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

that income (including the foreign housing de-

If you make this election, you cannot carry back

Deduction for

duction).

or carry over any unused foreign tax to or from

Foreign Income Taxes

If foreign law taxes both earned income and

this year.

some other type of income and the taxes on the

Instead of taking the foreign tax credit, you can

Separate limit. You must figure the limit on a

other type cannot be separated, the denomina-

deduct foreign income taxes as an itemized de-

separate basis with regard to each of the follow-

tor of the fraction is the total amount of income

duction on Schedule A (Form 1040).

ing categories of foreign source income (see the

subject to foreign tax minus deductible ex-

You can deduct only foreign income taxes

instructions for Form 1116).

penses allocable to that other type of income.

paid on income that is subject to U.S. tax. You

•

Passive income.

cannot deduct foreign taxes paid on earnings

If you take a foreign tax credit for tax on

•

you exclude from tax under any of the following.

income you could have excluded under

High withholding tax interest.

your choice to exclude foreign earned

CAUTION

•

Financial services income.

1) Foreign earned income exclusion.

income or your choice to exclude foreign hous-

•

ing costs, one or both of the choices may be

Shipping income.

2) Foreign housing exclusion.

considered revoked.

•

Certain dividends from a domestic interna-

3) Possession exclusion.

tional sales corporation (DISC) or former

4) Extraterritorial income exclusion.

Credit for

DISC.

Foreign Income Taxes

•

Certain distributions from a foreign sales

Example. You are a U.S. citizen and qualify

corporation (FSC) or former FSC.

to exclude your foreign earned income. Your

If you take the foreign tax credit, you may have

•

Any lump-sum distributions from employer

excluded wages in Country X are $70,000 on

to file Form 1116 with Form 1040. Form 1116 is

benefit plans for which a special averaging

which you paid income tax of $10,000. You

used to figure the amount of foreign tax paid or

treatment is used to determine your tax.

received dividends from Country X of $2,000 on

accrued that can be claimed as a foreign tax

which you paid income tax of $600.

credit. Do not include the amount of foreign tax

•

Section 901(j) income.

You can deduct the $600 tax payment be-

paid or accrued as withheld federal income

•

Income resourced by treaty.

cause the dividends relating to it are subject to

taxes on Form 1040, line 59.

U.S. tax. Because you exclude your wages, you

The foreign income tax for which you can

•

All other income not included above (gen-

claim a credit is the amount of legal and actual

cannot deduct the income tax of $10,000.

eral limitation income).

tax liability you pay or accrue during the year.

If you exclude only a part of your wages, see

The amount for which you can claim a credit is

the earlier discussion under Foreign taxes paid

Figuring the limit. In figuring taxable income

not necessarily the amount withheld by the for-

on excluded income.

in each category, you take into account only the

eign country. You cannot take a foreign tax

amount that you must include in income on your

Deduction for

credit for income tax you paid to a foreign coun-

federal tax return. Do not take any excluded

try that would be refunded by the foreign country

Other Foreign Taxes

amount into account.

if you made a claim for refund.

To determine your taxable income in each

You can deduct real property taxes you pay that

Subsidies. If a foreign country returns your

category, deduct expenses and losses that are

are imposed on you by a foreign country. You

foreign tax payments to you in the form of a

definitely related to that income.

take this deduction on Schedule A (Form 1040).

subsidy, you cannot claim a foreign tax credit

Other expenses (such as itemized deduc-

You cannot deduct other foreign taxes, such as

based on these payments. This rule applies to a

tions or the standard deduction) not definitely

personal property taxes, unless you incurred the

subsidy provided by any means that is deter-

related to specific items of income must be ap-

expenses in a trade or business or in the produc-

mined, directly or indirectly, by reference to the

portioned to the foreign income in each category

tion of income.

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

by multiplying them by a fraction. The numerator

On the other hand, you generally can deduct

tax.

(top number) of the fraction is your gross foreign

personal property taxes when you pay them to

Some ways of providing a subsidy are re-

income in the separate limit category. The de-

U.S. possessions. But if you claim the posses-

funds, credits, deductions, payments, or dis-

nominator (bottom number) of the fraction is

sion exclusion, see Publication 570.

charges of obligations. A credit is also not

your gross income from all sources. For this

The deduction for foreign taxes other than

allowed if the subsidy is given to a person re-

purpose, gross income includes amounts that

foreign income taxes is not related to the foreign

lated to you, or persons who participated in a

are otherwise exempt or excluded. You must

tax credit. You can take deductions for these

transaction or a related transaction with you.

use special rules for deducting interest ex-

miscellaneous foreign taxes and also claim the

penses. For more information on allocating and

foreign tax credit for income taxes imposed by a

apportioning your deductions, see Publication

Limit

foreign country.

514.

Exemptions. Do not take the deduction for

The foreign tax credit is limited to the part of your

exemptions for yourself, your spouse, or your

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

How To Report

dependents in figuring taxable income for pur-

income from sources outside the United States

poses of the limit.

compared to your total taxable income. The al-

Deductions

lowable foreign tax credit cannot be more than

Recapture of foreign losses. If you have an

your actual foreign tax liability.

overall foreign loss and the loss reduces your

If you exclude foreign earned income or housing

Exemption from limit. You will not be subject

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

amounts, how you show your deductions on

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

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

your tax return and how you figure the amount

you meet all three of the following requirements.

loss in later years when you have taxable in-

allocable to your excluded income depends on

come from foreign sources. This is done by

whether the expenses are used in figuring ad-

1) Your only foreign source income for the

treating a part of your taxable income from for-

justed gross income (Form 1040, line 34) or are

year is passive income (dividends, inter-

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

itemized deductions.

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

come. This reduces the numerator of the limiting

on a payee statement (such as a Form

If you have deductions used in figuring ad-

fraction and the resulting foreign tax credit limit.

1099 – DIV or 1099 – INT).

justed gross income, enter the total amount for

Foreign tax credit carryback and carryover.

each of these items on the appropriate lines and

2) Your foreign taxes for the year that qualify

The amount of foreign income tax not allowed as

schedules of Form 1040. Generally, you figure

for the credit are not more than $300

a credit because of the limit can be carried back

the amount of a deduction related to the ex-

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

2 years and carried forward 5 years.

cluded income by multiplying the deduction by a

are reported on a payee statement.

More information on figuring the foreign tax

fraction, the numerator of which is your foreign

3) You elect this procedure.

credit can be found in Publication 514.

earned income exclusion and the denominator

Chapter 5 Exemptions, Deductions, and Credits

Page 31

Publication 54 - Tax Guide For U.s. Citizens And U.s. Citizens Abroad - 2001 Page 31

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