxes 2011 If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be combined. H&r block taxes 2011 If these expenses are combined, you do not need to support the business purpose of each expense. H&r block taxes 2011 Instead, you can divide the expenses based on the total business use of the listed property. H&r block taxes 2011 Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. H&r block taxes 2011 For example, use of a truck to make deliveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. H&r block taxes 2011 Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. H&r block taxes 2011 Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. H&r block taxes 2011 Confidential Information If any of the information on the elements of an expenditure or use is confidential, it does not need to be in the account book or similar record if it is recorded at or near the time of the expenditure or use. H&r block taxes 2011 It must be kept elsewhere and made available as support to the district director on request. H&r block taxes 2011 Substantial Compliance If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems adequate. H&r block taxes 2011 If you fail to establish that you have substantially complied with the adequate records requirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element: By your own oral or written statement containing detailed information as to the element, and By other evidence sufficient to establish the element. H&r block taxes 2011 If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. H&r block taxes 2011 If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. H&r block taxes 2011 Sampling You can maintain an adequate record for portions of a tax year and use that record to support your business and investment use for the entire tax year if it can be shown by other evidence that the periods for which an adequate record is maintained are representative of use throughout the year. H&r block taxes 2011 Loss of Records When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. H&r block taxes 2011 Reporting Information on Form 4562 If you claim a deduction for any listed property, you must provide the requested information on page 2, Section B of Form 4562. H&r block taxes 2011 If you claim a deduction for any vehicle, you must answer certain questions onpage 2 of Form 4562 to provide information about the vehicle use. H&r block taxes 2011 Employees. H&r block taxes 2011   Employees claiming the standard mileage rate or actual expenses (including depreciation) must use Form 2106 instead of Part V of Form 4562. H&r block taxes 2011 Employees claiming the standard mileage rate may be able to use Form 2106–EZ. H&r block taxes 2011 Employer who provides vehicles to employees. H&r block taxes 2011   An employer who provides vehicles to employees must obtain enough information from those employees to provide the requested information onForm 4562. H&r block taxes 2011   An employer who provides more than five vehicles to employees need not include any information on his or her tax return. H&r block taxes 2011 Instead, the employer must obtain the information from his or her employees and indicate on his or her return that the information was obtained and is being retained. H&r block taxes 2011   You do not need to provide the information requested on page 2 of Form 4562 if, as an employer: You can satisfy the requirements of a written policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commuting, or You treat all vehicle use by employees as personal use. H&r block taxes 2011 See the instructions for Form 4562. H&r block taxes 2011 Deductions in Later Years When listed property is used for business, investment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. H&r block taxes 2011 In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. H&r block taxes 2011 In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for business or investment purposes in those years, beginning with the first tax year in which some or all of the property use is for business or investment. H&r block taxes 2011 For more information about deductions after the recovery period for automobiles, see Publication 917. H&r block taxes 2011 Appendix The following tables are for use in figuring depreciation deductions under the ACRS system. H&r block taxes 2011 Table 1. H&r block taxes 2011 15-Year Real Property* (Other Than Low-Inclome Housing) Table 3. H&r block taxes 2011 Low-Income Housing* Table 6 - Table 9 Table 6 - Table 9 Table 10 - Table 13 Table 14 - Table 17 Prev  Up  Next   Home   More Online Publications
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The H&r Block Taxes 2011

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