Irs Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad

Roth IRAs are generally limited to the lesser of

If your wages are completely excluded, you can-

income from sources outside the United States

$5,000 ($6,000 if 50 or older in 2008) or your

not deduct or take a credit for any of the foreign

compared to your total taxable income. The al-

compensation that is includible in your gross

lowable foreign tax credit cannot be more than

taxes paid on your wages.

income for the tax year. In determining compen-

your actual foreign tax liability.

If only part of your wages is excluded, you

sation for this purpose, do not take into account

cannot deduct or take a credit for the foreign

amounts you exclude under either the foreign

Exemption from limit. You will not be subject

income taxes allocable to the excluded part. You

earned income exclusion or the foreign housing

to this limit and will not have to file Form 1116 if

find the taxes allocable to your excluded wages

exclusion. Do not reduce your compensation by

you meet all three of the following requirements.

by applying a fraction to the foreign taxes paid

the foreign housing deduction.

•

Your only foreign source income for the

on foreign earned income received during the

If you are covered by an employer retirement

year is passive income (dividends, inter-

tax year. The numerator (top number) of the

plan at work, your deduction for your contribu-

est, royalties, etc.) that is reported to you

fraction is your excluded foreign earned income

tions to your traditional IRAs is generally limited

on a payee statement (such as a Form

received during the tax year minus deductible

based on your modified adjusted gross income.

1099-DIV or 1099-INT).

expenses allocable to that income (not including

This is your adjusted gross income figured with-

the foreign housing deduction). The denomina-

•

out taking into account the foreign earned in-

Your foreign taxes for the year that qualify

tor (bottom number) of the fraction is your total

come exclusion, the foreign housing exclusion,

for the credit are not more than $300

foreign earned income received during the tax

or the foreign housing deduction. Other modifi-

($600 if you are filing a joint return) and

year minus all deductible expenses allocable to

cations are also required. For more information

are reported on a payee statement.

that income (including the foreign housing de-

on IRAs, see Publication 590.

•

You elect this procedure.

duction).

If foreign law taxes both earned income and

If you make this election, you cannot carry back

some other type of income and the taxes on the

or carry over any unused foreign tax to or from

Taxes of Foreign

other type cannot be separated, the denomina-

this year.

tor of the fraction is the total amount of income

Countries and

Separate limit. You must figure the limit on a

subject to foreign tax minus deductible ex-

separate basis with regard to “passive category

penses allocable to that other type of income.

U.S. Possessions

income” and “general category income” (see the

If you take a foreign tax credit for tax on

instructions for Form 1116).

income you could have excluded under

You can take either a credit or a deduction for

your choice to exclude foreign earned

income taxes paid to a foreign country or a U.S.

CAUTION

Figuring the limit. In figuring taxable income

income or your choice to exclude foreign hous-

possession. Taken as a deduction, foreign in-

in each category, you take into account only the

ing costs, one or both of the choices may be

come taxes reduce your taxable income. Taken

amount that you must include in income on your

considered revoked.

as a credit, foreign income taxes reduce your tax

federal tax return. Do not take any excluded

liability. You must treat all foreign income taxes

amount into account.

Credit for Foreign

the same way. If you take a credit for any foreign

To determine your taxable income in each

income taxes, you cannot deduct any foreign

Income Taxes

category, deduct expenses and losses that are

income taxes. However, you may be able to

definitely related to that income.

deduct other foreign taxes. See Deduction for

If you take the foreign tax credit, you may have

Other expenses (such as itemized deduc-

Other Foreign Taxes, later.

to file Form 1116 with Form 1040. Form 1116 is

tions or the standard deduction) not definitely

There is no rule to determine whether it is to

related to specific items of income must be ap-

used to figure the amount of foreign tax paid or

your advantage to take a deduction or a credit

portioned to the foreign income in each category

accrued that can be claimed as a foreign tax

for foreign income taxes. In most cases, it is to

by multiplying them by a fraction. The numerator

credit. Do not include the amount of foreign tax

your advantage to take foreign income taxes as

(top number) of the fraction is your gross foreign

paid or accrued as withheld federal income

a tax credit, which you subtract directly from

income in the separate limit category. The de-

taxes on Form 1040, line 62.

your U.S. tax liability, rather than as a deduction

nominator (bottom number) of the fraction is

The foreign income tax for which you can

in figuring taxable income. However, if foreign

your gross income from all sources. For this

claim a credit is the amount of legal and actual

income taxes were imposed at a high rate and

purpose, gross income includes amounts that

tax liability you pay or accrue during the year.

the proportion of foreign income to U.S. income

are otherwise exempt or excluded. You must

The amount for which you can claim a credit is

is small, a lower final tax may result from deduct-

use special rules for deducting interest ex-

not necessarily the amount withheld by the for-

ing the foreign income taxes. In any event, you

penses. For more information on allocating and

eign country. You cannot take a foreign tax

should figure your tax liability both ways and

apportioning your deductions, see Publication

credit for income tax you paid to a foreign coun-

then use the one that is better for you.

514.

try that would be refunded by the foreign country

You can make or change your choice within

if you made a claim for refund.

Exemptions. Do not take the deduction for

10 years from the due date for filing the tax

exemptions for yourself, your spouse, or your

return on which you are entitled to take either the

dependents in figuring taxable income for pur-

Subsidies. If a foreign country returns your

deduction or the credit.

poses of the limit.

foreign tax payments to you in the form of a

Foreign income taxes. These are generally

subsidy, you cannot claim a foreign tax credit

income taxes you pay to any foreign country or

Recapture of foreign losses. If you have an

based on these payments. This rule applies to a

possession of the United States.

overall foreign loss and the loss reduces your

subsidy provided by any means that is deter-

U.S. source income (resulting in a reduction of

mined, directly or indirectly, by reference to the

Foreign income taxes on U.S. return. For-

your U.S. tax liability), you must recapture the

eign income taxes can only be taken as a credit

amount of tax, or to the base used to figure the

loss in later years when you have taxable in-

on Form 1040, line 47, or as an itemized deduc-

tax.

come from foreign sources. This is done by

tion on Schedule A. These amounts cannot be

Some ways of providing a subsidy are re-

treating a part of your taxable income from for-

included as withheld income taxes on Form

funds, credits, deductions, payments, or dis-

eign sources in later years as U.S. source in-

1040, line 62.

charges of obligations. A credit is also not

come. This reduces the numerator of the limiting

allowed if the subsidy is given to a person re-

Foreign taxes paid on excluded income.

fraction and the resulting foreign tax credit limit.

lated to you, or persons who participated in a

You cannot take a credit or deduction for foreign

transaction or a related transaction with you.

income taxes paid on earnings you exclude from

Foreign tax credit carryback and carryover.

tax under any of the following.

The amount of foreign income tax not allowed as

•

a credit because of the limit can be carried back

Limit

Foreign earned income exclusion.

1 year and carried forward 10 years.

•

Foreign housing exclusion.

The foreign tax credit is limited to the part of your

More information on figuring the foreign tax

•

Possession exclusion.

total U.S. tax that is in proportion to your taxable

credit can be found in Publication 514.

Chapter 5 Exemptions, Deductions, and Credits

Page 32

Irs Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad - 2008 Page 32

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