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

Part of the Department of Energy, the Office of Nuclear Energy works to improve the safety, cost, security, and efficiency of nuclear energy generation, largely through research and development.

Contact the Agency or Department

Website: Nuclear Energy, Science and Technology

Address: U.S. Department of Energy
1000 Independence Ave SW

Washington, DC 20585

Phone Number: (202) 586-5000 (Dept. of Energy Switchboard)

TTY: (800) 877-8339 (Dept. of Energy)

The Taxact

Taxact 12. Taxact   Other Income Table of Contents Introduction Useful Items - You may want to see: Bartering Canceled DebtsInterest included in canceled debt. Taxact Exceptions Host or Hostess Life Insurance ProceedsSurviving spouse. Taxact Endowment Contract Proceeds Accelerated Death Benefits Public Safety Officer Killed in the Line of Duty Partnership Income S Corporation Income RecoveriesItemized Deduction Recoveries Rents from Personal Property RepaymentsMethod 1. Taxact Method 2. Taxact RoyaltiesDepletion. Taxact Coal and iron ore. Taxact Sale of property interest. Taxact Part of future production sold. Taxact Unemployment BenefitsTypes of unemployment compensation. Taxact Governmental program. Taxact Repayment of unemployment compensation. Taxact Tax withholding. Taxact Repayment of benefits. Taxact Welfare and Other Public Assistance Benefits Other IncomeEmotional distress. Taxact Deduction for costs involved in unlawful discrimination suits. Taxact Energy conservation measure. Taxact Dwelling unit. Taxact Current income required to be distributed. Taxact Current income not required to be distributed. Taxact How to report. Taxact Losses. Taxact Grantor trust. Taxact Nonemployee compensation. Taxact Corporate director. Taxact Personal representatives. Taxact Manager of trade or business for bankruptcy estate. Taxact Notary public. Taxact Election precinct official. Taxact Difficulty-of-care payments. Taxact Maintaining space in home. Taxact Reporting taxable payments. Taxact Lotteries and raffles. Taxact Form W-2G. Taxact Reporting winnings and recordkeeping. Taxact Inherited pension or IRA. Taxact Employee awards or bonuses. Taxact Pulitzer, Nobel, and similar prizes. Taxact Payment for services. Taxact VA payments. Taxact Prizes. Taxact Strike and lockout benefits. Taxact Introduction You must include on your return all items of income you receive in the form of money, property, and services unless the tax law states that you do not include them. Taxact Some items, however, are only partly excluded from income. Taxact This chapter discusses many kinds of income and explains whether they are taxable or nontaxable. Taxact Income that is taxable must be reported on your tax return and is subject to tax. Taxact Income that is nontaxable may have to be shown on your tax return but is not taxable. Taxact This chapter begins with discussions of the following income items. Taxact Bartering. Taxact Canceled debts. Taxact Sales parties at which you are the host or hostess. Taxact Life insurance proceeds. Taxact Partnership income. Taxact S Corporation income. Taxact Recoveries (including state income tax refunds). Taxact Rents from personal property. Taxact Repayments. Taxact Royalties. Taxact Unemployment benefits. Taxact Welfare and other public assistance benefits. Taxact These discussions are followed by brief discussions of other income items. Taxact Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 544 Sales and Other Dispositions of Assets 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Bartering Bartering is an exchange of property or services. Taxact You must include in your income, at the time received, the fair market value of property or services you receive in bartering. Taxact If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise. Taxact Generally, you report this income on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Taxact However, if the barter involves an exchange of something other than services, such as in Example 3 below, you may have to use another form or schedule instead. Taxact Example 1. Taxact You are a self-employed attorney who performs legal services for a client, a small corporation. Taxact The corporation gives you shares of its stock as payment for your services. Taxact You must include the fair market value of the shares in your income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) in the year you receive them. Taxact Example 2. Taxact You are self-employed and a member of a barter club. Taxact The club uses “credit units” as a means of exchange. Taxact It adds credit units to your account for goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. Taxact The club subtracts credit units from your account when you receive goods or services from other members. Taxact You must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year. Taxact Example 3. Taxact You own a small apartment building. Taxact In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. Taxact You must report as rental income on Schedule E (Form 1040), Supplemental Income and Loss, the fair market value of the artwork, and the artist must report as income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) the fair rental value of the apartment. Taxact Form 1099-B from barter exchange. Taxact   If you exchanged property or services through a barter exchange, Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a similar statement from the barter exchange should be sent to you by February 18, 2014. Taxact It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2013. Taxact The IRS also will receive a copy of Form 1099-B. Taxact Canceled Debts In most cases, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. Taxact You have no income from the canceled debt if it is intended as a gift to you. Taxact A debt includes any indebtedness for which you are liable or which attaches to property you hold. Taxact If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. Taxact If it is a business debt, report the amount on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you are a farmer). Taxact Form 1099-C. Taxact   If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. Taxact The amount of the canceled debt is shown in box 2. Taxact Interest included in canceled debt. Taxact   If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will be shown in box 3. Taxact Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible when you paid it. Taxact See Deductible debt under Exceptions, later. Taxact   If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. Taxact If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3). Taxact Discounted mortgage loan. Taxact   If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. Taxact You must include the canceled amount in your income. Taxact Mortgage relief upon sale or other disposition. Taxact   If you are personally liable for a mortgage (recourse debt), and you are relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the fair market value of the property. Taxact To the extent the mortgage discharge exceeds the fair market value of the property, it is income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt , later. Taxact Report any income from discharge of indebtedness on nonbusiness debt that does not qualify for exclusion as other income on Form 1040, line 21. Taxact    You may be able to exclude part of the mortgage relief on your principal residence. Taxact See Excluded debt, later. Taxact   If you are not personally liable for a mortgage (nonrecourse debt), and you are relieved of the mortgage when you dispose of the property (such as through foreclosure), that relief is included in the amount you realize. Taxact You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Taxact Report any gain on nonbusiness property as a capital gain. Taxact   See Publication 4681 for more information. Taxact Stockholder debt. Taxact   If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that is generally dividend income to you. Taxact For more information, see Publication 542, Corporations. Taxact   If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. Taxact This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled. Taxact Repayment of canceled debt. Taxact   If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. Taxact You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. Taxact The statute of limitations generally does not end until 3 years after the due date of your original return. Taxact Exceptions There are several exceptions to the inclusion of canceled debt in income. Taxact These are explained next. Taxact Student loans. Taxact   Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers. Taxact   You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. Taxact To qualify, the loan must have been made by: The Federal Government, a state or local government, or an instrumentality, agency, or subdivision thereof, A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law, or An educational institution: Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or As part of a program of the institution designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt organization described in section 501(c)(3). Taxact   A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a qualified tax-exempt organization under its program designed as described in (3)(b) above. Taxact Education loan repayment assistance. Taxact   Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program), a state education loan repayment program eligible for funds under the Public Health Service Act, or any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas are not taxable. Taxact    The provision relating to the “other state loan repayment or loan forgiveness program” was added to this exclusion for amounts received in tax years beginning after December 31, 2008. Taxact If you included these amounts in income in 2010, 2011, or 2012, you should file an amended tax return to exclude this income. Taxact See Form 1040X and its instructions for details on filing. Taxact Deductible debt. Taxact   You do not have income from the cancellation of a debt if your payment of the debt would be deductible. Taxact This exception applies only if you use the cash method of accounting. Taxact For more information, see chapter 5 of Publication 334, Tax Guide for Small Business. Taxact Price reduced after purchase. Taxact   In most cases, if the seller reduces the amount of debt you owe for property you purchased, you do not have income from the reduction. Taxact The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property. Taxact Excluded debt. Taxact   Do not include a canceled debt in your gross income in the following situations. Taxact The debt is canceled in a bankruptcy case under title 11 of the U. Taxact S. Taxact Code. Taxact See Publication 908, Bankruptcy Tax Guide. Taxact The debt is canceled when you are insolvent. Taxact However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent. Taxact See Publication 908. Taxact The debt is qualified farm debt and is canceled by a qualified person. Taxact See chapter 3 of Publication 225, Farmer's Tax Guide. Taxact The debt is qualified real property business debt. Taxact See chapter 5 of Publication 334. Taxact The cancellation is intended as a gift. Taxact The debt is qualified principal residence indebtedness. Taxact See Publication 525 for additional information. Taxact Host or Hostess If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. Taxact You must report this item as income at its fair market value. Taxact Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. Taxact These expenses are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party. Taxact For more information about the 50% limit for meal and entertainment expenses, see chapter 26. Taxact Life Insurance Proceeds Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. Taxact This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. Taxact However, interest income received as a result of life insurance proceeds may be taxable. Taxact Proceeds not received in installments. Taxact   If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. Taxact If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death. Taxact Proceeds received in installments. Taxact   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. Taxact   To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Taxact Include anything over this excluded part in your income as interest. Taxact Surviving spouse. Taxact   If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. Taxact If you remarry, you can continue to take the exclusion. Taxact Surrender of policy for cash. Taxact   If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Taxact In most cases, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income. Taxact    You should receive a Form 1099-R showing the total proceeds and the taxable part. Taxact Report these amounts on lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A. Taxact More information. Taxact   For more information, see Life Insurance Proceeds in Publication 525. Taxact Endowment Contract Proceeds An endowment contract is a policy under which you are paid a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Taxact Endowment proceeds paid in a lump sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. Taxact To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Taxact Include the part of the lump sum payment that is more than your cost in your income. Taxact Accelerated Death Benefits Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded from income if the insured is terminally or chronically ill. Taxact Viatical settlement. Taxact   This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. Taxact A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code. Taxact Exclusion for terminal illness. Taxact    Accelerated death benefits are fully excludable if the insured is a terminally ill individual. Taxact This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification. Taxact Exclusion for chronic illness. Taxact    If the insured is a chronically ill individual who is not terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Taxact Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. Taxact This limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. Taxact For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits in Publication 525. Taxact Exception. Taxact   The exclusion does not apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured: Is a director, officer, or employee of the person, or Has a financial interest in the person's business. Taxact Form 8853. Taxact   To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. Taxact You do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred. Taxact Public Safety Officer Killed in the Line of Duty If you are a survivor of a public safety officer who was killed in the line of duty, you may be able to exclude from income certain amounts you receive. Taxact For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. Taxact For more information, see Publication 559, Survivors, Executors, and Administrators. Taxact Partnership Income A partnership generally is not a taxable entity. Taxact The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items. Taxact Schedule K-1 (Form 1065). Taxact    Although a partnership generally pays no tax, it must file an information return on Form 1065, U. Taxact S. Taxact Return of Partnership Income, and send Schedule K-1 (Form 1065) to each partner. Taxact In addition, the partnership will send each partner a copy of the Partner's Instructions for Schedule K-1 (Form 1065) to help each partner report his or her share of the partnership's income, deductions, credits, and tax preference items. Taxact Keep Schedule K-1 (Form 1065) for your records. Taxact Do not attach it to your Form 1040, unless you are specifically required to do so. Taxact For more information on partnerships, see Publication 541, Partnerships. Taxact Qualified joint venture. Taxact   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Taxact To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Taxact For further information on how to make the election and which schedule(s) to file, see the instructions for your individual tax return. Taxact S Corporation Income In most cases, an S corporation does not pay tax on its income. Taxact Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's pro rata share. Taxact Schedule K-1 (Form 1120S). Taxact   An S corporation must file a return on Form 1120S, U. Taxact S. Taxact Income Tax Return for an S Corporation, and send Schedule K-1 (Form 1120S) to each shareholder. Taxact In addition, the S corporation will send each shareholder a copy of the Shareholder's Instructions for Schedule K-1 (Form 1120S) to help each shareholder report his or her share of the S corporation's income, losses, credits, and deductions. Taxact Keep Schedule K-1 (Form 1120S) for your records. Taxact Do not attach it to your Form 1040, unless you are specifically required to do so. Taxact For more information on S corporations and their shareholders, see the Instructions for Form 1120S. Taxact Recoveries A recovery is a return of an amount you deducted or took a credit for in an earlier year. Taxact The most common recoveries are refunds, reimbursements, and rebates of deductions itemized on Schedule A (Form 1040). Taxact You also may have recoveries of non-itemized deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a tax credit. Taxact Tax benefit rule. Taxact   You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. Taxact For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year. Taxact For more information, see Publication 525. Taxact Federal income tax refund. Taxact   Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from income. Taxact State tax refund. Taxact   If you received a state or local income tax refund (or credit or offset) in 2013, you generally must include it in income if you deducted the tax in an earlier year. Taxact The payer should send Form 1099-G, Certain Government Payments, to you by January 31, 2014. Taxact The IRS also will receive a copy of the Form 1099-G. Taxact If you file Form 1040, use the State and Local Income Tax Refund Worksheet in the 2013 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income. Taxact See Publication 525 for when you must use another worksheet. Taxact   If you could choose to deduct for a tax year either: State and local income taxes, or State and local general sales taxes, then the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you did not choose to deduct for that year. Taxact For examples, see Publication 525. Taxact Mortgage interest refund. Taxact    If you received a refund or credit in 2013 of mortgage interest paid in an earlier year, the amount should be shown in box 3 of your Form 1098, Mortgage Interest Statement. Taxact Do not subtract the refund amount from the interest you paid in 2013. Taxact You may have to include it in your income under the rules explained in the following discussions. Taxact Interest on recovery. Taxact   Interest on any of the amounts you recover must be reported as interest income in the year received. Taxact For example, report any interest you received on state or local income tax refunds on Form 1040, line 8a. Taxact Recovery and expense in same year. Taxact   If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and is not reported as income. Taxact Recovery for 2 or more years. Taxact   If you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate, on a pro rata basis, the recovered amount between the years in which you paid it. Taxact This allocation is necessary to determine the amount of recovery from any earlier years and to determine the amount, if any, of your allowable deduction for this item for the current year. Taxact For information on how to compute the allocation, see Recoveries in Publication 525. Taxact Itemized Deduction Recoveries If you recover any amount that you deducted in an earlier year on Schedule A (Form 1040), you generally must include the full amount of the recovery in your income in the year you receive it. Taxact Where to report. Taxact   Enter your state or local income tax refund on Form 1040, line 10, and the total of all other recoveries as other income on Form 1040, line 21. Taxact You cannot use Form 1040A or Form 1040EZ. Taxact Standard deduction limit. Taxact   You generally are allowed to claim the standard deduction if you do not itemize your deductions. Taxact Only your itemized deductions that are more than your standard deduction are subject to the recovery rule (unless you are required to itemize your deductions). Taxact If your total deductions on the earlier year return were not more than your income for that year, include in your income this year the lesser of: Your recoveries, or The amount by which your itemized deductions exceeded the standard deduction. Taxact Example. Taxact For 2012, you filed a joint return. Taxact Your taxable income was $60,000 and you were not entitled to any tax credits. Taxact Your standard deduction was $11,900, and you had itemized deductions of $14,000. Taxact In 2013, you received the following recoveries for amounts deducted on your 2012 return: Medical expenses $200 State and local income tax refund 400 Refund of mortgage interest 325 Total recoveries $925 None of the recoveries were more than the deductions taken for 2012. Taxact The difference between the state and local income tax you deducted and your local general sales tax was more than $400. Taxact Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($14,000 − 11,900 = $2,100), so you must include your total recoveries in your income for 2013. Taxact Report the state and local income tax refund of $400 on Form 1040, line 10, and the balance of your recoveries, $525, on Form 1040, line 21. Taxact Standard deduction for earlier years. Taxact   To determine if amounts recovered in 2013 must be included in your income, you must know the standard deduction for your filing status for the year the deduction was claimed. Taxact Look in the instructions for your tax return from prior years to locate the standard deduction for the filing status for that prior year. Taxact Example. Taxact You filed a joint return on Form 1040 for 2012 with taxable income of $45,000. Taxact Your itemized deductions were $12,350. Taxact The standard deduction that you could have claimed was $11,900. Taxact In 2013, you recovered $2,100 of your 2012 itemized deductions. Taxact None of the recoveries were more than the actual deductions for 2012. Taxact Include $450 of the recoveries in your 2013 income. Taxact This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($12,350 − $11,900 = $450). Taxact Recovery limited to deduction. Taxact   You do not include in your income any amount of your recovery that is more than the amount you deducted in the earlier year. Taxact The amount you include in your income is limited to the smaller of: The amount deducted on Schedule A (Form 1040), or The amount recovered. Taxact Example. Taxact During 2012 you paid $1,700 for medical expenses. Taxact From this amount you subtracted $1,500, which was 7. Taxact 5% of your adjusted gross income. Taxact Your actual medical expense deduction was $200. Taxact In 2013, you received a $500 reimbursement from your medical insurance for your 2012 expenses. Taxact The only amount of the $500 reimbursement that must be included in your income for 2013 is $200—the amount actually deducted. Taxact Other recoveries. Taxact   See Recoveries in Publication 525 if: You have recoveries of items other than itemized deductions, or You received a recovery for an item for which you claimed a tax credit (other than investment credit or foreign tax credit) in a prior year. Taxact Rents from Personal Property If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is in most cases determined by: Whether or not the rental activity is a business, and Whether or not the rental activity is conducted for profit. Taxact In most cases, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business. Taxact See Publication 535, Business Expenses, for details on deducting expenses for both business and not-for-profit activities. Taxact Reporting business income and expenses. Taxact    If you are in the business of renting personal property, report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). Taxact The form instructions have information on how to complete them. Taxact Reporting nonbusiness income. Taxact   If you are not in the business of renting personal property, report your rental income on Form 1040, line 21. Taxact List the type and amount of the income on the dotted line next to line 21. Taxact Reporting nonbusiness expenses. Taxact   If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040, line 36. Taxact Also enter the amount and “PPR” on the dotted line next to line 36. Taxact   If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset other income. Taxact See Activity not for profit , under Other Income, later. Taxact Repayments If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Taxact Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Taxact Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction. Taxact Type of deduction. Taxact   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Taxact You generally deduct the repayment on the same form or schedule on which you previously reported it as income. Taxact For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Taxact If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). Taxact If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040). Taxact Repaid social security benefits. Taxact   If you repaid social security benefits or equivalent railroad retirement benefits, see Repayment of benefits in chapter 11. Taxact Repayment of $3,000 or less. Taxact   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Taxact If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 23. Taxact Repayment over $3,000. Taxact   If the amount you repaid was more than $3,000, you can deduct the repayment (as explained under Type of deduction , earlier). Taxact However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. Taxact This means that at the time you included the income, it appeared that you had an unrestricted right to it. Taxact If you qualify for this choice, figure your tax under both methods and compare the results. Taxact Use the method (deduction or credit) that results in less tax. Taxact When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Taxact Each instance of repayment is not considered separately. Taxact Method 1. Taxact   Figure your tax for 2013 claiming a deduction for the repaid amount. Taxact If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28. Taxact Method 2. Taxact   Figure your tax for 2013 claiming a credit for the repaid amount. Taxact Follow these steps. Taxact Figure your tax for 2013 without deducting the repaid amount. Taxact Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Taxact Subtract the tax in (2) from the tax shown on your return for the earlier year. Taxact This is the credit. Taxact Subtract the answer in (3) from the tax for 2013 figured without the deduction (Step 1). Taxact   If method 1 results in less tax, deduct the amount repaid. Taxact If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 71, by adding the amount of the credit to any other credits on this line, and entering “I. Taxact R. Taxact C. Taxact 1341” in the column to the right of line 71. Taxact   An example of this computation can be found in Publication 525. Taxact Repaid wages subject to social security and Medicare taxes. Taxact   If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. Taxact If the employer refuses to refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. Taxact File a claim for refund using Form 843, Claim for Refund and Request for Abatement. Taxact Repaid wages subject to Additional Medicare Tax. Taxact   Employers cannot make an adjustment or file a claim for refund for Additional Medicare Tax withholding when there is a repayment of wages received by an employee in a prior year because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year. Taxact If you had to repay an amount that you included in your wages or compensation in an earlier year, and on which Additional Medicare Tax was paid, you may be able to recover the Additional Medicare Tax paid on the amount. Taxact To recover Additional Medicare Tax on the repaid wages or compensation, you must file Form 1040X, Amended U. Taxact S. Taxact Individual Income Tax Return, for the prior year in which the wages or compensation were originally received. Taxact See the Instructions for Form 1040X. Taxact Royalties Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income. Taxact In most cases you report royalties in Part I of Schedule E (Form 1040). Taxact However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc. Taxact , report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). Taxact Copyrights and patents. Taxact   Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions, are amounts paid to you for the right to use your work over a specified period of time. Taxact Royalties generally are based on the number of units sold, such as the number of books, tickets to a performance, or machines sold. Taxact Oil, gas, and minerals. Taxact   Royalty income from oil, gas, and mineral properties is the amount you receive when natural resources are extracted from your property. Taxact The royalties are based on units, such as barrels, tons, etc. Taxact , and are paid to you by a person or company who leases the property from you. Taxact Depletion. Taxact   If you are the owner of an economic interest in mineral deposits or oil and gas wells, you can recover your investment through the depletion allowance. Taxact For information on this subject, see chapter 9 of Publication 535. Taxact Coal and iron ore. Taxact   Under certain circumstances, you can treat amounts you receive from the disposal of coal and iron ore as payments from the sale of a capital asset, rather than as royalty income. Taxact For information about gain or loss from the sale of coal and iron ore, see Publication 544. Taxact Sale of property interest. Taxact   If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of property used in a trade or business under section 1231, not royalty income. Taxact Under certain circumstances, the sale is subject to capital gain or loss treatment as explained in the Instructions for Schedule D (Form 1040). Taxact For more information on selling section 1231 property, see chapter 3 of Publication 544. Taxact   If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the property, you have made a lease or a sublease, and any cash you receive for the assignment of other interests in the property is ordinary income subject to a depletion allowance. Taxact Part of future production sold. Taxact   If you own mineral property but sell part of the future production, in most cases you treat the money you receive from the buyer at the time of the sale as a loan from the buyer. Taxact Do not include it in your income or take depletion based on it. Taxact   When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct depletion from that amount to arrive at your taxable income from the property. Taxact Unemployment Benefits The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits. Taxact Unemployment compensation. Taxact   You must include in income all unemployment compensation you receive. Taxact You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you. Taxact In most cases, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. Taxact Types of unemployment compensation. Taxact   Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. Taxact It includes the following benefits. Taxact Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund. Taxact State unemployment insurance benefits. Taxact Railroad unemployment compensation benefits. Taxact Disability payments from a government program paid as a substitute for unemployment compensation. Taxact (Amounts received as workers' compensation for injuries or illness are not unemployment compensation. Taxact See chapter 5 for more information. Taxact ) Trade readjustment allowances under the Trade Act of 1974. Taxact Unemployment assistance under the Disaster Relief and Emergency Assistance Act. Taxact Unemployment assistance under the Airline Deregulation Act of 1974 Program. Taxact Governmental program. Taxact   If you contribute to a governmental unemployment compensation program and your contributions are not deductible, amounts you receive under the program are not included as unemployment compensation until you recover your contributions. Taxact If you deducted all of your contributions to the program, the entire amount you receive under the program is included in your income. Taxact Repayment of unemployment compensation. Taxact   If you repaid in 2013 unemployment compensation you received in 2013, subtract the amount you repaid from the total amount you received and enter the difference on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. Taxact On the dotted line next to your entry enter “Repaid” and the amount you repaid. Taxact If you repaid unemployment compensation in 2013 that you included in income in an earlier year, you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. Taxact If the amount is more than $3,000, see Repayments , earlier. Taxact Tax withholding. Taxact   You can choose to have federal income tax withheld from your unemployment compensation. Taxact To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Taxact Tax will be withheld at 10% of your payment. Taxact    If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. Taxact If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. Taxact For more information on estimated tax, see chapter 4. Taxact Supplemental unemployment benefits. Taxact   Benefits received from an employer-financed fund (to which the employees did not contribute) are not unemployment compensation. Taxact They are taxable as wages and are subject to withholding for income tax. Taxact They may be subject to social security and Medicare taxes. Taxact For more information, see Supplemental Unemployment Benefits in section 5 of Publication 15-A, Employer's Supplemental Tax Guide. Taxact Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Taxact Repayment of benefits. Taxact   You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. Taxact If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. Taxact If you repay the benefits in a later year, you must include the full amount of the benefits received in your income for the year you received them. Taxact   Deduct the repayment in the later year as an adjustment to gross income on Form 1040. Taxact (You cannot use Form 1040A or Form 1040EZ. Taxact ) Include the repayment on Form 1040, line 36, and enter “Sub-Pay TRA” and the amount on the dotted line next to line 36. Taxact If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. Taxact For more information on this, see Repayments , earlier. Taxact Private unemployment fund. Taxact   Unemployment benefit payments from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. Taxact Report the taxable amount on Form 1040, line 21. Taxact Payments by a union. Taxact   Benefits paid to you as an unemployed member of a union from regular union dues are included in your income on Form 1040, line 21. Taxact However, if you contribute to a special union fund and your payments to the fund are not deductible, the unemployment benefits you receive from the fund are includible in your income only to the extent they are more than your contributions. Taxact Guaranteed annual wage. Taxact   Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are taxable as wages. Taxact Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Taxact State employees. Taxact   Payments similar to a state's unemployment compensation may be made by the state to its employees who are not covered by the state's unemployment compensation law. Taxact Although the payments are fully taxable, do not report them as unemployment compensation. Taxact Report these payments on Form 1040, line 21. Taxact Welfare and Other Public Assistance Benefits Do not include in your income governmental benefit payments from a public welfare fund based upon need, such as payments to blind individuals under a state public assistance law. Taxact Payments from a state fund for the victims of crime should not be included in the victims' incomes if they are in the nature of welfare payments. Taxact Do not deduct medical expenses that are reimbursed by such a fund. Taxact You must include in your income any welfare payments that are compensation for services or that are obtained fraudulently. Taxact Reemployment Trade Adjustment Assistance (RTAA) payments. Taxact   RTAA payments received from a state must be included in your income. Taxact The state must send you Form 1099-G to advise you of the amount you should include in income. Taxact The amount should be reported on Form 1040, line 21. Taxact Persons with disabilities. Taxact   If you have a disability, you must include in income compensation you receive for services you perform unless the compensation is otherwise excluded. Taxact However, you do not include in income the value of goods, services, and cash that you receive, not in return for your services, but for your training and rehabilitation because you have a disability. Taxact Excludable amounts include payments for transportation and attendant care, such as interpreter services for the deaf, reader services for the blind, and services to help individuals with an intellectual disability do their work. Taxact Disaster relief grants. Taxact    Do not include post-disaster grants received under the Robert T. Taxact Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, child care, or funeral expenses. Taxact Do not deduct casualty losses or medical expenses that are specifically reimbursed by these disaster relief grants. Taxact If you have deducted a casualty loss for the loss of your personal residence and you later receive a disaster relief grant for the loss of the same residence, you may have to include part or all of the grant in your taxable income. Taxact See Recoveries , earlier. Taxact Unemployment assistance payments under the Act are taxable unemployment compensation. Taxact See Unemployment compensation under Unemployment Benefits, earlier. Taxact Disaster relief payments. Taxact   You can exclude from income any amount you receive that is a qualified disaster relief payment. Taxact A qualified disaster relief payment is an amount paid to you: To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster; To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it is due to a qualified disaster; By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries incurred as a result of a qualified disaster; or By a federal, state, or local government, or agency, or instrumentality in connection with a qualified disaster in order to promote the general welfare. Taxact You can exclude this amount only to the extent any expense it pays for is not paid for by insurance or otherwise. Taxact The exclusion does not apply if you were a participant or conspirator in a terrorist action or a representative of one. Taxact   A qualified disaster is: A disaster which results from a terrorist or military action; A federally declared disaster; or A disaster which results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic by the Secretary of the Treasury or his or her delegate. Taxact   For amounts paid under item (4), a disaster is qualified if it is determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality. Taxact Disaster mitigation payments. Taxact   You also can exclude from income any amount you receive that is a qualified disaster mitigation payment. Taxact Qualified disaster mitigation payments are also most commonly paid to you in the period immediately following damage to property as a result of a natural disaster. Taxact However, disaster mitigation payments are used to mitigate (reduce the severity of) potential damage from future natural disasters. Taxact They are paid to you through state and local governments based on the provisions of the Robert T. Taxact Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act. Taxact   You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments. Taxact Home Affordable Modification Program (HAMP). Taxact   If you benefit from Pay-for-Performance Success Payments under HAMP, the payments are not taxable. Taxact Mortgage assistance payments under section 235 of the National Housing Act. Taxact   Payments made under section 235 of the National Housing Act for mortgage assistance are not included in the homeowner's income. Taxact Interest paid for the homeowner under the mortgage assistance program cannot be deducted. Taxact Medicare. Taxact   Medicare benefits received under title XVIII of the Social Security Act are not includible in the gross income of the individuals for whom they are paid. Taxact This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary (part B (Supplementary Medical Insurance Benefits for the Aged)). Taxact Old-age, survivors, and disability insurance benefits (OASDI). Taxact   Generally, OASDI payments under section 202 of title II of the Social Security Act are not includible in the gross income of the individuals to whom they are paid. Taxact This applies to old-age insurance benefits, and insurance benefits for wives, husbands, children, widows, widowers, mothers and fathers, and parents, as well as the lump-sum death payment. Taxact Nutrition Program for the Elderly. Taxact    Food benefits you receive under the Nutrition Program for the Elderly are not taxable. Taxact If you prepare and serve free meals for the program, include in your income as wages the cash pay you receive, even if you are also eligible for food benefits. Taxact Payments to reduce cost of winter energy. Taxact   Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable. Taxact Other Income The following brief discussions are arranged in alphabetical order. Taxact Other income items briefly discussed below are referenced to publications which provide more topical information. Taxact Activity not for profit. Taxact   You must include on your return income from an activity from which you do not expect to make a profit. Taxact An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. Taxact Enter this income on Form 1040, line 21. Taxact Deductions for expenses related to the activity are limited. Taxact They cannot total more than the income you report and can be taken only if you itemize deductions on Schedule A (Form 1040). Taxact See Not-for-Profit Activities in chapter 1 of Publication 535 for information on whether an activity is considered carried on for a profit. Taxact Alaska Permanent Fund dividend. Taxact   If you received a payment from Alaska's mineral income fund (Alaska Permanent Fund dividend), report it as income on line 21 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. Taxact The state of Alaska sends each recipient a document that shows the amount of the payment with the check. Taxact The amount also is reported to IRS. Taxact Alimony. Taxact   Include in your income on Form 1040, line 11, any alimony payments you receive. Taxact Amounts you receive for child support are not income to you. Taxact Alimony and child support payments are discussed in chapter 18. Taxact Bribes. Taxact   If you receive a bribe, include it in your income. Taxact Campaign contributions. Taxact   These contributions are not income to a candidate unless they are diverted to his or her personal use. Taxact To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. Taxact However, interest earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities are taxable and must be reported on Form 1120-POL, U. Taxact S. Taxact Income Tax Return for Certain Political Organizations. Taxact Excess campaign funds transferred to an office account must be included in the officeholder's income on Form 1040, line 21, in the year transferred. Taxact Car pools. Taxact   Do not include in your income amounts you receive from the passengers for driving a car in a car pool to and from work. Taxact These amounts are considered reimbursement for your expenses. Taxact However, this rule does not apply if you have developed car pool arrangements into a profit-making business of transporting workers for hire. Taxact Cash rebates. Taxact   A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate. Taxact Example. Taxact You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. Taxact The $2,000 is not income to you. Taxact Your basis in the car is $22,000. Taxact This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business. Taxact Casualty insurance and other reimbursements. Taxact   You generally should not report these reimbursements on your return unless you are figuring gain or loss from the casualty or theft. Taxact See chapter 25 for more information. Taxact Child support payments. Taxact   You should not report these payments on your return. Taxact See chapter 18 for more information. Taxact Court awards and damages. Taxact   To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. Taxact The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Taxact Include the following as ordinary income. Taxact Interest on any award. Taxact Compensation for lost wages or lost profits in most cases. Taxact Punitive damages, in most cases. Taxact It does not matter if they relate to a physical injury or physical sickness. Taxact Amounts received in settlement of pension rights (if you did not contribute to the plan). Taxact Damages for: Patent or copyright infringement, Breach of contract, or Interference with business operations. Taxact Back pay and damages for emotional distress received to satisfy a claim under title VII of the Civil Rights Act of 1964. Taxact Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income. Taxact   Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments). Taxact Emotional distress. Taxact   Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Taxact Do not include them in your income. Taxact   If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Taxact Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders. Taxact Deduction for costs involved in unlawful discrimination suits. Taxact   You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in Internal Revenue Code section 62(e), a claim against the United States government, or a claim under section 1862(b)(3)(A) of the Social Security Act. Taxact For more information, see Publication 525. Taxact Credit card insurance. Taxact   In most cases, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. Taxact These plans make the minimum monthly payment on your credit card account if you cannot make the payment due to injury, illness, disability, or unemployment. Taxact Report on Form 1040, line 21, the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year. Taxact Down payment assistance. Taxact   If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance is not included in your income. Taxact If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. Taxact If the corporation does not qualify, the assistance is treated as a rebate or reduction of the purchase price and is not included in your basis. Taxact Employment agency fees. Taxact   If you get a job through an employment agency, and the fee is paid by your employer, the fee is not includible in your income if you are not liable for it. Taxact However, if you pay it and your employer reimburses you for it, it is includible in your income. Taxact Energy conservation subsidies. Taxact   You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit. Taxact Energy conservation measure. Taxact   This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand. Taxact Dwelling unit. Taxact   This includes a house, apartment, condominium, mobile home, boat, or similar property. Taxact If a building or structure contains both dwelling and other units, any subsidy must be properly allocated. Taxact Estate and trust income. Taxact    An estate or trust, unlike a partnership, may have to pay federal income tax. Taxact If you are a beneficiary of an estate or trust, you may be taxed on your share of its income distributed or required to be distributed to you. Taxact However, there is never a double tax. Taxact Estates and trusts file their returns on Form 1041, U. Taxact S. Taxact Income Tax Return for Estates and Trusts, and your share of the income is reported to you on Schedule K-1 (Form 1041). Taxact Current income required to be distributed. Taxact   If you are the beneficiary of an estate or trust that must distribute all of its current income, you must report your share of the distributable net income, whether or not you actually received it. Taxact Current income not required to be distributed. Taxact    If you are the beneficiary of an estate or trust and the fiduciary has the choice of whether to distribute all or part of the current income, you must report: All income that is required to be distributed to you, whether or not it is actually distributed, plus All other amounts actually paid or credited to you, up to the amount of your share of distributable net income. Taxact How to report. Taxact   Treat each item of income the same way that the estate or trust would treat it. Taxact For example, if a trust's dividend income is distributed to you, you report the distribution as dividend income on your return. Taxact The same rule applies to distributions of tax-exempt interest and capital gains. Taxact   The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you are allowed on your individual income tax return. Taxact Losses. Taxact   Losses of estates and trusts generally are not deductible by the beneficiaries. Taxact Grantor trust. Taxact   Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. Taxact (The grantor is the one who transferred property to the trust. Taxact ) This rule applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor's spouse. Taxact   Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of the transferred property. Taxact Expenses paid by another. Taxact   If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. Taxact But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment is not includible in your income. Taxact Fees for services. Taxact   Include all fees for your services in your income. Taxact Examples of these fees are amounts you receive for services you perform as: A corporate director, An executor, administrator, or personal representative of an estate, A manager of a trade or business you operated before declaring Chapter 11 bankruptcy, A notary public, or An election precinct official. Taxact Nonemployee compensation. Taxact   If you are not an employee and the fees for your services from the same payer total $600 or more for the year, you may receive a Form 1099-MISC. Taxact You may need to report your fees as self-employment income. Taxact See Self-Employed Persons , in chapter 1, for a discussion of when you are considered self-employed. Taxact Corporate director. Taxact   Corporate director fees are self-employment income. Taxact Report these payments on Schedule C or Schedule C-EZ (Form 1040). Taxact Personal representatives. Taxact   All personal representatives must include in their gross income fees paid to them from an estate. Taxact If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on Form 1040, line 21. Taxact If you are in the trade or business of being an executor, report these fees as self-employment income on Schedule C or Schedule C-EZ (Form 1040). Taxact The fee is not includible in income if it is waived. Taxact Manager of trade or business for bankruptcy estate. Taxact   Include in your income all payments received from your bankruptcy estate for managing or operating a trade or business that you operated before you filed for bankruptcy. Taxact Report this income on Form 1040, line 21. Taxact Notary public. Taxact    Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). Taxact These payments are not subject to self-employment tax. Taxact See the separate instructions for Schedule SE (Form 1040) for details. Taxact Election precinct official. Taxact    You should receive a Form W-2 showing payments for services performed as an election official or election worker. Taxact Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Taxact Foster care providers. Taxact   Payments you receive from a state, political subdivision, or a qualified foster care placement agency for providing care to qualified foster individuals in your home generally are not included in your income. Taxact However, you must include in your income payments received for the care of more than 5 individuals age 19 or older and certain difficulty-of-care payments. Taxact   A qualified foster individual is a person who: Is living in a foster family home, and Was placed there by: An agency of a state or one of its political subdivisions, or A qualified foster care placement agency. Taxact Difficulty-of-care payments. Taxact   These are additional payments that are designated by the payer as compensation for providing the additional care that is required for physically, mentally, or emotionally handicapped qualified foster individuals. Taxact A state must determine that the additional compensation is needed, and the care for which the payments are made must be provided in your home. Taxact   You must include in your income difficulty-of-care payments received for more than: 10 qualified foster individuals under age 19, or 5 qualified foster individuals age 19 or older. Taxact Maintaining space in home. Taxact   If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income. Taxact Reporting taxable payments. Taxact    If you receive payments that you must include in your income, you are in business as a foster care provider and you are self-employed. Taxact Report the payments on Schedule C or Schedule C-EZ (Form 1040). Taxact See Publication 587, Business Use of Your Home, to help you determine the amount you can deduct for the use of your home. Taxact Found property. Taxact   If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession. Taxact Free tour. Taxact   If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. Taxact Report the fair market value of the tour on Form 1040, line 21, if you are not in the trade or business of organizing tours. Taxact You cannot deduct your expenses in serving as the voluntary leader of the group at the group's request. Taxact If you organize tours as a trade or business, report the tour's value on Schedule C or Schedule C-EZ (Form 1040). Taxact Gambling winnings. Taxact   You must include your gambling winnings in income on Form 1040, line 21. Taxact If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings. Taxact Lotteries and raffles. Taxact   Winnings from lotteries and raffles are gambling winnings. Taxact In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes. Taxact    If you win a state lottery prize payable in installments, see Publication 525 for more information. Taxact Form W-2G. Taxact   You may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any tax taken out of them. Taxact Include the amount from box 1 on Form 1040, line 21. Taxact Include the amount shown in box 4 on Form 1040, line 62, as federal income tax withheld. Taxact Reporting winnings and recordkeeping. Taxact   For more information on reporting gam