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Tax For Students

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Tax For Students

Tax for students 1. Tax for students   Fuel Taxes Table of Contents Definitions Information Returns Registration RequirementsAdditional information. Tax for students Gasoline and Aviation GasolineTaxable Events Gasoline Blendstocks Diesel Fuel and KeroseneTaxable Events Dyed Diesel Fuel and Dyed Kerosene Alaska and Feedstocks Back-up Tax Diesel-Water Fuel Emulsion Kerosene for Use in AviationTaxable Events Liability For Tax Surtax on any liquid used in a fractional ownership program aircraft as fuel Certificate for Commercial Aviation and Exempt UsesExempt use. Tax for students Reseller statement. Tax for students Other Fuels (Including Alternative Fuels)Taxable Events Compressed Natural Gas (CNG)Taxable Events Fuels Used on Inland WaterwaysFishing vessels. Tax for students Deep-draft ocean-going vessels. Tax for students Passenger vessels. Tax for students Ocean-going barges. Tax for students State or local governments. Tax for students Cellulosic or Second Generation Biofuel Not Used as Fuel Biodiesel Sold as But Not Used as Fuel Definitions Excise taxes are imposed on all the following fuels. Tax for students Gasoline, including aviation gasoline and gasoline blendstocks. Tax for students Diesel fuel, including dyed diesel fuel. Tax for students Diesel-water fuel emulsion. Tax for students Kerosene, including dyed kerosene and kerosene used in aviation. Tax for students Other Fuels (including alternative fuels). Tax for students Compressed natural gas (CNG). Tax for students Fuels used in commercial transportation on inland waterways. Tax for students Any liquid used in a fractional ownership program aircraft as fuel. Tax for students The following terms are used throughout the discussion of fuel taxes. Tax for students Other terms are defined in the discussion of the specific fuels to which they pertain. Tax for students Agri-biodiesel. Tax for students   Agri-biodiesel means biodiesel derived solely from virgin oils, including esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, and camelina, and from animal fats. Tax for students Approved terminal or refinery. Tax for students   This is a terminal operated by a registrant that is a terminal operator or a refinery operated by a registrant that is a refiner. Tax for students Biodiesel. Tax for students   Biodiesel means the monoalkyl esters of long chain fatty acids derived from plant or animal matter that meet the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act, and the requirements of the American Society of Testing Materials (ASTM) D6751. Tax for students Blended taxable fuel. Tax for students   This means any taxable fuel produced outside the bulk transfer/terminal system by mixing taxable fuel on which excise tax has been imposed and any other liquid on which excise tax has not been imposed. Tax for students This does not include a mixture removed or sold during the calendar quarter if all such mixtures removed or sold by the blender contain less than 400 gallons of a liquid on which the tax has not been imposed. Tax for students Blender. Tax for students   This is the person that produces blended taxable fuel. Tax for students Bulk transfer. Tax for students   This is the transfer of taxable fuel by pipeline or vessel. Tax for students Bulk transfer/terminal system. Tax for students   This is the taxable fuel distribution system consisting of refineries, pipelines, vessels, and terminals. Tax for students Fuel in the supply tank of any engine, or in any tank car, railcar, trailer, truck, or other equipment suitable for ground transportation is not in the bulk transfer/terminal system. Tax for students Cellulosic biofuel. Tax for students   Cellulosic biofuel means any liquid fuel produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis that meets the registration requirements for fuels and fuel additives established by the EPA under section 211 of the Clean Air Act. Tax for students Cellulosic biofuel does not include any alcohol with a proof of less than 150 (without regard to denaturants). Tax for students For fuels sold or used after December 31, 2009, cellulosic biofuel does not include fuel of which more than 4% (determined by weight) is any combination of water and sediment, fuel of which the ash content is more than 1%, or fuel that has an acid number greater than 25. Tax for students Also see Second generation biofuel below. Tax for students Diesel-water fuel emulsion. Tax for students   A diesel-water fuel emulsion means an emulsion at least 14% of which is water. Tax for students The emulsion additive used to produce the fuel must be registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003. Tax for students Dry lease aircraft exchange. Tax for students   See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel. Tax for students Enterer. Tax for students   This is the importer of record (under customs law) for the taxable fuel. Tax for students However, if the importer of record is acting as an agent, such as a customs broker, the person for whom the agent is acting is the enterer. Tax for students If there is no importer of record, the owner at the time of entry into the United States is the enterer. Tax for students Entry. Tax for students   Taxable fuel is entered into the United States when it is brought into the United States and applicable customs law requires that it be entered for consumption, use, or warehousing. Tax for students This does not apply to fuel brought into Puerto Rico (which is part of the U. Tax for students S. Tax for students customs territory), but does apply to fuel brought into the United States from Puerto Rico. Tax for students Fractional ownership aircraft program and fractional program aircraft. Tax for students   See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel. Tax for students Measurement of taxable fuel. Tax for students   Volumes of taxable fuel can be measured on the basis of actual volumetric gallons or gallons adjusted to 60 degrees Fahrenheit. Tax for students Other fuels. Tax for students   See Other Fuels (Including Alternative Fuels), later, and Alternative Fuel Credit and Alternative Fuel Mixture Credit in chapter 2. Tax for students Pipeline operator. Tax for students   This is the person that operates a pipeline within the bulk transfer/terminal system. Tax for students Position holder. Tax for students   This is the person that holds the inventory position in the taxable fuel in the terminal, as reflected in the records of the terminal operator. Tax for students You hold the inventory position when you have a contractual agreement with the terminal operator for the use of the storage facilities and terminaling services for the taxable fuel. Tax for students A terminal operator that owns taxable fuel in its terminal is a position holder. Tax for students Rack. Tax for students   This is a mechanism capable of delivering fuel into a means of transport other than a pipeline or vessel. Tax for students Refiner. Tax for students   This is any person that owns, operates, or otherwise controls a refinery. Tax for students Refinery. Tax for students   This is a facility used to produce taxable fuel and from which taxable fuel may be removed by pipeline, by vessel, or at a rack. Tax for students However, this term does not include a facility where only blended fuel, and no other type of fuel, is produced. Tax for students For this purpose, blended fuel is any mixture that would be blended taxable fuel if produced outside the bulk transfer/terminal system. Tax for students Registrant. Tax for students   This is a taxable fuel registrant (see Registration Requirements, later). Tax for students Removal. Tax for students   This is any physical transfer of taxable fuel. Tax for students It also means any use of taxable fuel other than as a material in the production of taxable fuel or Other Fuels. Tax for students However, taxable fuel is not removed when it evaporates or is otherwise lost or destroyed. Tax for students Renewable diesel. Tax for students   See Renewable Diesel Credits in chapter 2. Tax for students Sale. Tax for students   For taxable fuel not in a terminal, this is the transfer of title to, or substantial incidents of ownership in, taxable fuel to the buyer for money, services, or other property. Tax for students For taxable fuel in a terminal, this is the transfer of the inventory position if the transferee becomes the position holder for that taxable fuel. Tax for students Second generation biofuel. Tax for students   This is any liquid fuel derived by, or from, qualified feedstocks, and meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U. Tax for students S. Tax for students C. Tax for students 7545). Tax for students It also includes certain liquid fuel which is derived by, or from, any cultivated algae, cyanobacteria, or lemna. Tax for students It is not alcohol of less than 150 proof (disregard any added denaturants). Tax for students See Form 6478 for more information. Tax for students State. Tax for students   This includes any state, any of its political subdivisions, the District of Columbia, and the American Red Cross. Tax for students An Indian tribal government is treated as a state only if transactions involve the exercise of an essential tribal government function. Tax for students Taxable fuel. Tax for students   This means gasoline, diesel fuel, and kerosene. Tax for students Terminal. Tax for students   This is a storage and distribution facility supplied by pipeline or vessel, and from which taxable fuel may be removed at a rack. Tax for students It does not include a facility at which gasoline blendstocks are used in the manufacture of products other than finished gasoline if no gasoline is removed from the facility. Tax for students A terminal does not include any facility where finished gasoline, diesel fuel, or kerosene is stored if the facility is operated by a registrant and all such taxable fuel stored at the facility has been previously taxed upon removal from a refinery or terminal. Tax for students Terminal operator. Tax for students   This is any person that owns, operates, or otherwise controls a terminal. Tax for students Throughputter. Tax for students   This is any person that is a position holder or that owns taxable fuel within the bulk transfer/terminal system (other than in a terminal). Tax for students Vessel operator. Tax for students   This is the person that operates a vessel within the bulk transfer/terminal system. Tax for students However, vessel does not include a deep draft ocean-going vessel. Tax for students Information Returns Form 720-TO and Form 720-CS are information returns used to report monthly receipts and disbursements of liquid products. Tax for students A liquid product is any liquid transported into storage at a terminal or delivered out of a terminal. Tax for students For a list of products, see the product code table in the Instructions for Forms 720-TO and 720-CS. Tax for students The returns are due the last day of the month following the month in which the transaction occurs. Tax for students Generally, these returns can be filed on paper or electronically. Tax for students For information on filing electronically, see Publication 3536, Motor Fuel Excise Tax EDI Guide. Tax for students Publication 3536 is only available on the IRS website. Tax for students Form 720-TO. Tax for students   This information return is used by terminal operators to report receipts and disbursements of all liquid products to and from all approved terminals. Tax for students Each terminal operator must file a separate form for each approved terminal. Tax for students Form 720-CS. Tax for students   This information return must be filed by bulk transport carriers (barges, vessels, and pipelines) who receive liquid product from an approved terminal or deliver liquid product to an approved terminal. Tax for students Registration Requirements The following discussion applies to excise tax registration requirements for activities relating to fuels only. Tax for students See Form 637 for other persons who must register and for more information about registration. Tax for students Persons that are required to be registered. Tax for students   You are required to be registered if you are a: Blender; Enterer; Pipeline operator; Position holder; Refiner; Terminal operator; Vessel operator; Producer or importer of alcohol, biodiesel, agri-biodiesel, and renewable diesel; or Producer of cellulosic or second generation biofuel. Tax for students Persons that may register. Tax for students   You may, but are not required to, register if you are a: Feedstock user, Industrial user, Throughputter that is not a position holder, Ultimate vendor, Diesel-water fuel emulsion producer, Credit card issuer, or Alternative fuel claimant. Tax for students Ultimate vendors, credit card issuers, and alternative fuel claimants do not need to be registered to buy or sell fuel. Tax for students However, they must be registered to file claims for certain sales and uses of fuel. Tax for students See Form 637 for more information. Tax for students Taxable fuel registrant. Tax for students   This is an enterer, an industrial user, a refiner, a terminal operator, or a throughputter who received a Letter of Registration under the excise tax registration provisions and whose registration has not been revoked or suspended. Tax for students The term registrant as used in the discussions of these fuels means a taxable fuel registrant. Tax for students Additional information. Tax for students   See the Form 637 instructions for the information you must submit when you apply for registration. Tax for students Failure to register. Tax for students   The penalty for failure to register if you must register, unless due to reasonable cause, is $10,000 for the initial failure, and then $1,000 each day thereafter you fail to register. Tax for students Gasoline and Aviation Gasoline Gasoline. Tax for students   Gasoline means all products commonly or commercially known or sold as gasoline with an octane rating of 75 or more that are suitable for use as a motor fuel. Tax for students Gasoline includes any gasoline blend other than: Qualified ethanol and methanol fuel (at least 85 percent of the blend consists of alcohol produced from coal, including peat), Partially exempt ethanol and methanol fuel (at least 85 percent of the blend consists of alcohol produced from natural gas), or Denatured alcohol. Tax for students Gasoline also includes gasoline blendstocks, discussed later. Tax for students Aviation gasoline. Tax for students   This means all special grades of gasoline suitable for use in aviation reciprocating engines and covered by ASTM specification D910 or military specification MIL-G-5572. Tax for students Taxable Events The tax on gasoline is $. Tax for students 184 per gallon. Tax for students The tax on aviation gasoline is $. Tax for students 194 per gallon. Tax for students When used in a fractional ownership program aircraft, gasoline also is subject to a surtax of $. Tax for students 141 per gallon. Tax for students See Surtax on any liquid used in a fractional ownership program aircraft as fuel, later. Tax for students Tax is imposed on the removal, entry, or sale of gasoline. Tax for students Each of these events is discussed later. Tax for students Also, see the special rules that apply to gasoline blendstocks, later. Tax for students If the tax is paid on the gasoline in more than one event, a refund may be allowed for the “second” tax paid. Tax for students See Refunds of Second Tax in chapter 2. Tax for students Removal from terminal. Tax for students   All removals of gasoline at a terminal rack are taxable. Tax for students The position holder for that gasoline is liable for the tax. Tax for students Two-party exchanges. Tax for students   In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. Tax for students A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply. Tax for students The transaction includes a transfer from the delivering person, who holds the inventory position for the taxable fuel in the terminal as reflected in the records of the terminal operator. Tax for students The exchange transaction occurs before or at the same time as removal across the rack by the receiving person. Tax for students The terminal operator in its records treats the receiving person as the person that removes the product across the terminal rack for purposes of reporting the transaction on Form 720-TO. Tax for students The transaction is subject to a written contract. Tax for students Terminal operator's liability. Tax for students   The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant. Tax for students   However, a terminal operator meeting all the following conditions at the time of the removal will not be liable for the tax. Tax for students The terminal operator is a registrant. Tax for students The terminal operator has an unexpired notification certificate (discussed later) from the position holder. Tax for students The terminal operator has no reason to believe any information on the certificate is false. Tax for students Removal from refinery. Tax for students   The removal of gasoline from a refinery is taxable if the removal meets either of the following conditions. Tax for students It is made by bulk transfer and the refiner, the owner of the gasoline immediately before the removal, or the operator of the pipeline or vessel is not a registrant. Tax for students It is made at the refinery rack. Tax for students The refiner is liable for the tax. Tax for students Exception. Tax for students   The tax does not apply to a removal of gasoline at the refinery rack if all the following requirements are met. Tax for students The gasoline is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel. Tax for students The gasoline is received at a facility operated by a registrant and located within the bulk transfer/terminal system. Tax for students The removal from the refinery is by railcar. Tax for students The same person operates the refinery and the facility at which the gasoline is received. Tax for students Entry into the United States. Tax for students   The entry of gasoline into the United States is taxable if the entry meets either of the following conditions. Tax for students It is made by bulk transfer and the enterer or the operator of the pipeline or vessel is not a registrant. Tax for students It is not made by bulk transfer. Tax for students The enterer is liable for the tax. Tax for students Importer of record's liability. Tax for students   The importer of record is jointly and severally liable for the tax with the enterer if the importer of record is not the enterer of the taxable fuel and the enterer is not a taxable fuel registrant. Tax for students   However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax. Tax for students The importer of record has an unexpired notification certificate (discussed later) from the enterer. Tax for students The importer of record has no reason to believe any information in the certificate is false. Tax for students Customs bond. Tax for students   The customs bond will not be charged for the tax imposed on the entry of the gasoline if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false. Tax for students Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. Tax for students   The removal by bulk transfer of gasoline from a terminal is taxable if the position holder for the gasoline or the operator of the pipeline or vessel is not a registrant. Tax for students The position holder is liable for the tax. Tax for students The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. Tax for students However, see Terminal operator's liability under Removal from terminal, earlier, for an exception. Tax for students Bulk transfers not received at approved terminal or refinery. Tax for students   The removal by bulk transfer of gasoline from a terminal or refinery, or the entry of gasoline by bulk transfer into the United States, is taxable if the following conditions apply. Tax for students No tax was previously imposed (as discussed earlier) on any of the following events. Tax for students The removal from the refinery. Tax for students The entry into the United States. Tax for students The removal from a terminal by an unregistered position holder. Tax for students Upon removal from the pipeline or vessel, the gasoline is not received at an approved terminal or refinery (or at another pipeline or vessel). Tax for students   The owner of the gasoline when it is removed from the pipeline or vessel is liable for the tax. Tax for students However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax. Tax for students The owner is a registrant. Tax for students The owner has an unexpired notification certificate (discussed later) from the operator of the terminal or refinery where the gasoline is received. Tax for students The owner has no reason to believe any information on the certificate is false. Tax for students The operator of the facility where the gasoline is received is liable for the tax if the owner meets these conditions. Tax for students The operator is jointly and severally liable if the owner does not meet these conditions. Tax for students Sales to unregistered person. Tax for students   The sale of gasoline located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier. Tax for students   The seller is liable for the tax. Tax for students However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax. Tax for students   The seller is a registrant. Tax for students The seller has an unexpired notification certificate (discussed later) from the buyer. Tax for students The seller has no reason to believe any information on the certificate is false. Tax for students The buyer of the gasoline is liable for the tax if the seller meets these conditions. Tax for students The buyer is jointly and severally liable if the seller does not meet these conditions. Tax for students Exception. Tax for students   The tax does not apply to a sale if all of the following apply. Tax for students The buyer's principal place of business is not in the United States. Tax for students The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel. Tax for students The seller is a registrant and the exporter of record. Tax for students The fuel was exported. Tax for students Removal or sale of blended gasoline. Tax for students   The removal or sale of blended gasoline by the blender is taxable. Tax for students See Blended taxable fuel under Definitions, earlier. Tax for students   The blender is liable for the tax. Tax for students The tax is figured on the number of gallons not previously subject to the tax on gasoline. Tax for students   Persons who blend alcohol with gasoline to produce an alcohol fuel mixture outside the bulk transfer/terminal system must pay the gasoline tax on the volume of alcohol in the mixture. Tax for students See Form 720 to report this tax. Tax for students You also must be registered with the IRS as a blender. Tax for students See Form 637. Tax for students   However, if an untaxed liquid is sold as taxed taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel. Tax for students Notification certificate. Tax for students   The notification certificate is used to notify a person of the registration status of the registrant. Tax for students A copy of the registrant's letter of registration cannot be used as a notification certificate. Tax for students A model notification certificate is shown in the Appendix as Model Certificate C. Tax for students A notification certificate must contain all information necessary to complete the model. Tax for students   The certificate may be included as part of any business records normally used for a sale. Tax for students A certificate expires on the earlier of the date the registrant provides a new certificate, or the date the recipient of the certificate is notified that the registrant's registration has been revoked or suspended. Tax for students The registrant must provide a new certificate if any information on a certificate has changed. Tax for students Additional persons liable. Tax for students   When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax is imposed on: Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty, or Anyone who willfully causes the person to fail to pay the tax. Tax for students Gasoline Blendstocks Gasoline blendstocks may be subject to $. Tax for students 001 per gallon LUST tax as discussed below. Tax for students Gasoline includes gasoline blendstocks. Tax for students The previous discussions apply to these blendstocks. Tax for students However, if certain conditions are met, the removal, entry, or sale of gasoline blendstocks are taxed at $. Tax for students 001 per gallon or are not subject to the excise tax. Tax for students Blendstocks. Tax for students   Gasoline blendstocks are: Alkylate, Butane, Butene, Catalytically cracked gasoline, Coker gasoline, Ethyl tertiary butyl ether (ETBE), Hexane, Hydrocrackate, Isomerate, Methyl tertiary butyl ether (MTBE), Mixed xylene (not including any separated isomer of xylene), Natural gasoline, Pentane, Pentane mixture, Polymer gasoline, Raffinate, Reformate, Straight-run gasoline, Straight-run naphtha, Tertiary amyl methyl ether (TAME), Tertiary butyl alcohol (gasoline grade) (TBA), Thermally cracked gasoline, and Toluene. Tax for students   However, gasoline blendstocks do not include any product that cannot be used without further processing in the production of finished gasoline. Tax for students Not used to produce finished gasoline. Tax for students   Gasoline blendstocks not used to produce finished gasoline are not taxable (other than LUST) if the following conditions are met. Tax for students Removals and entries not connected to sale. Tax for students   Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant. Tax for students Removals and entries connected to sale. Tax for students   Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant, and at the time of the sale, meets the following requirements. Tax for students The person has an unexpired certificate (discussed later) from the buyer. Tax for students The person has no reason to believe any information in the certificate is false. Tax for students Sales after removal or entry. Tax for students   The sale of a gasoline blendstock that was not subject to tax on its nonbulk removal or entry, as discussed earlier, is taxable. Tax for students The seller is liable for the tax. Tax for students However, the sale is not taxable if, at the time of the sale, the seller meets the following requirements. Tax for students The seller has an unexpired certificate (discussed next) from the buyer. Tax for students The seller has no reason to believe any information in the certificate is false. Tax for students Certificate of buyer. Tax for students   The certificate from the buyer certifies the gasoline blendstocks will not be used to produce finished gasoline. Tax for students The certificate may be included as part of any business records normally used for a sale. Tax for students A model certificate is shown in the Appendix as Model Certificate D. Tax for students The certificate must contain all information necessary to complete the model. Tax for students   A certificate expires on the earliest of the following dates. Tax for students The date 1 year after the effective date (not earlier than the date signed) of the certificate. Tax for students The date a new certificate is provided to the seller. Tax for students The date the seller is notified that the buyer's right to provide a certificate has been withdrawn. Tax for students The buyer must provide a new certificate if any information on a certificate has changed. Tax for students   The IRS may withdraw the buyer's right to provide a certificate if that buyer uses the gasoline blendstocks in the production of finished gasoline or resells the blendstocks without getting a certificate from its buyer. Tax for students Received at approved terminal or refinery. Tax for students   The nonbulk removal or entry of gasoline blendstocks received at an approved terminal or refinery is not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) meets all the following requirements. Tax for students The person is a registrant. Tax for students The person has an unexpired notification certificate (discussed earlier) from the operator of the terminal or refinery where the gasoline blendstocks are received. Tax for students The person has no reason to believe any information on the certificate is false. Tax for students Bulk transfers to registered industrial user. Tax for students   The removal of gasoline blendstocks from a pipeline or vessel is not taxable (other than LUST) if the blendstocks are received by a registrant that is an industrial user. Tax for students An industrial user is any person that receives gasoline blendstocks by bulk transfer for its own use in the manufacture of any product other than finished gasoline. Tax for students Credits or Refunds. Tax for students   A credit or refund of the gasoline tax may be allowable if gasoline is used for a nontaxable purpose or exempt use. Tax for students For more information, see chapter 2. Tax for students Diesel Fuel and Kerosene Generally, diesel fuel and kerosene are taxed in the same manner as gasoline (discussed earlier). Tax for students However, special rules (discussed later) apply to dyed diesel fuel and dyed kerosene, and to undyed diesel fuel and undyed kerosene sold or used in Alaska for certain nontaxable uses and undyed kerosene used for a feedstock purpose. Tax for students Diesel fuel means: Any liquid that without further processing or blending is suitable for use as a fuel in a diesel-powered highway vehicle or train, and Transmix. Tax for students A liquid is suitable for this use if the liquid has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. Tax for students A liquid may possess this practical and commercial fitness even though the specified use is not the predominant use of the liquid. Tax for students However, a liquid does not possess this practical and commercial fitness solely by reason of its possible or rare use as a fuel in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. Tax for students Diesel fuel does not include gasoline, kerosene, excluded liquid, No. Tax for students 5 and No. Tax for students 6 fuel oils covered by ASTM specification D396, or F-76 (Fuel Naval Distillate) covered by military specification MIL-F-16884. Tax for students An excluded liquid is either of the following. Tax for students A liquid that contains less than 4% normal paraffins. Tax for students A liquid with all the following properties. Tax for students Distillation range of 125 degrees Fahrenheit or less. Tax for students Sulfur content of 10 ppm or less. Tax for students Minimum color of +27 Saybolt. Tax for students Transmix means a by-product of refined products created by the mixing of different specification products during pipeline transportation. Tax for students Kerosene. Tax for students   This means any of the following liquids. Tax for students One of the two grades of kerosene (No. Tax for students 1-K and No. Tax for students 2-K) covered by ASTM specification D3699. Tax for students Kerosene-type jet fuel covered by ASTM specification D1655 or military specification MIL-DTL-5624T (Grade JP-5) or MIL-DTL-83133E (Grade JP-8). Tax for students See Kerosene for Use in Aviation, later. Tax for students   However, kerosene does not include excluded liquid, discussed earlier. Tax for students   Kerosene also includes any liquid that would be described above but for the presence of a dye of the type used to dye kerosene for a nontaxable use. Tax for students Diesel-powered highway vehicle. Tax for students   This is any self-propelled vehicle designed to carry a load over public highways (whether or not also designed to perform other functions) and propelled by a diesel-powered engine. Tax for students Specially designed mobile machinery for nontransportation functions and vehicles specially designed for off-highway transportation are generally not considered diesel-powered highway vehicles. Tax for students For more information about these vehicles and for information about vehicles not considered highway vehicles, see Off-Highway Business Use (No. Tax for students 2) in chapter 2. Tax for students Diesel-powered train. Tax for students   This is any diesel-powered equipment or machinery that rides on rails. Tax for students The term includes a locomotive, work train, switching engine, and track maintenance machine. Tax for students Taxable Events The tax on diesel fuel and kerosene is $. Tax for students 244 per gallon. Tax for students It is imposed on the removal, entry, or sale of diesel fuel and kerosene. Tax for students Each of these events is discussed later. Tax for students Only the $. Tax for students 001 LUST tax applies to dyed diesel fuel and dyed kerosene, discussed later. Tax for students If the tax is paid on the diesel fuel or kerosene in more than one event, a refund may be allowed for the “second” tax paid. Tax for students See Refunds of Second Tax in chapter 2. Tax for students Use in certain intercity and local buses. Tax for students   Dyed diesel fuel and dyed kerosene cannot be used in certain intercity and local buses. Tax for students A claim for $. Tax for students 17 per gallon may be made by the registered ultimate vendor (under certain conditions) or the ultimate purchaser for undyed diesel fuel or undyed kerosene sold for use in certain intercity or local buses. Tax for students An intercity or local bus is a bus engaged in furnishing (for compensation) passenger land transportation available to the general public. Tax for students The bus must be engaged in one of the following activities. Tax for students Scheduled transportation along regular routes regardless of the size of the bus. Tax for students Nonscheduled transportation if the seating capacity of the bus is at least 20 adults (not including the driver). Tax for students A bus is available to the general public if the bus is available for hire to more than a limited number of persons, groups, or organizations. Tax for students Removal from terminal. Tax for students   All removals of diesel fuel and kerosene at a terminal rack are taxable. Tax for students The position holder for that fuel is liable for the tax. Tax for students Two-party exchanges. Tax for students   In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. Tax for students A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply. Tax for students The transaction includes a transfer from the delivering person, who holds the inventory position for the taxable fuel in the terminal as reflected in the records of the terminal operator. Tax for students The exchange transaction occurs before or at the same time as completion of removal across the rack by the receiving person. Tax for students The terminal operator in its records treats the receiving person as the person that removes the product across the terminal rack for purposes of reporting the transaction on Form 720-TO. Tax for students The transaction is subject to a written contract. Tax for students Terminal operator's liability. Tax for students   The terminal operator is jointly and severally liable for the tax if the terminal operator provides any person with any bill of lading, shipping paper, or similar document indicating that diesel fuel or kerosene is dyed (discussed later). Tax for students   The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant. Tax for students However, a terminal operator will not be liable for the tax in this situation if, at the time of the removal, the following conditions are met. Tax for students The terminal operator is a registrant. Tax for students The terminal operator has an unexpired notification certificate (discussed under Gasoline) from the position holder. Tax for students The terminal operator has no reason to believe any information on the certificate is false. Tax for students Removal from refinery. Tax for students   The removal of diesel fuel or kerosene from a refinery is taxable if the removal meets either of the following conditions. Tax for students It is made by bulk transfer and the refiner, the owner of the fuel immediately before the removal, or the operator of the pipeline or vessel is not a registrant. Tax for students It is made at the refinery rack. Tax for students The refiner is liable for the tax. Tax for students Exception. Tax for students   The tax does not apply to a removal of diesel fuel or kerosene at the refinery rack if all the following conditions are met. Tax for students The diesel fuel or kerosene is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel. Tax for students The diesel fuel or kerosene is received at a facility operated by a registrant and located within the bulk transfer/terminal system. Tax for students The removal from the refinery is by: Railcar and the same person operates the refinery and the facility at which the diesel fuel or kerosene is received, or For diesel fuel only, a trailer or semi-trailer used exclusively to transport the diesel fuel from a refinery (described in (1)) to a facility (described in (2)) less than 20 miles from the refinery. Tax for students Entry into the United States. Tax for students   The entry of diesel fuel or kerosene into the United States is taxable if the entry meets either of the following conditions. Tax for students It is made by bulk transfer and the enterer or the operator of the pipeline or vessel is not a registrant. Tax for students It is not made by bulk transfer. Tax for students The enterer is liable for the tax. Tax for students Importer of record's liability. Tax for students   The importer of record is jointly and severally liable for the tax with the enterer if the importer of record is not the enterer of the taxable fuel and the enterer is not a taxable fuel registrant. Tax for students   However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax. Tax for students The importer of record has an unexpired notification certificate (discussed under Gasoline) from the enterer. Tax for students The importer of record has no reason to believe any information in the certificate is false. Tax for students Customs bond. Tax for students   The customs bond will not be charged for the tax imposed on the entry of the diesel fuel or kerosene if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false. Tax for students Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. Tax for students   The removal by bulk transfer of diesel fuel or kerosene from a terminal is taxable if the position holder for that fuel or the operator of the pipeline or vessel is not a registrant. Tax for students The position holder is liable for the tax. Tax for students The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. Tax for students However, see Terminal operator's liability under Removal from terminal, earlier, for an exception. Tax for students Bulk transfers not received at approved terminal or refinery. Tax for students   The removal by bulk transfer of diesel fuel or kerosene from a terminal or refinery or the entry of diesel fuel or kerosene by bulk transfer into the United States is taxable if the following conditions apply. Tax for students No tax was previously imposed (as discussed earlier) on any of the following events. Tax for students The removal from the refinery. Tax for students The entry into the United States. Tax for students The removal from a terminal by an unregistered position holder. Tax for students Upon removal from the pipeline or vessel, the diesel fuel or kerosene is not received at an approved terminal or refinery (or at another pipeline or vessel). Tax for students   The owner of the diesel fuel or kerosene when it is removed from the pipeline or vessel is liable for the tax. Tax for students However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax. Tax for students The owner is a registrant. Tax for students The owner has an unexpired notification certificate (discussed under Gasoline) from the operator of the terminal or refinery where the diesel fuel or kerosene is received. Tax for students The owner has no reason to believe any information on the certificate is false. Tax for students The operator of the facility where the diesel fuel or kerosene is received is liable for the tax if the owner meets these conditions. Tax for students The operator is jointly and severally liable if the owner does not meet these conditions. Tax for students Sales to unregistered person. Tax for students   The sale of diesel fuel or kerosene located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier. Tax for students   The seller is liable for the tax. Tax for students However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax. Tax for students The seller is a registrant. Tax for students The seller has an unexpired notification certificate (discussed under Gasoline) from the buyer. Tax for students The seller has no reason to believe any information on the certificate is false. Tax for students The buyer of the diesel fuel or kerosene is liable for the tax if the seller meets these conditions. Tax for students The buyer is jointly and severally liable if the seller does not meet these conditions. Tax for students Exception. Tax for students   The tax does not apply to a sale if all of the following apply. Tax for students The buyer's principal place of business is not in the United States. Tax for students The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel. Tax for students The seller is a registrant and the exporter of record. Tax for students The fuel was exported. Tax for students Removal or sale of blended diesel fuel or kerosene. Tax for students   The removal or sale of blended diesel fuel or blended kerosene by the blender is taxable. Tax for students Blended taxable fuel produced using biodiesel is subject to the tax. Tax for students See Blended taxable fuel under Definitions, earlier. Tax for students   The blender is liable for the tax. Tax for students The tax is figured on the number of gallons not previously subject to the tax. Tax for students   Persons who blend biodiesel with undyed diesel fuel to produce and sell or use a biodiesel mixture outside the bulk transfer/terminal system must pay the diesel fuel tax on the volume of biodiesel in the mixture. Tax for students Generally, the biodiesel mixture must be diesel fuel (defined earlier). Tax for students See Form 720 to report this tax. Tax for students You also must be registered by the IRS as a blender. Tax for students See Form 637 for more information. Tax for students   However, if an untaxed liquid is sold as taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel. Tax for students Additional persons liable. Tax for students   When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax applies to: Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty; or Anyone who willfully causes the person to fail to pay the tax. Tax for students Credits or Refunds. Tax for students   A credit or refund is allowable for the tax on undyed diesel fuel or undyed kerosene used for a nontaxable use. Tax for students For more information, see chapter 2. Tax for students Dyed Diesel Fuel and Dyed Kerosene Dyed diesel fuel and dyed kerosene are subject to $. Tax for students 001 per gallon LUST tax as discussed below, unless the fuel is for export. Tax for students The excise tax is not imposed on the removal, entry, or sale of diesel fuel or kerosene (other than the LUST tax) if all the following tests are met. Tax for students The person otherwise liable for tax (for example, the position holder) is a registrant. Tax for students In the case of a removal from a terminal, the terminal is an approved terminal. Tax for students The diesel fuel or kerosene satisfies the dyeing requirements (described next). Tax for students Dyeing requirements. Tax for students   Diesel fuel or kerosene satisfies the dyeing requirements only if it satisfies the following requirements. Tax for students It contains the dye Solvent Red 164 (and no other dye) at a concentration spectrally equivalent to at least 3. Tax for students 9 pounds of the solid dye standard Solvent Red 26 per thousand barrels of fuel or any dye of a type and in a concentration that has been approved by the Commissioner. Tax for students Is indelibly dyed by mechanical injection. Tax for students See section 6 of Notice 2005-80 for transition rules that apply until final regulations are issued by the IRS. Tax for students Notice required. Tax for students   A legible and conspicuous notice stating either: DYED DIESEL FUEL, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE or DYED KEROSENE, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE must be: Provided by the terminal operator to any person that receives dyed diesel fuel or dyed kerosene at a terminal rack of that operator, and Posted by a seller on any retail pump or other delivery facility where it sells dyed diesel fuel or dyed kerosene for use by its buyer. Tax for students   The notice under item (1) must be provided by the time of the removal and must appear on all shipping papers, bills of lading, and similar documents accompanying the removal of the fuel. Tax for students   Any seller that fails to post the required notice under item (2) is presumed to know that the fuel will be used for a taxable use (a use other than a nontaxable use listed later). Tax for students That seller is subject to the penalty described next. Tax for students Penalty. Tax for students   A penalty is imposed on a person if any of the following situations apply. Tax for students Any dyed fuel is sold or held for sale by the person for a use the person knows or has reason to know is not a nontaxable use of the fuel. Tax for students Any dyed fuel is held for use or used by the person for a use other than a nontaxable use and the person knew, or had reason to know, that the fuel was dyed. Tax for students The person willfully alters, chemically or otherwise, or attempts to so alter, the strength or composition of any dye in dyed fuel. Tax for students The person has knowledge that a dyed fuel that has been altered, as described in (3) above, sells or holds for sale such fuel for any use for which the person knows or has reason to know is not a nontaxable use of the fuel. Tax for students   The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. Tax for students After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. Tax for students   This penalty is in addition to any tax imposed on the fuel. Tax for students   If the penalty is imposed, each officer, employee, or agent of a business entity who willfully participated in any act giving rise to the penalty is jointly and severally liable with that entity for the penalty. Tax for students   There is no administrative appeal or review allowed for the third and subsequent penalty imposed by section 6715 on any person except for: Fraud or a mistake in the chemical analysis, or Mathematical calculation of the penalty. Tax for students   If you are liable for the penalty, you may also be liable for the back-up tax, discussed later. Tax for students However, the penalty applies only to dyed diesel fuel and dyed kerosene, while the back-up tax may apply to other fuels. Tax for students The penalty may apply if the fuel is held for sale or use for a taxable use while the back-up tax does not apply unless the fuel is delivered into a fuel supply tank. Tax for students Exception to penalty. Tax for students   The penalty under item (3) will not apply in any of the following situations. Tax for students Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any undyed liquid and the resulting product meets the dyeing requirements. Tax for students Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any other liquid (other than diesel fuel or kerosene) that contains the type and amount of dye required to meet the dyeing requirements. Tax for students The alteration or attempted alteration occurs in an exempt area of Alaska. Tax for students See Removal for sale or use in Alaska, later. Tax for students Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with diesel fuel or kerosene not meeting the dyeing requirements and the blending occurs as part of a nontaxable use (other than export), discussed later. Tax for students Alaska and Feedstocks Tax of $. Tax for students 001 per gallon is imposed on: Undyed diesel fuel or undyed kerosene sold or used in Alaska for certain nontaxable uses (see Later sales on page 10). Tax for students Undyed kerosene used for feedstock purposes. Tax for students Removal for sale or use in Alaska. Tax for students   No tax is imposed on the removal, entry, or sale of diesel fuel or kerosene in Alaska for ultimate sale or use in certain areas of Alaska for certain nontaxable uses. Tax for students The removal or entry of any diesel fuel or kerosene is not taxed if all the following requirements are satisfied. Tax for students The person otherwise liable for the tax (position holder, refiner, or enterer): Is a registrant, Can show satisfactory evidence of the nontaxable nature of the transaction, and Has no reason to believe the evidence is false. Tax for students In the case of a removal from a terminal, the terminal is an approved terminal. Tax for students The owner of the fuel immediately after the removal or entry holds the fuel for its own use in a nontaxable use (discussed later) or is a qualified dealer. Tax for students   If all three of the requirements above are not met, then tax is imposed at $. Tax for students 244 per gallon. Tax for students   A qualified dealer is any person that holds a qualified dealer license from the state of Alaska or has been registered by the IRS as a qualified retailer. Tax for students Satisfactory evidence may include copies of qualified dealer licenses or exemption certificates obtained for state tax purposes. Tax for students Later sales. Tax for students   The excise tax applies to diesel fuel or kerosene sold by a qualified dealer after the removal or entry. Tax for students The tax is imposed at the time of the sale and the qualified dealer is liable for the tax. Tax for students However, the sale is not taxable (other than the LUST tax at $. Tax for students 001 per gallon) if all the following requirements are met. Tax for students The fuel is sold in Alaska for certain nontaxable uses. Tax for students The buyer buys the fuel for its own use in a nontaxable use or is a qualified dealer. Tax for students The seller can show satisfactory evidence of the nontaxable nature of the transaction and has no reason to believe the evidence is false. Tax for students Feedstock purposes. Tax for students   The $. Tax for students 001 per gallon LUST tax is imposed on the removal or entry of undyed kerosene if all the following conditions are met. Tax for students The person otherwise liable for tax (position holder, refiner, or enterer) is a registrant. Tax for students In the case of a removal from a terminal, the terminal is an approved terminal. Tax for students Either: The person otherwise liable for tax uses the kerosene for a feedstock purpose, or The kerosene is sold for use by the buyer for a feedstock purpose and, at the time of the sale, the person otherwise liable for tax has an unexpired certificate (described later) from the buyer and has no reason to believe any information on the certificate is false. Tax for students   If all of the requirements above are not met, then tax is imposed at $. Tax for students 244 per gallon. Tax for students   Kerosene is used for a feedstock purpose when it is used for nonfuel purposes in the manufacture or production of any substance other than gasoline, diesel fuel, or Other Fuels. Tax for students For example, kerosene is used for a feedstock purpose when it is used as an ingredient in the production of paint, but is not used for a feedstock purpose when it is used to power machinery at a factory where paint is produced. Tax for students A feedstock user is a person that uses kerosene for a feedstock purpose. Tax for students A registered feedstock user is a person that has been registered by the IRS as a feedstock user. Tax for students See Registration Requirements, earlier. Tax for students Later sales. Tax for students   The excise tax ($. Tax for students 244 per gallon) applies to kerosene sold for use by the buyer for a feedstock purpose (item (3)(b) above) if the buyer in that sale later sells the kerosene. Tax for students The tax is imposed at the time of the later sale and that seller is liable for the tax. Tax for students Certificate. Tax for students   The certificate from the buyer certifies the buyer is a registered feedstock user and the kerosene will be used by the buyer for a feedstock purpose. Tax for students The certificate may be included as part of any business records normally used for a sale. Tax for students A model certificate is shown in the Appendix as Model Certificate G. Tax for students Your certificate must contain all information necessary to complete the model. Tax for students   A certificate expires on the earliest of the following dates. Tax for students The date 1 year after the effective date (not earlier than the date signed) of the certificate. Tax for students The date the seller is provided a new certificate or notice that the current certificate is invalid. Tax for students The date the seller is notified the buyer's registration has been revoked or suspended. Tax for students   The buyer must provide a new certificate if any information on a certificate has changed. Tax for students Back-up Tax Tax is imposed on the delivery of any of the following into the fuel supply tank of a diesel-powered highway vehicle. Tax for students Any dyed diesel fuel or dyed kerosene for other than a nontaxable use. Tax for students Any undyed diesel fuel or undyed kerosene on which a credit or refund (for fuel used for a nontaxable purpose) has been allowed. Tax for students Any liquid other than gasoline, diesel fuel, or kerosene. Tax for students Generally, this back-up tax is imposed at a rate of $. Tax for students 244 per gallon. Tax for students Liability for tax. Tax for students   Generally, the operator of the vehicle into which the fuel is delivered is liable for the tax. Tax for students In addition, the seller of the diesel fuel or kerosene is jointly and severally liable for the tax if the seller knows or has reason to know that the fuel will be used for other than a nontaxable use. Tax for students Exemptions from the back-up tax. Tax for students   The back-up tax does not apply to a delivery of diesel fuel or kerosene for uses 1, 2, 6, 7, 12, 13, 14, and 15 listed under Definitions of Nontaxable Uses in chapter 2. Tax for students   In addition, since the back-up tax is imposed only on the delivery into the fuel supply tank of a diesel-powered vehicle or train, the tax does not apply to diesel fuel or kerosene used as heating oil or in stationary engines. Tax for students Diesel-Water Fuel Emulsion Diesel-water fuel emulsion means diesel fuel at least 14% of which is water and for which the emulsion additive is registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003. Tax for students A reduced tax rate of $. Tax for students 198 per gallon is imposed on a diesel-water fuel emulsion. Tax for students To be eligible for the reduced rate, the person who sells, removes, or uses the diesel-water fuel emulsion must be registered by the IRS. Tax for students If the diesel-water fuel emulsion does not meet the requirements above, or if the person who sells, removes, or uses the fuel is not registered, the diesel-water fuel emulsion is taxed at $. Tax for students 244 per gallon. Tax for students Credits or refunds. Tax for students   The allowance for a credit or refund on a diesel-water fuel emulsion is discussed in chapter 2. Tax for students Kerosene for Use in Aviation Taxable Events Generally, kerosene is taxed at $. Tax for students 244 per gallon unless a reduced rate applies (see Diesel Fuel and Kerosene, earlier). Tax for students For kerosene removed directly from a terminal into the fuel tank of an aircraft for use in noncommercial aviation, the tax rate is $. Tax for students 219. Tax for students The rate of $. Tax for students 219 also applies if kerosene is removed into any aircraft from a qualified refueler truck, tanker, or tank wagon that is loaded with the kerosene from a terminal that is located within an airport. Tax for students The airport terminal does not need to be a secured airport terminal for this rate to apply. Tax for students However, the refueler truck, tanker, or tank wagon must meet the requirements discussed under Certain refueler trucks, tankers, and tank wagons, treated as terminals, later. Tax for students For kerosene removed directly into the fuel tank of an aircraft for use in commercial aviation, the rate of tax is $. Tax for students 044 per gallon. Tax for students For kerosene removed into an aircraft from a qualified refueler truck, tanker, or tank wagon, the $. Tax for students 044 rate applies only if the truck, tanker, or tank wagon is loaded at a terminal that is located in a secured area of the airport. Tax for students See Terminal located within a secured area of an airport, later. Tax for students In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix. Tax for students For kerosene removed directly into the fuel tank of an aircraft for a use exempt from tax under section 4041(c) (such as use in an aircraft for the exclusive use of a state or local government), the rate of tax is $. Tax for students 001. Tax for students There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade. Tax for students The kerosene must be removed from a qualifying refueler truck, tanker, or tank wagon loaded at a terminal located within a secured area of an airport. Tax for students See Terminal located within a secured area of an airport, later. Tax for students In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix. Tax for students The position holder is liable for the $. Tax for students 001 per gallon tax. Tax for students For kerosene removed directly from a terminal into the fuel tank of an fractional ownership program aircraft after March 31, 2012, a surtax of $. Tax for students 141 per gallon applies. Tax for students Certain refueler trucks, tankers, and tank wagons treated as terminals. Tax for students   For purposes of the tax imposed on kerosene for use in aviation removed directly into the fuel tank of an aircraft for use in commercial aviation, certain refueler trucks, tankers, and tank wagons are treated as part of a terminal if the following conditions are met. Tax for students Such terminal is located within an area of an airport. Tax for students Any kerosene for use in aviation that is loaded in a refueler truck, tanker, or tank wagon at a terminal is for delivery into aircraft at the airport in which the terminal is located. Tax for students Except in exigent circumstances, such as those identified in Notice 2005-80, no vehicle registered for highway use is loaded with kerosene for use in aviation at the terminal. Tax for students The refueler truck, tanker, or tank wagon meets the following requirements: Has storage tanks, hose, and coupling equipment designed and used for fueling aircraft, Is not registered for highway use, and Is operated by the terminal operator or a person that makes a daily accounting to the terminal operator of each delivery of fuel from the refueler truck, tanker, or tank wagon. Tax for students Information reporting will be required by terminal operators regarding this provision. Tax for students Until the format of this information reporting is issued, taxpayers are required to retain records regarding the daily accounting, but are not required to report such information. Tax for students Terminal located within a secured area of an airport. Tax for students   See Notice 2005-4 and Notice 2005-80 for the list of terminals located within a secured area of an airport. Tax for students This list refers to fueling operations at airport terminals as it applies to the federal excise tax on kerosene for use in aviation, and has nothing to do with the general security of airports either included or not included in the list. Tax for students Liability For Tax If the kerosene is removed directly into the fuel tank of an aircraft for use in commercial aviation, the operator of the aircraft in commercial aviation is liable for the tax on the removal at the rate of $. Tax for students 044 per gallon. Tax for students However, the position holder is liable for the LUST tax for kerosene for use in aviation removed directly into the fuel tank of an aircraft for use exempt from tax under section 4041(c) (except foreign trade). Tax for students For example, for kerosene removed directly into the aircraft for use in military aircraft, the position holder is liable for the tax. Tax for students For the aircraft operator to be liable for the tax $. Tax for students 044 rate, the position holder must meet the following requirements: Is a taxable fuel registrant, Has an unexpired certificate (a model certificate is shown in the Appendix as Model Certificate K) from the operator of the aircraft, and Has no reason to believe any of the information in the certificate is false. Tax for students Commercial aviation. Tax for students   Commercial aviation is any use of an aircraft in the business of transporting persons or property by air for pay. Tax for students However, commercial aviation does not include any of the following uses. Tax for students Any use exclusively for the purpose of skydiving. Tax for students Certain air transportation by seaplane. Tax for students See Seaplanes under Transportation of Persons by Air in chapter 4. Tax for students Any use of an aircraft owned or leased by a member of an affiliated group and unavailable for hire by nonmembers. Tax for students For more information, see Aircraft used by affiliated corporations under Special Rules on Transportation Taxes in chapter 4. Tax for students Any use of an aircraft that has a maximum certificated takeoff weight of 6,000 pounds or less, unless the aircraft is operated on an established line. Tax for students For more information, see Small aircraft under Special Rules on Transportation Taxes in chapter 4. Tax for students Any use where the surtax on fuel used in a fractional ownership program aircraft is imposed. Tax for students See Surtax on any liquid used in a fractional ownership program aircraft as fuel below. Tax for students Surtax on any liquid used in a fractional ownership program aircraft as fuel Fuel used in a fractional ownership program aircraft (as defined below) after March 31, 2012, is subject to a surtax of $. Tax for students 141 per gallon. Tax for students The fractional ownership program manager is liable for the tax. Tax for students The surtax applies in addition to any other taxes imposed on the removal, entry, use, or sale of the fuel. Tax for students If the surtax is imposed, the following air transportation taxes do not apply. Tax for students Transportation of persons by air. Tax for students Transportation of property by air. Tax for students Use of international air travel facilities. Tax for students These taxes are described under Air Transportation Taxes, later. Tax for students A fractional ownership program aircraft flight is considered noncommercial aviation, for the rules for kerosene used in noncommercial aviation, see Kerosene for Use in Aviation above. Tax for students Fractional ownership aircraft program    is a program under which:  A single fractional ownership program manager provides fractional ownership program management services on behalf of the fractional owners; There are one or more fractional owners per fractional program aircraft, with at least one fractional program aircraft having more than one owner; For at least two fractional program aircraft, none of the ownership interests in the aircraft are less than the minimum fractional ownership interest or held by the program manager; There exists a dry-lease aircraft exchange arrangement among all of the fractional owners; and There are multi-year program agreements covering the fractional ownership, fractional ownership program management services, and dry-lease aircraft exchange aspects of the program. Tax for students Fractional program aircraft. Tax for students   Any aircraft that, in any fractional ownership aircraft program, is listed as a fractional program aircraft in the management specifications issued to the manager of such program by Federal Aviation Administration under subpart K of part 91 title 14, Code of Federal Regulations, and is registered in the U. Tax for students S. Tax for students   Fractional program aircraft are not considered used for transportation of a qualified fractional owner, or on account of such qualified fractional owner when they are used for flight demonstration, maintenance or crew training. Tax for students In such situations, the flight is not commercial aviation. Tax for students Instead, the tax on the fuel used in the flight is imposed at the non-commercial aviation rate. Tax for students Fractional owner. Tax for students   Any person owning any interest (including the entire interest) in a fractional program aircraft. Tax for students Dry lease aircraft exchange. Tax for students   An agreement, documented by the written program agreements, under which the fractional program aircraft are available, on an as-needed basis without crew, to each fractional owner. Tax for students Special rule relating to deadhead service. Tax for students   A fractional program aircraft will not be considered to be used on account of a qualified fractional owner when it is used in deadhead service and a person other than a qualified fractional owner is separately charged for such service. Tax for students More information. Tax for students   See section 4043 for more information on the surtax. Tax for students Certificate for Commercial Aviation and Exempt Uses A certificate is required from the aircraft operator: To support aircraft operator liability for tax on removal of kerosene for use in aviation directly into the fuel tank of an aircraft in commercial aviation, or For exempt uses. Tax for students Certificate. Tax for students   The certificate may be included as part of any business records normally used for a sale. Tax for students See Model Certificate K in the Appendix. Tax for students   A certificate expires on the earliest of the following dates. Tax for students The date 1 year after the effective date (not earlier than the date signed) of the certificate. Tax for students The date the buyer provides the seller a new certificate or notice that the current certificate is invalid. Tax for students The date the IRS or the buyer notifies the seller that the buyer's right to provide a certificate has been withdrawn. Tax for students   The buyer must provide a new certificate if any information on a certificate has changed. Tax for students   The IRS may withdraw the buyer's right to provide a certificate if the buyer uses the kerosene for use in aviation to which a certificate relates other than as stated in the certificate. Tax for students Exempt use. Tax for students   The rate on kerosene for use in aviation is $. Tax for students 001 (LUST tax) if it is removed from any refinery or terminal directly into the fuel tank of an aircraft for an exempt use. Tax for students An exempt use includes kerosene for the exclusive use of a state or local government. Tax for students There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade. Tax for students Flash title transaction. Tax for students   A position holder is not liable for tax if, among other conditions, it obtains a certificate (described above) from the operator of the aircraft into which the kerosene is delivered. Tax for students In a “flash title transaction” the position holder sells the kerosene to a wholesale distributor (reseller) that in turn sells the kerosene to the aircraft operator as the kerosene is being removed from a terminal into the fuel tank of an aircraft. Tax for students In this case, the position holder will be treated as having a certificate from the operator of the aircraft if: The aircraft operator puts the reseller's name, address, and EIN on the certificate in place of the position holder's information; and The reseller provides the position holder with a statement of the kerosene reseller. Tax for students Reseller statement. Tax for students   This is a statement that is signed under penalties of perjury by a person with authority to bind the reseller; is provided at the bottom or on the back of the certificate (or in an attached document); and contains: The reseller's name, address, and EIN; The position holder's name, address, and EIN; and A statement that the reseller has no reason to believe that any information in the accompanying aircraft operator's certificate is false. Tax for students Credits or Refunds. Tax for students   A claim may be made by the ultimate purchaser (the operator) for taxed kerosene for use in aviation used in commercial aviation (other than foreign trade) and noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia). Tax for students A claim may be made by a registered ultimate vendor for certain sales. Tax for students For more information, see chapter 2. Tax for students Other Fuels (Including Alternative Fuels) Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. Tax for students Other Fuels include alternative fuels. Tax for students Alternative fuels are: Liquefied petroleum gas (LPG), “P Series” fuels, Compressed natural gas (CNG) (discussed later), Liquefied hydrogen, Any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, Liquid fuel derived from biomass, Liquefied natural gas (LNG), and Liquefied gas derived from biomass. Tax for students Liquefied petroleum gas includes propane, butane, pentane, or mixtures of those products. Tax for students Qualified methanol and ethanol fuels. Tax for students   Qualified ethanol and methanol means any liquid at least 85 percent of which consists of alcohol produced from coal, including peat. Tax for students The tax rates are listed in the Instructions for Form 720. Tax for students Partially exempt methanol and ethanol fuels. Tax for students   A reduced tax rate applies to these fuels. Tax for students Partially exempt ethanol and methanol means any liquid at least 85 percent of which consists of alcohol produced from natural gas. Tax for students The tax rates are listed in the Instructions for Form 720. Tax for students Motor vehicles. Tax for students   Motor vehicles include all types of vehicles, whether or not registered (or required to be registered) for highway use, that have both the following characteristics. Tax for students They are propelled by a motor. Tax for students They are designed for carrying or towing loads from one place to another, regardless of the type of material or load carried or t
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The Tax For Students

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