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            Department of the Treasury                        Contents
            Internal Revenue Service
                                                              What’s New   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
                                                              Reminders    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Publication 514
Cat. No. 15018A                                               Introduction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  2
                                                              Choosing To Take Credit or Deduction . . . . . . . . . .                   3
                                                              Why Choose the Credit?            . . . . . . . . . . . . . . . . . . . .  4
Foreign Tax
                                                              Who Can Take the Credit?            . . . . . . . . . . . . . . . . . . .  9
Credit for                                                    What Foreign Taxes Qualify for the Credit?                    . . . . . .  9
                                                              Foreign Taxes for Which You Cannot Take a 
Individuals                                                   Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       13
                                                              How To Figure the Credit          . . . . . . . . . . . . . . . . . . .    18
For use in preparing
                                                              Carryback and Carryover . . . . . . . . . . . . . . . . . . .              37
2023 Returns                                                  How To Claim the Credit . . . . . . . . . . . . . . . . . . . .            41
                                                              How To Get Tax Help       . . . . . . . . . . . . . . . . . . . . . . .    44
                                                              Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  49

                                                              Future Developments
                                                              For  the  latest  information  about  developments  related  to 
                                                              Pub.  514,  such  as  legislation  enacted  after  it  was 
                                                              published, go to IRS.gov/Pub514.

                                                              What’s New
                                                              Final  foreign  tax  credit  regulations.             Final  foreign  tax 
                                                              credit  regulations  were  published  January  4,  2022.  The 
                                                              new regulations made changes to the rules relating to the 
                                                              creditability of foreign taxes under Internal Revenue Code 
                                                              sections 901 and 903, the applicable period for claiming a 
                                                              credit or deduction for foreign taxes, and the new election 
                                                              to claim a provisional credit for contested foreign taxes. A 
                                                              Notice  was  subsequently  released  on  July  21,  2023,  al-
                                                              lowing  taxpayers  to  apply  prior  rules  in  place  of  certain 
                                                              rules provided in the new regulations. The rules described 
                                                              in this Notice were modified in part by a Notice released 
                                                              on  December  11,  2023,  to  address  their  application  to 
                                                              partnerships and their partners and to extend the relief pe-
                                                              riod until further notice. For more information, see Treas-
                                                              ury  Decision  9959,  2022-03  I.R.B.  328,  available  at 
                                                              IRS.gov/irb/2022-03_IRB#TD-9959;                    Notice        2023-55, 
                                                              2023-32      I.R.B.     427,        available         at      IRS.gov/irb/
                                                              2023-32_IRB#NOT-2023-55;                  and       Notice        2023-80, 
                                                              2023-52      I.R.B.     1583,       available         at      IRS.gov/irb/
                                                              2023-52_IRB#NOT-2023-80.

Get forms and other information faster and easier at:
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• IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt) 

Jan 25, 2024

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Unless you qualify for exemption from the foreign tax
credit limit, you claim the credit by filing Form 1116 with
Reminders
your U.S. income tax return.
Schedule K-3. Beginning in 2021, certain information
that was previously reported on Schedule K-1 (Form Comments and suggestions. We welcome your com-
1065), Schedule K-1 (Form 1120-S), and Schedule K-1 ments about this publication and suggestions for future
(Form 8865) is now reported on Schedule K-3 (Form editions.
1065), Schedule K-3 (Form 1120-S), and Schedule K-3 You can send us comments through IRS.gov/
(Form 8865), respectively. In 2023, certain partnerships FormComments. Or, you can write to the Internal Revenue
and S corporations are excepted from providing Sched- Service, Tax Forms and Publications, 1111 Constitution
ule K-3 to partners and shareholders that might otherwise Ave. NW, IR-6526, Washington, DC 20224.
benefit from Schedule K-3 information in claiming a for- Although we can’t respond individually to each com-
eign tax credit. However, you have the right to request the ment received, we do appreciate your feedback and will
Schedule K-3 from the partnership or S corporation to ob- consider your comments and suggestions as we revise
tain this information. See the partnership and S corpora- our tax forms, instructions, and publications. Don’t send
tion instructions for Schedules K-2 and K-3 (Form 1065 or tax questions, tax returns, or payments to the above ad-
1120-S) and the partner and shareholder instructions for dress.
Schedule K-3 (Form 1065 or 1120-S), available at Getting answers to your tax questions. If you have
IRS.gov/Form1065 and IRS.gov/Form1120S, respectively, a tax question not answered by this publication or the How
for further information. To Get Tax Help section at the end of this publication, go
Alternative minimum tax. In addition to your regular in- to the IRS Interactive Tax Assistant page at IRS.gov/
come tax, you may be liable for the alternative minimum Help/ITA where you can find topics by using the search
tax. A foreign tax credit may be allowed in figuring this tax. feature or viewing the categories listed.
See the Instructions for Form 6251 for a discussion of the Getting tax forms, instructions, and publications.
alternative minimum tax foreign tax credit. Go to IRS.gov/Forms to download current and prior-year
Change of address. If your address changes from the forms, instructions, and publications.
address shown on your last return, use Form 8822, Ordering tax forms, instructions, and publications.
Change of Address, to notify the IRS. Go to IRS.gov/OrderForms to order current forms, instruc-
Photographs of missing children. The IRS is a proud tions, and publications; call 800-829-3676 to order
partner with the National Center for Missing & Exploited prior-year forms and instructions. The IRS will process
Children® (NCMEC). Photographs of missing children se- your order for forms and publications as soon as possible.
lected by the Center may appear in this publication on pa- Don’t resubmit requests you’ve already sent us. You can
ges that would otherwise be blank. You can help bring get forms and publications faster online.
these children home by looking at the photographs and
calling 1-800-THE-LOST (1-800-843-5678) if you recog- Useful Items
nize a child. You may want to see:

Publication
54
Introduction 54 Tax Guide for U.S. Citizens and Resident Aliens
Abroad
If you paid or accrued income taxes to a foreign country 519 519 U.S. Tax Guide for Aliens
on foreign source income and are subject to U.S. tax on
your foreign source income, you may be able to take either 570 570 Tax Guide for Individuals With Income From
a credit or an itemized deduction for those taxes. Taken as U.S. Territories
a deduction, foreign income taxes reduce your U.S. taxa-
ble income. Taken as a credit, foreign income taxes re- Form (and Instructions)
duce your U.S. tax liability. 1116 1116 Foreign Tax Credit
In most cases, it is to your advantage to take foreign in-
come taxes as a tax credit. The major scope of this publi- Schedule B (Form 1116) Schedule B (Form 1116) Foreign Tax Carryover
cation is the foreign tax credit. Reconciliation Schedule
This publication discusses: Schedule C (Form 1116) Schedule C (Form 1116) Foreign Tax
• How to choose to take the credit or the deduction, Redeterminations
• Who can take the credit, Form 7204 Form 7204 Consent To Extend the Time To Assess
• What foreign taxes qualify for the credit, Tax Related to Contested Foreign Income
Taxes—Provisional Foreign Tax Credit
• How to figure the credit, and Agreement
• How to carry over unused foreign taxes to other tax See How To Get Tax Help at the end of this publication for
years. additional information.

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it or recognize its government and that government is
not otherwise eligible to purchase defense articles or
Choosing To Take Credit or services under the Arms Export Control Act.
Deduction • You paid withholding tax on dividends from foreign
corporations whose stock you did not hold for the re-
You can choose whether to take the amount of any quali- quired period of time.
fied foreign taxes paid or accrued during the year as a for-
• You paid withholding tax on income or gain (other than
eign tax credit or as an itemized deduction. You can
dividends) from property you did not hold for the re-
change your choice for each year's taxes.
quired period of time.
To choose the foreign tax credit, in most cases, you You paid withholding tax on income or gain to the ex-
•
must complete Form 1116 and attach it to your U.S. tax re- tent you had to make related payments on positions in
turn. However, you may qualify for the exception that al- substantially similar or related property.
lows you to claim the foreign tax credit without using Form
1116. See How To Figure the Credit, later. To claim the • You participated in or cooperated with an international
taxes as an itemized deduction, use Schedule A (Form boycott.
1040). • You paid taxes in connection with the purchase or sale
Figure your tax both ways—claiming the credit of oil or gas.
TIP and claiming the deduction. Then, fill out your re- • You paid or accrued taxes on income or gain in con-
turn the way that benefits you more. See Why nection with a covered asset acquisition. Covered as-
Choose the Credit, later. set acquisitions include certain acquisitions that result
in a stepped-up basis for U.S. tax purposes. For more
information, see Internal Revenue Code section
Choice Applies to All Qualified
901(m) and the regulations under that section, includ-
Foreign Taxes ing Treasury Decision 9895, 2020-15 I.R.B. 565, avail-
able at IRS.gov/irb/2020-15_IRB#TD-9895.
As a general rule, you must choose each year to take ei-
ther a credit or a deduction for all qualified foreign taxes For more information on these items, see Taxes for
paid or accrued in that year. Which You Can Only Take an Itemized Deduction, later,
under Foreign Taxes for Which You Cannot Take a Credit.
If you choose to take a credit for any qualified foreign
taxes in a year, you must take the credit for all qualified for- Foreign taxes that are not income taxes. In most ca-
eign taxes paid or accrued in that year. You cannot deduct ses, only foreign income taxes qualify for the foreign tax
any of them. Conversely, if you choose to deduct qualified credit. Other taxes, such as foreign real and personal
foreign taxes, you must deduct all of them. You cannot property taxes, do not qualify. But you may be able to de-
take a credit for any of them. duct these other taxes even if you claim the foreign tax
See What Foreign Taxes Qualify for the Credit, later, for credit for foreign income taxes if they are expenses incur-
the meaning of qualified foreign taxes. red in a trade or business or in the production of income.
There are exceptions to this general rule, which are de- Final foreign tax credit regulations issued on Jan-
scribed next. ! uary 4, 2022, revised the creditability require-
CAUTION ments under Regulations sections 1.901-2 and
Exception for taxes that relate to a prior year in 1.903-1, applicable for foreign taxes paid or accrued in tax
which you deducted foreign income taxes. If you are years beginning on or after December 28, 2021. A Notice
an accrual basis taxpayer (or you elected to claim your for- was subsequently released on July 21, 2023, allowing tax-
eign tax credit on an accrual basis, see Credit for Taxes payers to apply prior rules in place of certain rules provi-
Paid or Accrued, later) that has chosen to claim a credit ded in the new regulations. The rules described in this No-
for foreign taxes this year, and you paid additional quali- tice were modified in part by a Notice released on
fied foreign tax this year that relates to a prior year in December 11, 2023, to address their application to part-
which you chose to deduct foreign taxes, then you may nerships and their partners and to extend the relief period
claim a deduction for the additional tax paid (you may not until further notice. For more information, see Treasury De-
claim a credit for such taxes). See Regulations section cision 9959, 2022-03 I.R.B. 328, available at IRS.gov/irb/
1.901-1(c)(3). 2022-03_IRB#TD-9959; Notice 2023-55, 2023-32 I.R.B.
427, available at IRS.gov/irb/2023-32_IRB#NOT-2023-55;
Exceptions for foreign taxes not allowed as a credit. and Notice 2023-80, 2023-52 I.R.B. 1583, available at
Even if you claim a credit for other foreign taxes, you can IRS.gov/irb/2023-52_IRB#NOT-2023-80.
deduct any foreign tax that is not allowed as a credit if you
did any of the following. Carrybacks and carryovers. There is a limit on the
• You paid the tax to a country for which a credit is not credit you can claim in a tax year. If your qualified foreign
allowed because it provides support for acts of inter- taxes exceed the credit limit, you may be able to carry
national terrorism, or because the United States does over or carry back the excess to another tax year. If you
not have or does not conduct diplomatic relations with deduct qualified foreign taxes in a tax year, you cannot

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take a credit for qualified foreign taxes that are carried
back or carried over to that tax year from another tax year.
That is because you cannot take both a deduction and a Why Choose the Credit?
credit for qualified foreign taxes in the same tax year.
For more information on the limit, see How To Figure The foreign tax credit is intended to relieve you of a double
the Credit, later. For more information on carrybacks and tax burden when your foreign source income is taxed by
carryovers, see Carryback and Carryover, later. both the United States and the foreign country. In most ca-
ses, if the foreign tax rate is higher than the U.S. rate,
there will be no U.S. tax on the foreign income. If the for-
Making or Changing Your Choice eign tax rate is lower than the U.S. rate, U.S. tax on the for-
eign income will be limited to the difference between the
You can choose to claim a credit or to change from claim-
rates. The foreign tax credit can only reduce U.S. taxes on
ing a deduction to claiming a credit at any time during the
foreign source income; it cannot reduce U.S. taxes on U.S.
period within 10 years from the regular due date for filing
source income.
the return (without regard to any extension of time to file)
for the tax year in which the taxes were actually paid or ac- Although no one rule covers all situations, in most ca-
crued. You can also choose to claim a deduction or to ses, it is better to take a credit for qualified foreign taxes
change from claiming a credit to claiming a deduction at than to deduct them as an itemized deduction. The follow-
any time during the period within 3 years from the time you ing bullets explain why the credit may provide a greater tax
filed the return or 2 years from when you paid the tax, benefit.
whichever is later. This 10-year or 3-year (or 2-year) pe-
• A credit reduces your actual U.S. income tax on a dol-
riod may be extended by an agreement. You make or lar-for-dollar basis, while a deduction reduces only
change your choice on your tax return (or on an amended
your income subject to tax.
return) for the year your choice is to be effective.
• You can choose to take the foreign tax credit even if
Example. You paid foreign taxes for the last 13 years you do not itemize your deductions. You are then al-
and chose to deduct them on your U.S. income tax re- lowed the standard deduction in addition to the credit.
turns. In February 2023, you file an amended return for tax
year 2012, choosing to take a credit for your 2012 foreign • If you choose to take the foreign tax credit, and the
taxes paid or accrued exceed the credit limit for the tax
taxes because you now realize that the credit is more ad-
year, you may be able to carry over or carry back the
vantageous than the deduction for that year. This choice is
excess to another tax year. (See Limit on the Credit
timely because it was made within 10 years of the unex-
under How To Figure the Credit, later.)
tended due date of your tax return for 2012.
Because there is a limit on the credit for your 2012 for- Example 1. For 2023, you and your spouse have ad-
eign tax, you have unused 2012 foreign taxes. Ordinarily, justed gross income of $80,300, including $20,000 of divi-
you first carry back unused foreign taxes arising in 2012 dend income from foreign sources. None of the dividends
to, and claim them as a credit in, the preceding tax year. If are qualified dividends. You file a joint return. You had to
you are unable to claim all of them in that year, you carry pay $1,900 in foreign income taxes on the dividend in-
them forward to the 10 years following the year in which come. If you take the foreign taxes as an itemized deduc-
they arose. tion, your total itemized deductions are $15,000. Your tax-
Because you originally chose to deduct your foreign able income then is $65,300 and your tax is $7,399.
taxes and the 10-year period for changing the choice for If you take the credit instead, your itemized deductions
2011 has passed, you cannot change your choice and are only $13,100. Your taxable income then is $67,200
carry the unused 2012 foreign taxes back to tax year and your tax before the credit is $7,627. After the credit,
2011. however, your tax is only $5,727. Therefore, your tax is
Because the 10-year period for changing the choice $1,672 lower ($7,399 − $5,727) by taking the credit.
has not passed for your 2013 through 2022 income tax re-
turns, you can still choose to claim the credit for those Example 2. In 2023, you receive investment income of
years and carry forward any unused 2012 foreign taxes. $5,000 from a foreign country, which imposes a tax of
However, you must reduce the unused 2012 foreign taxes $1,500 on that income. You report on your U.S. return this
that you carry forward by the amount that would have income as well as $56,000 of U.S. source wages and an
been allowed as a carryback if you had timely carried allowable $40,000 partnership loss from a U.S. partner-
back the foreign tax to tax year 2011. ship. Your share of the partnership's gross income is
You cannot take a credit or a deduction for foreign $25,000 and your share of its expenses is $65,000. You
are single and have other itemized deductions of $15,850.
! taxes paid on income you exclude under the for- If you deduct the foreign tax on your U.S. return, your taxa-
CAUTION eign earned income exclusion or the foreign hous-
ing exclusion. See Foreign Earned Income and Housing ble income is $3,650 ($5,000 + $56,000 − $40,000 −
Exclusions under Foreign Taxes for Which You Cannot $1,500 − $15,850) and your tax is $368.
Take a Credit, later. If you take the credit instead, your taxable income is
$5,150 ($5,000 + $56,000 − $40,000 − $15,850) and your
tax before the credit is $518. You can take a credit of only
$410 because of limits discussed in Limit on the Credit,

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later. Your tax after the credit is $108 ($518 − $410), which claim a deduction for any part of the previously accrued
is $260 ($368 – $108) less than if you deduct the foreign taxes.
tax.
Credit based on taxes paid in earlier year. If, in ear-
If you choose the credit, you will have unused foreign
lier years, you took the credit based on taxes paid, and
taxes of $1,090 ($1,500 − $410). When deciding whether
this year you choose to take the credit based on taxes ac-
to take the credit or the deduction, you should also con-
crued, you may be able to take the credit this year for
sider whether you can benefit from a carryback or carry-
taxes from more than 1 year. See Regulations section
over of that unused foreign tax.
1.905-1(e)(3).

Credit for Taxes Paid or Accrued Example. Last year, you took the credit based on
taxes paid. This year, you chose to take the credit based
You can claim the credit for a qualified foreign tax in the on taxes accrued. During the year, you paid foreign in-
tax year in which you pay it or accrue it, depending on come taxes owed for last year. You also accrued foreign
your method of accounting. “Tax year” refers to the tax income taxes for this year that you did not pay by the end
year for which your U.S. return is filed, not the tax year for of the year. You can base the credit on your return for this
which your foreign return is filed. year on both last year's taxes that you paid and this year's
taxes that you accrued.
Accrual method of accounting. If you use an accrual
method of accounting, you can claim the credit only in the Contesting your foreign tax liability. In general, you
year in which you accrue the tax. You are using an accrual cannot claim a credit for a contested foreign income tax li-
method of accounting if you report income when you earn ability until the contest is resolved and the amount of the
it, rather than when you receive it, and you deduct your ex- liability is finally determined.
penses when you incur them, rather than when you pay If you use the cash method of accounting, you cannot
them. claim a credit for any portion of a tax liability you are con-
In most cases, foreign taxes accrue when all the events testing, even if you paid any portion of the liability to the
have taken place that fix the amount of the tax and your li- foreign country. You can claim a credit once the contest is
ability to pay it. Generally, this occurs on the last day of the resolved and your foreign tax liability is determined. The
foreign tax year for which your foreign return is filed. tax is considered paid in the tax year in which the payment
You may have to post a bond. If you claim a credit was made. See Regulations section 1.905-1(c)(2). Alter-
for taxes accrued but not paid, you may have to post an in- natively, you may elect to claim a provisional credit for
come tax bond to guarantee your payment of any tax due contested taxes, as discussed later.
in the event the amount of foreign tax paid differs from the If you chose to take the credit in the year the foreign
amount claimed. taxes accrue, you cannot claim a credit for any portion of a
The IRS can request this bond at any time without re- tax liability you are contesting, even if you paid any portion
gard to the time limit on tax assessment, discussed later of the liability to the foreign country. You can claim a credit
under Carryback and Carryover. once the contest is resolved and your foreign tax liability is
determined and paid. The tax is considered to accrue in
Cash method of accounting. If you use the cash the foreign tax year to which the contested tax liability is
method of accounting, you can claim the credit only in the related (“relation-back year”). See Regulations section
year in which you pay the tax. You are using the cash 1.905-1(d)(3). Alternatively, you can elect to claim a provi-
method of accounting if you report income in the year you sional credit for contested taxes. See the next paragraph
actually or constructively receive it, and deduct expenses for details.
in the year you pay them. You can choose to take the
credit in the year you accrue it. See Choosing to take Election to claim a provisional credit for contested
credit in the year taxes accrue next. taxes. If you use the cash method of accounting, you may
elect to take a provisional credit for any portion of a con-
Choosing to take credit in the year taxes accrue. tested foreign income tax liability that you have paid to the
Even if you use the cash method of accounting, you can foreign country in the year that you pay the tax. If you are
choose to take a credit for foreign taxes in the year they an accrual basis taxpayer or if you elected to claim your
accrue. You make the choice by checking the “Accrued” foreign tax credit on an accrual basis, you may elect to
box in Part II of Form 1116 on a timely filed original return. take a credit for any portion of a contested foreign income
You cannot make this choice on an amended return. Once tax liability that you have paid to the foreign country in the
you make that choice, you must follow it in all later years relation-back year. To make the election, you must file
and take a credit for foreign taxes in the year they accrue. Form 7204 with your return. In addition, for each subse-
In addition, the choice to take the credit when foreign quent tax year up to and including the tax year in which
taxes accrue applies to all foreign taxes qualifying for the the contest is resolved, you must annually file Schedule C
credit. You cannot take a credit for some foreign taxes (Form 1116). If you receive from the foreign country a re-
when paid and take a credit for others when accrued. fund of any portion of the tax liability you contested and
If you make the choice to take the credit when foreign paid, you may have to adjust your credit, as discussed
taxes accrue and pay them in a later year, you cannot later under Foreign Tax Redetermination.

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Foreign Currency and Exchange discussed next. If your tax was withheld in foreign cur-
rency, use the rate of exchange in effect for the date on
Rates which the tax was withheld. If you make foreign estimated
U.S. income tax is imposed on income expressed in U.S. tax payments, you use the rate of exchange in effect for
dollars, while in most cases, the foreign tax is imposed on the date on which you made the estimated tax payment.
income expressed in foreign currency. Therefore, fluctua- The exchange rate rules discussed here apply even if
tions in the value of the foreign currency relative to the the foreign taxes are paid or accrued with respect to a for-
U.S. dollar may affect the foreign tax credit. eign tax credit splitting event (discussed later).
Exception. If you claim the credit for foreign taxes on
Translating foreign currency into U.S. dollars. If you an accrual basis, in most cases, you must use the average
receive all or part of your income or pay some or all of your exchange rate for the tax year to which the taxes relate.
expenses in foreign currency, you must translate the for- This rule applies to accrued taxes only under the following
eign currency into U.S. dollars. How and when you do this conditions.
depends on your functional currency. In most cases, your
functional currency is the U.S. dollar unless you are re- 1. The foreign taxes are paid on or after the first day of
quired to use the currency of a foreign country. the tax year to which they relate.
You must make all federal income tax determinations in 2. The foreign taxes are paid not later than 24 months af-
your functional currency. The U.S. dollar is the functional ter the close of the tax year to which they relate.
currency for all taxpayers except some qualified business
units (QBUs). A QBU is a separate and clearly identified 3. The foreign tax liability is not denominated in an infla-
unit of a trade or business that maintains separate books tionary currency (defined in the Form 1116 instruc-
and records. Unless you are self-employed, your func- tions).
tional currency is the U.S. dollar.
For all other foreign taxes, you should use the ex-
Even if you are self-employed and have a QBU, your
change rate in effect on the date you paid them.
functional currency is the U.S. dollar if any of the following
apply. Election to use exchange rate on date paid. If you
have accrued foreign taxes that you are otherwise re-
• You conduct the business primarily in dollars.
quired to convert using the average exchange rate, you
• The principal place of business is located in the Uni- may elect to use the exchange rate in effect on the date
ted States. the foreign taxes are paid if the taxes are denominated in
• You choose to or are required to use the dollar as your a nonfunctional foreign currency. If any of the accrued
functional currency. taxes are unpaid, you must translate them into U.S. dollars
using the exchange rate on the last day of the U.S. tax
• The business books and records are not kept in the year to which those taxes relate. You may make the elec-
currency of the economic environment in which a sig- tion for all nonfunctional currency foreign income taxes or
nificant part of the business activities is conducted. only those nonfunctional currency foreign income taxes
If your functional currency is the U.S. dollar, you must that are attributable to QBUs with a U.S. dollar functional
immediately translate into dollars all items of income, ex- currency. Once made, the election applies to the tax year
pense, etc., that you receive, pay, or accrue in a foreign for which made and all subsequent tax years unless re-
currency and that will affect computation of your income voked with the consent of the IRS. It must be made by the
tax. If there is more than one exchange rate, use the one due date (including extensions) for filing the tax return for
that most properly reflects your income. In most cases, the first tax year to which the election applies. Make the
you can get exchange rates from banks and U.S. embas- election by attaching a statement to the applicable tax re-
sies. turn. The statement must identify whether the election is
If your functional currency is not the U.S. dollar, make made for all foreign taxes or only for foreign taxes attribut-
all income tax determinations in your functional currency. able to QBUs with a U.S. dollar functional currency.
At the end of the year, translate the results, such as in-
come or loss, into U.S. dollars to report on your income Foreign Tax Redetermination
tax return.
For more information, write to: A foreign tax redetermination is a change in your foreign
tax liability, and certain other changes that may affect your
U.S. income tax liability, including by reason of a change in
the amount of your foreign tax credit claimed. See Regula-
Internal Revenue Service tions section 1.905-3(a) for more information.
International Section
If a foreign tax redetermination occurs, a redetermina-
Philadelphia, PA 19255-0725
tion of your U.S. tax liability is required if any of the follow-
ing conditions apply.
Rate of exchange for foreign taxes paid. Use the rate 1. The accrued taxes, when paid, differ from the
of exchange in effect on the date you paid the foreign amounts claimed as a credit.
taxes to the foreign country unless you meet the exception

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2. The accrued taxes you claimed as a credit in a tax turn, or other amended return, to notify the IRS so that
year are not paid within 24 months after the end of your U.S. tax for the year or years affected can be redeter-
that tax year. mined. Complete and attach to Form 1040-X (or other
If this applies to you, you must reduce the credit amended return) a revised Form 1116 for the tax year(s)
previously claimed by the amount of the unpaid taxes. affected and a statement that contains information suffi-
You will not be allowed a credit for the unpaid taxes cient for the IRS to redetermine your U.S. tax liability. See
until you pay them. When you pay the accrued taxes, Contents of statement, later. In some cases, you may not
a new foreign tax redetermination occurs and you have to file Form 1040-X or attach Form 1116.
must translate the taxes into U.S. dollars using the ex-
change rate as of the date they were paid. The foreign In addition to filing an amended return with Form 1116
tax credit is allowed for the year to which the foreign and attached statement for your tax year(s) for which your
tax relates. See Rate of exchange for foreign taxes U.S. tax liability is changed as a result of the foreign tax re-
paid, earlier, under Foreign Currency and Exchange determination, you must file Schedule C (Form 1116) with
Rates. your current year tax return summarizing the foreign tax
redeterminations that occurred in the current year that re-
3. The foreign taxes you paid are refunded in whole or in late to prior tax years. You must file Schedule C (Form
part. 1116) for each applicable separate category of income.
4. You change your election and claim a credit for foreign
No change in U.S. tax liability. If a foreign tax redeter-
income taxes that you previously deducted, or you
mination doesn't change the amount of U.S. tax due for
change your election and claim a deduction for for-
any tax year including in instances where the additional
eign income taxes that you previously credited.
U.S. tax due by reason of the redetermination is elimina-
5. There is a change in foreign tax liability that affects the ted by a carryback or carryover of an unused foreign tax,
amount of distributions or inclusions under section you don't need to file an amended return and may instead
951, 951A, or 1293, or affects the application of the notify the IRS of the redetermination by attaching for each
high-tax exception described in section 954(b)(4). applicable separate category of income a completed
Schedule C (Form 1116) to the original return for your tax
6. For taxes taken into account when accrued but trans-
year in which the foreign tax redetermination occurs. See
lated into dollars on the date of payment, the dollar
the Instructions for Schedule C (Form 1116) for additional
value of the accrued tax differs from the dollar value of
information.
the tax paid because of fluctuations in the exchange
rate between the date of accrual and the date of pay- You are not required to attach Form 1116 for a tax year
ment. However, no redetermination is required if the affected by a redetermination if you meet both of the fol-
change in foreign tax liability for each foreign country lowing criteria.
is solely attributable to exchange rate fluctuations and
is less than the smaller of: 1. The amount of your creditable taxes paid or accrued
during the tax year is not more than $300 ($600 if
a. $10,000, or married filing a joint return) as a result of the foreign
b. 2% of the total dollar amount of the foreign tax ini- tax redetermination.
tially accrued for that foreign country for the U.S. 2. You meet the requirements listed under Exemption
tax year. from foreign tax credit limit under How To Figure the
In this case, you must adjust your U.S. tax in the tax Credit, later.
year in which the accrued foreign taxes are paid.
There are other exceptions to this requirement. They
Generally, you must take into account foreign tax rede- are discussed later under Due date of notification to IRS.
terminations in the tax year to which the tax relates.
Contents of statement. The statement must include all
Note. If you use the cash method of accounting and of the following.
choose to take credits for taxes in the year they are paid
• Your name, address, and taxpayer identification num-
(see Credit for Taxes Paid or Accrued, earlier), and you
ber.
pay additional foreign income taxes that relate to a prior
tax year, that is not a foreign tax redetermination. You re- • The tax year or years that are affected by the foreign
port those additional foreign income taxes in the tax year tax redetermination.
in which you paid the additional taxes. • The date or dates the foreign taxes were accrued, if
applicable.
Notice to the IRS of Redetermination
• The date or dates the foreign taxes were paid.
Change in U.S. tax liability. If any of the above foreign • The amount of foreign taxes paid or accrued on each
tax redeterminations occur after you file your tax return, date (in foreign currency) and the exchange rate used
and the foreign tax redeterminations change the amount to translate each amount.
of U.S. tax due for any tax year, you must generally file
Form 1040-X, Amended U.S. Individual Income Tax Re- • Information sufficient to determine any interest due
from or owing to you, including the amount of any

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interest paid to you by the foreign government, and the Failure-to-notify penalty. If you fail to notify the IRS of a
dates received. foreign tax redetermination and cannot show reasonable
In the case of any foreign taxes that were not paid be- cause for the failure, you may have to pay a penalty.
fore the date 24 months after the close of the tax year to For each month, or part of a month, that the failure con-
which those taxes relate, you must provide the amount of tinues, you pay a penalty of 5% of the tax due resulting
those taxes in foreign currency and the exchange rate that from a redetermination of your U.S. tax. This penalty can-
was used to translate that amount when originally claimed not be more than 25% of the tax due.
as a credit.
Foreign tax refund. If you receive a foreign tax refund
If any foreign tax was refunded in whole or in part, you
without interest from the foreign government, you will not
must provide the date and amount (in foreign currency) of
have to pay interest on the amount of tax due resulting
each refund, the exchange rate that was used to translate
from the adjustment to your U.S. tax for the time before the
each amount when originally claimed as a credit, and the
date of the refund.
exchange rate for the date the refund was received (for
However, if you receive a foreign tax refund with inter-
purposes of figuring foreign currency gain or loss under In-
est, you must pay interest to the IRS up to the amount of
ternal Revenue Code section 988).
the interest paid to you by the foreign government. The in-
Due date of notification to IRS. If you pay less foreign terest you must pay cannot be more than the interest you
tax than you originally claimed a credit for, in most cases, would have had to pay on taxes that were unpaid for any
you must file a notification by the due date (with exten- other reason for the same period. Interest is also owed
sions) of your original return for your tax year in which the from the time you receive a refund until you pay the addi-
foreign tax redetermination occurred. There is no limit on tional tax due.
the time the IRS has to redetermine and assess the cor- Foreign tax imposed on foreign refund. If your for-
rect U.S. tax due. If you pay more foreign tax than you eign tax refund is taxed by the foreign country, you cannot
originally claimed a credit for, you have 10 years to file a take a separate credit or deduction for this additional for-
claim for refund of U.S. taxes. See Time Limit on Refund eign tax. However, when you refigure the foreign tax credit
Claims, later. taken for the original foreign tax, reduce the amount of the
Exceptions to this due date are explained in the next refund by the foreign tax paid on the refund.
two paragraphs.
Example. You paid a foreign income tax of $3,000 in
Multiple redeterminations of U.S. tax liability for
2021, and received a foreign tax refund of $500 in 2023 on
same tax year. Where more than one foreign tax redeter-
which a foreign tax of $100 was imposed. When you refig-
mination requires a redetermination of U.S. tax liability for
ure your credit for 2021, you must reduce the $3,000 you
the same tax year and those redeterminations occur in the
paid by $400.
same tax year or within 2 consecutive tax years, you can
file for that tax year one notification (Form 1040-X with a
Form 1116 and the required statement) that reflects all Time Limit on Refund Claims

those tax redeterminations. If you choose to file one notifi- You have 10 years to file a claim for refund of U.S. tax if
cation for multiple redeterminations which, taken together, you find that you paid or accrued a larger foreign tax than
increase your U.S. tax liability for the tax year, the due you claimed a credit for. The 10-year period begins the
date for that notification is the due date (with extensions) day after the regular due date for filing the return (without
for the year in which the first foreign tax redetermination extensions) for the year in which the taxes were actually
that increased your U.S. tax liability occurred. On the other paid or accrued.
hand, if multiple redeterminations, taken together, de-
crease your U.S. tax liability for the tax year, the due date You have 10 years to file your claim regardless of
for that notification is the applicable due date for filing a whether you claim the credit for taxes paid or taxes ac-
claim for credit or refund for an overpayment of U.S. tax. crued. The 10-year period applies to claims for refund or
However, foreign tax redeterminations with respect to the credit based on:
tax year for which a redetermination of U.S. tax liability is
required may occur after the due date for providing that 1. Fixing math errors in figuring qualified foreign taxes,
notification. In this situation, you may have to file more 2. Reporting qualified foreign taxes not originally repor-
than one Form 1040-X for that tax year. ted on the return, or
Additional U.S. tax due eliminated by foreign tax 3. Any other change in the size of the credit (including
credit carryback or carryover. If a foreign tax redeter- one caused by correcting the foreign tax credit limit).
mination requires a redetermination of U.S. tax liability that
would otherwise result in an additional amount of U.S. tax The special 10-year period also applies to claiming a
due, but the additional tax is eliminated by a carryback or credit or to changing from claiming a deduction to claiming
carryover of an unused foreign tax, you do not have to a credit for foreign taxes. See Making or Changing Your
amend your tax return for the year affected by the redeter- Choice, earlier, under Choosing To Take Credit or Deduc-
mination. Instead, you can notify the IRS by attaching tion.
Schedule C (Form 1116) to the original return for the tax
year in which the foreign tax redetermination occurred.

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4. The tax must be an income tax (or a tax in lieu of an
income tax).
Who Can Take the Credit?
Certain foreign taxes do not qualify for the credit
U.S. citizens, resident aliens, and nonresident aliens who ! even if the four tests are met. See Foreign Taxes
paid foreign income tax and are subject to U.S. tax on for- CAUTION for Which You Cannot Take a Credit, later.
eign source income may be able to take a foreign tax
credit.
Tax Must Be Imposed on You

U.S. Citizens You can claim a credit only for foreign taxes that are im-
posed on you by a foreign country or U.S. possession. For
If you are a U.S. citizen, you are taxed by the United example, a tax that is deducted from your wages is con-
States on your worldwide income wherever you live. You sidered to be imposed on you. You cannot shift the right to
are normally entitled to take a credit for foreign taxes you claim the credit by contract or other means.
pay or accrue.
Foreign country. A foreign country includes any foreign
Resident Aliens state and its political subdivisions. Income, war profits,
and excess profits taxes paid or accrued to a foreign city
If you are a resident alien of the United States, you can or province qualify for the foreign tax credit.
take a credit for foreign taxes subject to the same general
rules as U.S. citizens. If you are a bona fide resident of Pu- U.S. possessions. For foreign tax credit purposes, all
erto Rico for the entire tax year, you also fall under the qualified taxes paid to U.S. possessions are considered
same rules. foreign taxes. For this purpose, U.S. possessions include
Puerto Rico, the U.S. Virgin Islands, Guam, the Northern
Usually, you can take a credit only for those foreign Mariana Islands, and American Samoa.
taxes imposed on income you actually or constructively When the term “foreign country” is used in this publica-
received while you had resident alien status. tion, it includes U.S. possessions unless otherwise stated.
For information on alien status, see Pub. 519, U.S. Tax
Guide for Aliens. You Must Have Paid or Accrued the
Tax
Nonresident Aliens
In most cases, you can claim the credit only if you paid or
If you are a nonresident alien, you cannot take the credit in accrued the foreign tax to a foreign country or U.S. pos-
most cases. However, you may be able to take the credit if session. However, the paragraphs that follow describe
you meet either of the following conditions. some instances in which you can claim the credit even if
• You were a bona fide resident of Puerto Rico during you did not directly pay or accrue the tax yourself.
your entire tax year.
Joint return. If you file a joint return, you can claim the
• You pay or accrue tax to a foreign country or U.S. pos- credit based on the total foreign income taxes paid or ac-
session on income from foreign sources that is effec- crued by you and your spouse.
tively connected with a trade or business in the United
States. But if you must pay tax to a foreign country or Combined income. If foreign tax is imposed on the com-
U.S. possession on income from U.S. sources only bined income of two or more persons (for example, spou-
because you are a citizen or a resident of that country ses), the tax is allocated among, and considered paid by,
or U.S. possession, do not use that tax in figuring the these persons on a pro rata basis in proportion to each
amount of your credit. person's portion of the combined income, as determined
For information on alien status and effectively connected under foreign law and Regulations section 1.901-2(f)(3)
income, see Pub. 519. (iii). Combined income with respect to each foreign tax
that is imposed on a combined basis (and combined in-
come subject to tax exemption or preferential tax rates) is
figured separately, and the tax on that combined income is
What Foreign Taxes Qualify for allocated separately.

the Credit? Example. You and your spouse reside in Country X,
which imposes income tax on your combined incomes.
In most cases, the following four tests must be met for any Both of you use the “u” as your functional currency. Coun-
foreign tax to qualify for the credit. try X apportions tax based on income. You had income of
1. The tax must be imposed on you. 30,000u and your spouse had income of 20,000u. Your fil-
ing status on your U.S. income tax return is married filing
2. You must have paid or accrued the tax. separately. You can claim only 60% (30,000u/50,000u) of
3. The tax must be the legal and actual foreign tax liabil-
ity.

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the foreign taxes imposed on your income on your U.S in- income and section 956 amount, and your GILTI inclu-
come tax return. Your spouse can claim only 40% sion.
(20,000u/50,000u).
• The amount of your U.S. tax liability with respect to
Partner or S corporation shareholder. If you are a amounts subject to section 962.
partner in a partnership, or a shareholder in an S corpora- See Internal Revenue Code sections 951(a), 951A, 960,
tion, you can claim the credit based on your proportionate and 962 and Regulations section 1.962-2 for more infor-
share of the foreign income taxes paid or accrued by the mation.
partnership or the S corporation. These amounts will be
If you are a shareholder in a CFC who has made a
shown on the Schedule K-3 you receive from the partner-
TIP section 962 election and you figured a foreign tax
ship or S corporation. However, if you are a partner in a
credit, see the instructions for Form 1040 or
partnership or a shareholder in an S corporation that in
1040-SR, line 16.
turn owns stock in a foreign corporation, you cannot claim
a credit for your share of foreign taxes paid by the foreign Controlled foreign corporation (CFC). A CFC is a
corporation unless you make a section 962 election, dis- foreign corporation in which U.S. shareholders directly, in-
cussed later under Controlled foreign corporation (CFC) directly, or constructively own more than 50% of the voting
shareholder. power or value of the stock. You are considered a U.S.
Beneficiary. If you are a beneficiary of an estate or trust, shareholder if you own, directly, indirectly, or construc-
you may be able to claim the credit based on your propor- tively, 10% or more of the total voting power or value of all
tionate share of foreign income taxes paid or accrued by classes of the foreign corporation's stock. For tax years
the estate or trust. This amount will be shown on the beginning after 2017, the definition of U.S. shareholder is
Schedule K-1 you receive from the estate or trust. How- expanded to include U.S. persons who own 10% or more
ever, you must show that the tax was imposed on income of the total value of shares of all classes of stock of such
of the estate and not on income received by the decedent. foreign corporation. See Internal Revenue Code sections
951(b) and 958(b) for more information.
Mutual fund shareholder. If you are a shareholder of a
mutual fund or other regulated investment company (RIC), Tax Must Be the Legal and Actual
you may be able to claim the credit based on your share of
Foreign Tax Liability
foreign income taxes paid by the fund if it chooses to pass
the credit on to its shareholders. You should receive from The amount of foreign tax that qualifies is not necessarily
the mutual fund or other RIC a Form 1099-DIV, or similar the amount of tax withheld by the foreign country. Only the
statement, showing your share of the foreign income and legal and actual foreign tax liability that you paid or ac-
your share of the foreign taxes paid. If you do not receive crued during the year qualifies for the credit.
this information, you will need to contact the fund.
Foreign tax refund and credits. You cannot take a for-
Controlled foreign corporation (CFC) shareholder. If eign tax credit for income taxes paid to a foreign country if
you are a shareholder of a CFC and elect under section it is reasonably certain the amount would be refunded,
962 to be taxed at corporate rates on your section 951(a) credited, rebated, abated, or forgiven if you made a claim.
amount (which is generally your share of subpart F in- For example, the United States has tax treaties with
come and your section 956 amount with respect to invest- many countries allowing U.S. citizens and residents reduc-
ment of earnings in U.S. property), and your global intan- tions in the rates of tax of those foreign countries. How-
gible low-taxed income (GILTI) inclusion for the tax year, ever, some treaty countries require U.S. citizens and resi-
you may be able to claim a credit for certain foreign taxes dents to pay the tax figured without regard to the lower
paid or accrued by the CFC, but only against your sepa- treaty rates and then claim a refund for the amount by
rately computed U.S. tax liability with respect to your sec- which the tax actually paid is more than the amount of tax
tion 951(a) amount and GILTI inclusion. To claim the figured using the lower treaty rate. The qualified foreign
credit, you must file Forms 1118, as applicable, and you tax is the amount figured using the lower treaty rate and
must also include the statement required under Regula- not the amount actually paid, because the excess tax is
tions section 1.962-2 to make the section 962 election. refundable.
You should include the following information for the tax You cannot take a credit for taxes paid to a foreign
year in your statement. country that are reduced or offset by a tax credit. This in-
• Your section 951(a) amount broken out between sub- cludes foreign taxes offset or reduced by a tax credit that
part F income and section 956 amount. is refundable to you in cash only if an excess credit re-
mains after offsetting your foreign income tax liability as
• Your GILTI inclusion. well as a tax credit purchased from another taxpayer. See
• The amount of your deduction under section 250 with Regulations section 1.901-2(e)(2)(ii). However, if the for-
respect to your GILTI inclusion (your section 250 de- eign income taxes are offset or reduced by a tax credit
duction). that is fully refundable to you in cash at your option, with-
out having to first offset your foreign income tax liability,
• The amount of the foreign tax credit taken on your
section 951(a) amount broken out between subpart F

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you can claim a foreign tax credit against your U.S. in- 1. If there is a generally imposed income tax, the eco-
come tax for those foreign taxes. See Regulations section nomic benefit is not available on substantially the
1.901-2(e)(2)(iii). same terms to all persons subject to the income tax;
or
Subsidy received. Tax payments a foreign country re-
turns to you in the form of a subsidy do not qualify for the 2. If there is no generally imposed income tax, the eco-
foreign tax credit. This rule applies even if the subsidy is nomic benefit is not available on substantially the
given to a person related to you, or persons who participa- same terms to the population of the foreign country in
ted with you in a transaction or a related transaction. A general.
subsidy can be provided by any means but must be deter- You are considered to receive a specific economic ben-
mined, directly or indirectly, in relation to the amount of efit if you have a business transaction with a person who
tax, or to the base used to figure the tax. receives a specific economic benefit from the foreign
The term “subsidy” includes any type of benefit. Some country and, under the terms and conditions of the trans-
ways of providing a subsidy are refunds, credits, deduc- action, you receive, directly or indirectly, all or part of the
tions, payments, or discharges of obligations. benefit.
However, see the exception discussed later under Pen-
Shareholder receiving refund for corporate tax in in-
sion, unemployment, and disability fund payments.
tegrated system. Under some foreign tax laws and trea-
ties, a shareholder is considered to have paid part of the Economic benefits. Economic benefits include the
tax that is imposed on the corporation. You may be able to following.
claim a refund of these taxes from the foreign government. Goods.
•
You must include the refund (including any amount with-
held) in your income in the year received. Any tax withheld • Services.
from the refund is a qualified foreign tax. • Fees or other payments.
Example. You are a shareholder of a French corpora- • Rights to use, acquire, or extract resources, patents,
tion. You receive a $100 refund of the tax paid to France or other property the foreign country owns or controls.
by the corporation on the earnings distributed to you as a • Discharges of contractual obligations.
dividend. The French government imposes a 15% with-
holding tax ($15) on the refund you received. You receive In most cases, the right or privilege merely to engage in
a check for $85. You include $100 in your income. The business is not an economic benefit.
$15 of tax withheld is a qualified foreign tax. Dual-capacity taxpayers. If you are subject to a for-
eign country's levy and you also receive a specific eco-
Tax Must Be an Income Tax (or Tax in nomic benefit from that foreign country, you are a “dual-ca-
pacity taxpayer.” As a dual-capacity taxpayer, you cannot
Lieu of Income Tax)
claim a credit for any part of the foreign levy, unless you
In most cases, only income, war profits, and excess profits establish that the amount paid under a distinct element of
taxes (income taxes) qualify for the foreign tax credit. Fur- the foreign levy is a tax, rather than a compulsory payment
thermore, foreign taxes on income can qualify even for a direct or indirect specific economic benefit.
though they are not imposed under an income tax law if For more information on how to establish amounts
the tax is in lieu of an income, war profits, or excess profits paid under separate elements of a levy, write to:
tax. See Taxes in Lieu of Income Taxes, later.
Internal Revenue Service
Simply because the levy is called an income tax by the
International Section
foreign taxing authority does not make it an income tax for
Philadelphia, PA 19255-0725
this purpose. A foreign levy is a foreign income tax only if it
meets both of the following requirements.
1. It is a tax; that is, you have to pay it and you get no Pension, unemployment, and disability fund pay-
specific economic benefit (discussed below) from ments. A foreign tax imposed on an individual to pay for
paying it. retirement, old-age, death, survivor, unemployment, ill-
ness, or disability benefits, or for substantially similar pur-
2. Either (a) the foreign tax is a net income tax that
poses, is not payment for a specific economic benefit if
meets the requirements of Regulations section
the amount of the tax does not depend on the age, life ex-
1.901-2(b), or (b) the foreign tax is a tax in lieu of an
pectancy, or similar characteristics of that individual.
income tax that meets the requirements of Regula-
No deduction or credit is allowed, however, for social
tions section 1.903-1.
security taxes paid or accrued to a foreign country with
Specific economic benefit. In most cases, you get a which the United States has a social security agreement.
specific economic benefit if you receive, or are considered For more information about these agreements, see Pub.
to receive, an economic benefit from the foreign country 54.
imposing the levy, and:
Net income tax. A foreign tax is a net income tax if it is
imposed on realized gross receipts reduced by costs and

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expenses related to those gross receipts. In addition, the Soak-up taxes. An amount paid to a foreign country is
foreign tax must meet the attribution requirement, descri- not an amount of foreign income tax paid and does not
bed next. In order for the foreign tax to be a net income qualify for the foreign tax credit to the extent it is a soak-up
tax, the foreign tax must generally allow for deduction of tax. A tax is a soak-up tax to the extent that liability for it
significant costs and expenses, including capital expendi- depends on the availability of a credit for it against income
tures, interest, rents, royalties, wages or other payments tax imposed by another country. This rule applies only if
for services, and research and experimentation. However, and to the extent that the foreign tax would not be im-
the foreign tax does not need to allow deductions for costs posed if the credit were not available.
and expenses attributable to wage income or to invest-
ment income that is not derived from a trade or business. Penalties and interest. Amounts paid to a foreign gov-
For more information, see Regulations section 1.901-2(b) ernment to satisfy a liability for interest, fines, penalties, or
(4). any similar obligation are not taxes and do not qualify for
the credit.
Attribution requirement. A foreign tax must meet the
attribution requirement in Regulations section 1.901-2(b) Taxes not based on income. Foreign taxes based on
(5). For a tax that is imposed on nonresidents of a country, gross receipts or the number of units produced, rather
the foreign tax must meet one of the following three re- than on realized net income, do not qualify unless they are
quirements: imposed in lieu of an income tax, as discussed next.
Taxes based on assets, such as property taxes, do not
1. Activities nexus: The base of the foreign tax must be
qualify for the credit.
determined based on gross receipts and costs that
are attributable to the activities (without using the lo-
cation of customers as a criterion) of the nonresident. Taxes in Lieu of Income Taxes

2. Source-based nexus: For a tax that is imposed on the A tax paid or accrued to a foreign country qualifies for the
basis of source, the foreign country's source rules credit if it is imposed in lieu of an income tax otherwise
must be reasonably similar to U.S. source rules. generally imposed. A foreign levy is a tax in lieu of an in-
come tax only if it meets both of the following require-
3. Property situs nexus: For a tax imposed on gain from
ments.
the sale or disposition of property, the base of the tax
only includes gains from the sale or disposition of real • It is not payment for a specific economic benefit, as
property located in the foreign country (or interest in a discussed earlier.
resident entity that owns real property) or gain from • The tax meets the attribution requirement and is im-
the sale or disposition of interest in a passthrough en- posed in place of, and not in addition to, a generally
tity that's attributable to business property forming imposed net income tax.
part of a taxable presence in the foreign country.
A tax in lieu of an income tax does not have to be
For a tax that is imposed on residents of the foreign
based on realized net income. A foreign tax imposed on
country, the rules for allocating income, deduction, and
gross income, gross receipts or sales, or the number of
losses between related parties must be consistent with
units produced or exported can qualify for the credit. How-
arm's-length principles.
ever, the tax must meet the attribution requirement, descri-
Notice 2023-55, issued on July 21, 2023, pro- bed earlier. That means that a withholding tax imposed on
! vides temporary relief in determining whether a gross interest, dividends, royalties, or other gross income
CAUTION foreign tax meets the definition of a foreign in- of a nonresident is only creditable if the foreign country's
come tax under section 901 for the 2022 and 2023 tax source rule for those items of income is reasonably similar
years (the relief period). For foreign taxes paid or accrued to U.S. source rules.
during any tax year within the relief period, taxpayers may
apply former sections 1.901-2(a) and (b), before it was In most cases, soak-up taxes (discussed earlier) do not
amended by Treasury Decision 9959, subject to a modifi- qualify as a tax in lieu of an income tax. However, if the
cation to the nonconfiscatory gross basis tax rule as de- foreign country imposes a soak-up tax in lieu of an income
scribed in the Notice. Those former regulations do not in- tax, the amount that does not qualify for foreign tax credit
clude the attribution requirement described above. The is the lesser of the following amounts.
rules described in this Notice were modified in part by a • The soak-up tax.
Notice released on December 11, 2023, to address their
application to partnerships and their partners and to ex- • The foreign tax you paid that is more than the amount
tend the relief period until further notice. For more informa- you would have paid if you had been subject to the
tion, see Treasury Decision 9959, 2022-03 I.R.B. 328, generally imposed income tax.
available at IRS.gov/irb/2022-03_IRB#TD-9959; Notice
2023-55, 2023-32 I.R.B. 427, available at IRS.gov/irb/
2023-32_IRB#NOT-2023-55; and Notice 2023-80,
2023-52 I.R.B. 1583, available at IRS.gov/irb/
2023-52_IRB#NOT-2023-80.

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income and some other income (for example, earned in-
come from U.S. sources or a type of income not subject to
Foreign Taxes for Which You U.S. tax), and the taxes on the other income cannot be
segregated, the denominator of the fraction is the total
Cannot Take a Credit
amount of income subject to the foreign tax minus deduc-
tible expenses allocable to that income.
This part discusses the foreign taxes for which you cannot
take a credit. These are: Example. You are a U.S. citizen and a cash basis tax-
• Taxes on excluded income, payer, employed by Company X and living in Country A.
Your records show the following.
• Taxes for which you can only take an itemized deduc-
tion, Foreign earned income received. . . . . . . . . . . . . . $125,000
• Taxes on foreign mineral income, Unreimbursed business travel expenses . . . . . . . . 20,000
• Taxes from international boycott operations, Income tax paid to Country A. . . . . . . . . . . . . . . . 30,000
• A portion of taxes on combined foreign oil and gas in- Exclusion of foreign earned
come, income and housing allowance. . . . . . . . . . . . . . . 120,000
• Taxes of U.S. persons controlling foreign corporations
and partnerships who fail to file required information Because you can exclude part of your wages, you can-
returns, not claim a credit for part of the foreign taxes. To find that
• Taxes related to a foreign tax splitting event, and part, do the following.
First, find the amount of business expenses allocable to
• Foreign taxes disallowed under section 965(g) and excluded wages and therefore not deductible. To do this,
Regulations section 1.965-5. multiply the otherwise deductible expenses by a fraction.
That fraction is the excluded wages over your foreign
Taxes on Excluded Income earned income.

$120,000
You cannot take a credit for foreign taxes paid or accrued $20,000 × = $19,200
on certain income that is excluded from U.S. gross in- $125,000
come.
Next, find the numerator of the fraction by which you
Foreign Earned Income and Housing will multiply the foreign taxes paid. To do this, subtract
Exclusions business expenses allocable to excluded wages
($19,200) from excluded wages ($120,000). The result is
You must reduce your foreign taxes available for the credit $100,800.
by the amount of those taxes paid or accrued on income Then, find the denominator of the fraction by subtract-
that is excluded from U.S. income under the foreign ing all your deductible expenses from all your foreign
earned income exclusion or the foreign housing exclusion. earned income ($125,000 − $20,000 = $105,000).
See Pub. 54 for more information on the foreign earned in- Finally, multiply the foreign tax you paid by the resulting
come and housing exclusions. fraction.

Wages completely excluded. If your wages are com- $100,800
pletely excluded, you cannot take a credit for any of the $30,000 × = $28,800
$105,000
foreign taxes paid or accrued on these wages.
The amount of Country A tax you cannot take a credit for
Wages partly excluded. If only part of your wages is ex- is $28,800.
cluded, you cannot take a credit for the foreign income
taxes allocable to the excluded part. You find the amount Taxes on Income From Puerto Rico Exempt
allocable to your excluded wages by multiplying the for- From U.S. Tax
eign tax paid or accrued on foreign earned income re-
ceived or accrued during the tax year by a fraction. If you have income from Puerto Rican sources that is not
The numerator of the fraction is your foreign earned in- taxable, you must reduce your foreign taxes paid or ac-
come and housing amounts excluded under the foreign crued by the taxes allocable to the exempt income. For in-
earned income and housing exclusions for the tax year mi- formation on figuring the reduction, see Pub. 570.
nus otherwise deductible expenses definitely related and
properly apportioned to that income. Deductible expenses
do not include the foreign housing deduction.
The denominator is your total foreign earned income re-
ceived or accrued during the tax year minus all deductible
expenses allocable to that income (including the foreign
housing deduction). If the foreign law taxes foreign earned

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Possession Exclusion Note. Effective December 10, 2004, the President gran-
ted a waiver to Libya. Income taxes arising on or after this
If you are a bona fide resident of American Samoa and ex- date qualify for the credit if they meet the other require-
clude income from sources in American Samoa, you can- ments in this publication.
not take a credit for the taxes you pay or accrue on the ex-
cluded income. For more information on this exclusion, Limit on credit. In figuring the foreign tax credit limit, dis-
see Pub. 570. cussed later, income from a sanctioned country is a sepa-
rate category of foreign income unless a Presidential
waiver is granted. You must fill out a separate Form 1116
Extraterritorial Income Exclusion for this income and check box at the top of the form. Be-e
cause no credit is allowed for taxes paid to sanctioned
You cannot take a credit for taxes you pay on qualifying countries, you would generally complete Form 1116 for
foreign trade income excluded on Form 8873. However, this category only through line 17.
see Internal Revenue Code section 943(d) for an excep-
tion for certain withholding taxes. Example. You lived and worked in Iran until August,
when you were transferred to Italy. You paid taxes to each
Taxes for Which You Can Only Take an country on the income earned in that country. You cannot
claim a foreign tax credit for the foreign taxes paid on the
Itemized Deduction
income earned in Iran. Because the income earned in Iran
is a separate category of foreign income, you must fill out
You cannot claim a foreign tax credit for foreign income
a separate Form 1116 for that income. You cannot take a
taxes paid or accrued under the following circumstances.
credit for taxes paid on the income earned in Iran, but that
However, you can claim an itemized deduction for these
income is taxable by the United States.
taxes. See Choosing To Take Credit or Deduction, earlier.
Note. A foreign tax credit may be claimed for foreign
Taxes Imposed by Sanctioned Countries taxes paid or accrued with respect to section 901(j) in-
(Section 901(j) Income) come if such tax is paid or accrued to a country other than
a sanctioned country. For example, if a U.S. citizen resi-
You cannot claim a foreign tax credit for income taxes paid dent in a nonsanctioned country pays a residence-based
or accrued to any country if the income giving rise to the income tax in that country on income derived from busi-
tax is for a period (the sanction period) during which: ness activities in a sanctioned country, those foreign taxes
would be eligible for a foreign tax credit. In this situation,
• The Secretary of State has designated the country as
you would continue completing Form 1116, and not stop
one that repeatedly provides support for acts of inter-
at line 17.
national terrorism;
• The United States has severed or does not conduct Figuring the credit when a sanction ends. Table 1 lists
diplomatic relations with the country; or the countries for which sanctions have ended or for which
a Presidential waiver has been granted. For any of these
• The United States does not recognize the country's countries, you can claim a foreign tax credit for the taxes
government, and that government is not otherwise eli- paid or accrued to that country on the income for the pe-
gible to purchase defense articles or services under riod that begins after the end of the sanction period or the
the Arms Export Control Act. date the Presidential waiver was granted.
The following countries meet this description for 2023. In-
come taxes paid or accrued to these countries in 2023 do Example. The sanctions against Country X ended on
not qualify for the credit. July 31. On August 19, you receive a distribution from a
mutual fund of Country X income. The fund paid Country
• Iran. X income tax for you on the distribution. Because the dis-
• Libya (but see Note, later). tribution was made after the sanction ended, you may in-
clude the foreign tax paid on the distribution to figure your
• North Korea.
foreign tax credit.
• Sudan.
Amounts for the nonsanctioned period. If a sanc-
• Syria. tion period ends (or a Presidential waiver is granted) dur-
ing your tax year and you are not able to determine the ac-
Waiver of denial of the credit. A waiver can be granted tual income and taxes for that period, you can allocate
to a sanctioned country if the President of the United amounts to that period based on the number of days in the
States determines that granting the waiver is in the na- period that fall in your tax year. Multiply the income or
tional interest of the United States and will expand trade taxes for the year by the following fraction to determine the
and investment opportunities for U.S. companies in the amounts allocable to that period.
sanctioned country. The President must report to Con-
gress, not less than 30 days before the date on which the
Number of nonsanctioned days in year
waiver is granted, the intention to grant the waiver and the Number of days in year
reason for the waiver.

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Example. You are a calendar year filer and received dividend for positions in substantially similar or related
$20,000 of income from Country X in 2023 on which you property.
paid tax of $4,500. Sanctions against Country X ended on
July 11, 2023. You are unable to determine how much of Withholding tax. For this purpose, withholding tax in-
the income or tax is for the nonsanctioned period. Be- cludes any tax determined on a gross basis. It does not in-
cause your tax year starts on January 1, and the Country clude any tax which is in the nature of a prepayment of a
X sanction ended on July 11, 2023, 173 days of your tax tax imposed on a net basis.
year are in the nonsanctioned period. You would figure the
Ex-dividend date. The ex-dividend date is the first date
income for the nonsanctioned period as follows.
following the declaration of a dividend on which the pur-
chaser of a stock is not entitled to receive the next divi-
173
× $20,000 = $9,479
365 dend payment.

Example 1. You bought common stock from a foreign
You would figure the tax for the nonsanctioned period as corporation on November 3. You sold the stock on No-
follows. vember 19. You received a dividend on this stock because
you owned it on the ex-dividend date of November 5. To
173 claim the credit, you must have held the stock for at least
× $4,500 = $2,133
365 16 days within the 31-day period that began on October
To figure your foreign tax credit, you would use $9,479 as 21 (15 days before the ex-dividend date). Because you
the income from Country X and $2,133 as the tax. held the stock for 16 days, from November 4 until Novem-
ber 19, you are entitled to the credit.
Further information. The rules for figuring the foreign
tax credit after a country's sanction period ends are more Example 2. The facts are the same as in Example 1,
fully explained in Revenue Ruling 92-62, Cumulative Bul- except that you sold the stock on November 14. You held
letin 1992-2, page 193. Issues of the Cumulative Bulletin the stock for only 11 days. You are not entitled to the
are available in most IRS offices and you are welcome to credit.
read them there.
Exception. If you are a securities dealer who actively
conducts business in a foreign country, you may be able to
Taxes Imposed on Certain Dividends claim a foreign tax credit for qualified taxes paid on divi-
You cannot claim a foreign tax credit for withholding tax dends regardless of how long you held the stock or
(defined later) on dividends paid or accrued if either of the whether you were obligated to make payments for posi-
following applies to the dividends. tions in substantially similar or related property. See sec-
tion 901(k)(4) of the Internal Revenue Code for more infor-
1. The dividends are on stock you held for less than 16 mation.
days during the 31-day period that begins 15 days be-
fore the ex-dividend date (defined later). Taxes Withheld on Income or Gain (Other
2. The dividends are for a period or periods totaling Than Dividends)
more than 366 days on preferred stock you held for
less than 46 days during the 91-day period that be- For income or gain (other than dividends) paid or accrued
gins 45 days before the ex-dividend date. If the divi- on property, you cannot claim a foreign tax credit for with-
dend is not for more than 366 days, rule (1) applies to holding tax (defined later):
the preferred stock. • If you have not held the property for at least 16 days
When figuring how long you held the stock, count the day during the 31-day period that begins 15 days before
you sold it, but do not count the day you acquired it or any the date on which the right to receive the payment ari-
days on which you were protected from risk of loss. ses, or
• To the extent you have to make related payments on
Regardless of how long you held the stock, you cannot positions in substantially similar or related property.
claim the credit to the extent you have an obligation under
a short sale or otherwise to make payments related to the
Table 1. Countries Removed From the
Sanction List or Granted Presidential Waiver
Sanction Period
Country Starting Date Ending Date
Cuba January 1, 1987 December 21, 2015
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.

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When figuring how long you held the property, count the In most cases, this rule does not apply to employees
day you sold it, but do not count the day you acquired it or with wages who are working and living in boycotting coun-
any days on which you were protected from risk of loss. tries, or to retirees with pensions who are living in these
countries.
Withholding tax. For this purpose, withholding tax in-
cludes any tax determined on a gross basis. It does not in- List of boycotting countries. A list of the countries that
clude any tax which is in the nature of a prepayment of a may require participation in or cooperation with an interna-
tax imposed on a net basis. tional boycott is published by the Department of the Treas-
ury. As of October 2023, the following countries are listed.
Exception for dealers. If you are a dealer in property
who actively conducts business in a foreign country, you • Iraq.
may be able to claim a foreign tax credit for qualified taxes • Kuwait.
withheld on income or gain from that property regardless
of how long you held it or whether you have to make rela- • Lebanon.
ted payments on positions in substantially similar or rela- • Libya.
ted property. See section 901(I)(2) of the Internal Revenue Qatar.
•
Code for more information.
• Saudi Arabia.
Covered Asset Acquisition • Syria.
You cannot take a credit for the disqualified portion of any • Yemen.
foreign tax paid or accrued in connection with a covered The list is updated quarterly and is available at
asset acquisition. A covered asset acquisition includes FederalRegister.gov. Enter "International Boycott" in the
certain acquisitions that result in a stepped-up basis for search box.
U.S. tax purposes but not for foreign tax purposes. For
For information concerning changes to the list,
more information, see Internal Revenue Code section
write to:
901(m) and the regulations under that section, including
Treasury Decision 9895, 2020-15 I.R.B. 565, available at
IRS.gov/irb/2020-15_IRB#TD-9895. Internal Revenue Service
International Section
Philadelphia, PA 19255-0725
Taxes in Connection With the Purchase or
Sale of Oil or Gas
You cannot claim a foreign tax credit for taxes paid or ac- Determinations of whether the boycott rule applies.
crued to a foreign country in connection with the purchase You may request a determination from the IRS as to
or sale of oil or gas extracted in that country if you do not whether a particular operation constitutes participation in
have an economic interest in the oil or gas, and the pur- or cooperation with an international boycott. The proce-
chase price or sales price is different from the fair market dures for obtaining a determination from the IRS are out-
value (FMV) of the oil or gas at the time of purchase or lined in Revenue Procedure 77-9 in Cumulative Bulletin
sale. 1977-1. Cumulative Bulletins are available in most IRS of-
fices and you are welcome to read them there.
Taxes on Foreign Mineral Income Public inspection. A determination and any related
background file are open to public inspection. However,
You must reduce any taxes paid or accrued to a foreign your identity and certain other information will remain con-
country or possession on mineral income from that coun- fidential.
try or possession if you were allowed a deduction for per-
centage depletion for any part of the mineral income. For Reporting requirements. You must file a report with the
details, see Regulations section 1.901-3. IRS if you or any of the following persons have operations
in or related to a boycotting country or with the govern-
ment, a company, or a national of a boycotting country.
Taxes From International Boycott
Operations • A foreign corporation in which you own 10% or more
of the voting power or value of all classes of stock but
If you participate in or cooperate with an international boy- only if you own the stock of the foreign corporation di-
cott during the tax year, your foreign taxes resulting from rectly or through foreign entities.
boycott activities will reduce the total taxes available for • A partnership in which you are a partner.
credit. See the instructions for line 12 in the Form 1116 in-
structions to figure this reduction. • A trust you are treated as owning.
Form 5713 required. If you have to file a report, you
must use Form 5713 and attach all supporting schedules.

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See the Instructions for Form 5713 for information on capital or profits interest, or an interest to which more than
when and where to file the form. 50% of the deductions or losses were allocated.
You may also have to file Form 8865 if, at any time dur-
Penalty for failure to file. If you willfully fail to make a
ing the tax year of the partnership, you owned a 10% or
report, in addition to other penalties, you may be fined
greater interest in the partnership while the partnership
$25,000 or imprisoned for no more than 1 year, or both.
was controlled by U.S. persons owning at least a 10% in-
terest. See the Instructions for Form 8865 for more infor-
Taxes on Combined Foreign Oil and mation.
Gas Income
Penalty for not filing Form 5471 or Form 8865. In
most cases, there is a penalty of $10,000 for each annual
You must reduce your foreign taxes by a portion of any for-
accounting period for which you fail to furnish information.
eign taxes imposed on combined foreign oil and gas in-
Additional penalties apply if the failure continues for more
come. The amount of the reduction is the amount by
than 90 days after the day the IRS mails you notice of the
which your foreign oil and gas taxes exceed the amount of
failure to furnish the information.
your combined foreign oil and gas income multiplied by a
If you fail to file either Form 5471 or Form 8865 when
fraction equal to your pre-credit U.S. tax liability divided by
due, you may also be required to reduce by 10% all for-
your worldwide taxable income. You may be entitled to
eign taxes that may be used for the foreign tax credit. Ad-
carry over to other years taxes reduced under this rule.
ditional reductions apply if the failure continues for 90
See Internal Revenue Code section 907(f).
days or more after the date the IRS mails you notice of the
Combined foreign oil and gas income means the sum failure to furnish the information. The total reductions shall
of foreign oil-related income and foreign oil and gas ex- not exceed the greater of $10,000 or the income of the for-
traction income. Foreign oil and gas taxes are the sum of eign corporation or foreign partnership for the accounting
foreign oil and gas extraction taxes and foreign oil-related period for which the failure occurs. This foreign tax credit
taxes. penalty is also reduced by the amount of the dollar penalty
imposed.
Taxes of U.S. Persons Controlling
Taxes Related to a Foreign Tax Credit
Foreign Corporations and
Splitting Event
Partnerships
Reduce taxes paid or accrued by any taxes paid or ac-
If you had control of a foreign corporation or a foreign part- crued with respect to a foreign tax credit splitting event.
nership for the annual accounting period of that corpora- For foreign taxes paid or accrued in tax years beginning
tion or partnership that ended with or within your tax year, after 2010, if there is a foreign tax credit splitting event,
you may have to file an annual information return. If you do you may not take the foreign tax into account before the
not file the required information return, you may have to re- tax year in which you take the income into account. There
duce the foreign taxes that may be used for the foreign tax is a foreign tax credit splitting event with respect to a for-
credit. See Penalty for not filing Form 5471 or Form 8865, eign income tax if (in connection with a splitter arrange-
later. ment listed below) the related income is (or will be) taken
into account by a covered person. A covered person is ei-
U.S. persons controlling foreign corporations. If you
ther of the following.
are a U.S. citizen or resident who had control of a foreign
corporation during the annual accounting period of that • An entity in which you hold, directly or indirectly, at
corporation, and you owned the stock on the last day of least a 10% ownership interest (determined by vote or
the foreign corporation's annual accounting period, you value).
may have to file an annual information return on Form • Any person who is related to you. For a list of related
5471. Under this rule, you generally had control of a for- persons, see Nondeductible Loss in chapter 2 of Pub.
eign corporation if, at any time during your tax year, you 544.
owned stock possessing:
A covered asset acquisition under Internal Revenue
• More than 50% of the total combined voting power of
Code section 901(m) is not a foreign tax credit splitting
all classes of stock entitled to vote, or
event under Internal Revenue Code section 909.
• More than 50% of the total value of shares of all
classes of stock of the foreign corporation. For more information, see section 909 and the regula-
tions under that section.
U.S. persons controlling foreign partnerships. If you
are a U.S. citizen or resident who had control of a foreign Splitter arrangements. The following paragraphs sum-
partnership at any time during the partnership's tax year, marize the splitter arrangements. For more details, see
you may have to file an annual information return on Form Regulations section 1.909-2(b).
8865, Return of U.S. Persons With Respect to Certain For- Reverse hybrid splitter arrangement. A reverse hy-
eign Partnerships. Under this rule, you generally had con- brid is a splitter arrangement if you pay or accrue foreign
trol of the partnership if you owned more than 50% of the income taxes with respect to income of a reverse hybrid. A

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reverse hybrid is an entity that is a corporation for U.S. fed-
eral income tax purposes but is a fiscally transparent en-
tity (under the principles of Regulations section 1.894-1(d) How To Figure the Credit
(3)) or a branch under the laws of a foreign country impos-
ing tax on the income of the entity. As already indicated, you can claim a foreign tax credit
only for foreign taxes on income, war profits, or excess
Loss-sharing splitter arrangement. A foreign group profits, or taxes in lieu of those taxes. In addition, there is a
relief or other loss-sharing regime is a loss-sharing splitter limit on the amount of the credit that you can claim. You
arrangement to the extent that a shared loss of a U.S. figure this limit and your credit on Form 1116. Your credit
combined income group could have been used to offset is the amount of foreign tax you paid or accrued or, if
income of that group (usable shared loss) but is used in- smaller, the limit.
stead to offset income of another U.S. combined income
group. If you have foreign taxes available for credit but you
cannot use them because of the limit, you may be able to
U.S. equity hybrid instrument splitter arrangement. carry them back 1 tax year and forward to the next 10 tax
A U.S. equity hybrid instrument is a splitter arrangement if years. See Carryback and Carryover, later.
payments or accruals on or with respect to this instrument
meet all of the following conditions. Also, certain tax treaties have special rules that you
must consider when figuring your foreign tax credit. See
1. They give rise to foreign income taxes paid or accrued Tax Treaties, later.
by the owner of this instrument.
2. They give rise to income tax deductions for the issuer Exemption from foreign tax credit limit. You will not be
under the laws of a foreign jurisdiction in which the is- subject to this limit and will be able to claim the credit with-
suer is subject to tax. out using Form 1116 if the following requirements are met.
3. They do not give rise to income for U.S. federal in- • Your only foreign source gross income for the tax year
is passive category income. Passive category income
come tax purposes.
is defined later under Separate Limit Income. How-
A U.S. equity hybrid instrument is an instrument that is ever, for purposes of this rule, high-taxed income and
treated as equity for U.S. federal income tax purposes but export financing interest are also passive category in-
is treated as indebtedness for foreign tax purposes, or come.
with respect to which the issuer is otherwise entitled to a
• Your qualified foreign taxes for the tax year are not
deduction for foreign tax purposes for amounts paid or ac-
more than $300 ($600 if married filing a joint return).
crued with respect to the instrument.
• All of your gross foreign income and the foreign taxes
U.S. debt hybrid instrument splitter arrangement. are reported to you on a payee statement (such as a
A U.S. debt hybrid instrument is an instrument that is trea- Form 1099-DIV or 1099-INT).
ted as equity for foreign tax purposes but as indebtedness
for U.S. federal income tax purposes. • You elect this procedure for the tax year.
A U.S. debt hybrid instrument is a splitter arrangement If you make this election, you cannot carry back or
if the issuer of the U.S. debt hybrid instrument pays or ac- carry over any unused foreign tax to or from this tax year.
crues foreign income taxes with respect to income in an
This election exempts you only from the limit fig-
amount equal to the interest (including original issue dis-
ured on Form 1116 and not from the other require-
count) paid or accrued on the instrument that is deductible CAUTION!
ments described in this publication. For example,
for U.S. federal income tax purposes but that does not
the election does not exempt you from the requirements
give rise to a deduction under the laws of a foreign juris-
discussed earlier under What Foreign Taxes Qualify for
diction in which the issuer is subject to tax.
the Credit.
Partnership interbranch payment splitter arrange-
ment. An allocation of foreign income tax that a partner-
ship pays or accrues with respect to an interbranch pay- Limit on the Credit
ment as described in Regulations section 1.704-1(b)(4)
(viii)(d)(3) (the interbranch payment tax) is a splitter ar- Your foreign tax credit cannot be more than your total U.S.
rangement to the extent the interbranch payment tax is not tax liability multiplied by a fraction. The numerator of the
allocated to the partners in the same proportion as the dis- fraction is your taxable income from sources outside the
tributive shares of income in the creditable foreign tax ex- United States. The denominator is your total taxable in-
penditures (CFTE) category to which the interbranch pay- come from U.S. and foreign sources.
ment tax is or would be assigned under Regulations To determine the limit, you must separate your foreign
section 1.704-1(b)(4)(viii)(d) without regard to Regulations source income into categories, as discussed later under
section 1.704-1(b)(4)(viii)(d)(3). Separate Limit Income. The limit treats all foreign income
and expenses in each separate category as a single unit
and limits the credit to the U.S. income tax on the taxable
income in that category from all sources outside the Uni-
ted States.

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Determining the foreign tax credit limit if you elect to In most cases, subpart F inclusions are treated as sep-
be taxed at corporate tax rates under section 962. If arate limit income in the same category to which they are
you elect under Internal Revenue Code section 962 to be attributable at the level of the CFC. Interest, rents, and roy-
taxed initially at corporate rates on your section 951(a) alties from a CFC are treated as passive category income
amount and GILTI inclusion for the tax year, determine the if they are attributable to the passive category income of
limit on the related foreign tax credit on the applicable the CFC. A dividend paid or accrued out of the earnings
separate category Forms 1118. For purposes of complet- and profits of a CFC is treated as passive category in-
ing the Forms 1118, the numerator determined for each come in the same proportion that the part of earnings and
separate category includes only your foreign source sec- profits attributable to passive category income bears to
tion 951(a) amount and your foreign source GILTI inclu- the total earnings and profits of the CFC. The portions of
sion (less its portion of the section 250 deduction), as ap- interest, rents, royalties, and dividends that are not treated
plicable. The total taxable income in the denominator is as passive category income are treated as separate limit
equal to your total section 951(a) amount and GILTI inclu- income in another category following the rules described
sion less your section 250 deduction. Your total U.S. tax li- below for each category as applied at the level of the U.S.
ability multiplied by this fraction is the amount of your U.S. shareholder.
tax liability computed with respect to amounts subject to
section 962 for the tax year (before taking into account for- Partnership distributive share. In most cases, a part-
eign tax credits). ner's distributive share of partnership income is treated as
Complete Form 1116 to determine the limit on the separate limit income if it is from the separate limit income
credit that you are allowed to take with respect to any of the partnership. However, if the partner owns less than
other foreign income taxes that you paid or accrued during a 10% interest in the partnership, the income is treated as
the tax year, but do not include in the numerator or de- passive income in most cases. For more information, see
nominator of the fraction your section 951(a) amount, your the Partner's Instructions for Schedule K-3 (Form 1065),
GILTI inclusion, and the amount of your section 250 de- and Regulations section 1.904-4(n).
duction for the tax year. Do not include in the amount of
your total U.S. tax liability, which you multiply by this frac- Section 951A Category Income
tion, the amount of your U.S. tax liability computed with re-
spect to amounts subject to section 962 for the tax year Section 951A category income, a new category beginning
(before taking into account foreign tax credits). See Inter- in 2018, consists of the GILTI a U.S. shareholder of a CFC
nal Revenue Code sections 960 and 962 and the regula- is required to include in income under section 951A (other
tions under those sections for more information. See, in than GILTI that is passive category income). A U.S. share-
particular, Regulations section 1.962-1(c) for a detailed holder’s GILTI is determined based on its aggregate pro
example of computing separate foreign tax credit limits re- rata share of the tested income of all CFCs it owns, offset
quired when you are filing both a Form 1116 and a Form by its pro rata share of tested loss of any CFCs it owns,
1118. and the shareholder’s net deemed tangible income return
with respect to the CFCs. A CFC’s tested income does not
Separate Limit Income include effectively connected income, subpart F income,
foreign oil and gas income, or certain related party pay-
You must figure the limit on a separate Form 1116 for each ments. GILTI is included in income in a manner generally
of the following categories of income. similar to inclusions of subpart F income. See Internal
Revenue Code section 951A for more information.
• Section 951A category income.
• Foreign branch category income. Foreign Branch Category Income
• Passive category income.
Foreign branch category income consists of the business
• General category income. profits of a U.S. person that are attributable to one or more
• Section 901(j) income. QBUs in one or more foreign countries. Foreign branch
category income does not include any passive category
• Certain income re-sourced by treaty. income. See Internal Revenue Code section 904(d)(2)(J)
• Lump-sum distributions (LSDs). and Regulations section 1.904-4(f).
In figuring your separate limits, you must combine the
income (and losses) in each category from all foreign Passive Category Income
sources, and then apply the limit.
Passive category income consists of passive income and
Income from controlled foreign corporations (CFCs). specified passive category income.
As a U.S. shareholder, certain income that you receive or
accrue from a CFC is treated as separate limit income. Passive income. Except as described earlier under In-
You are considered a U.S. shareholder in a CFC if you come from controlled foreign corporations and Partnership
own 10% or more of the total voting power or value of all distributive share, passive income generally includes the
classes of the corporation's stock. following.
• Dividends.

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• Interest. High-taxed income. High-taxed income is income if
the foreign taxes you paid on the income (after allocation
• Rents.
of expenses) exceed the highest U.S. tax that can be im-
• Royalties. posed on the income. See Regulations section 1.904-4(c)
• Annuities. for more information.

• Net gain from the sale of non-income-producing in- Specified passive category income. Specified passive
vestment property or property that generates passive income consists of:
income.
1. Dividends from a domestic international sales corpo-
• Net gain from commodities transactions, except for ration (DISC) or former DISC to the extent the divi-
hedging and active business gains or losses of pro- dends are treated as foreign source income; and
ducers, processors, merchants, or handlers of com-
modities. 2. Distributions from a former foreign sales corporation
(FSC) out of earnings and profits that are attributable
• Amounts includible in income under section 1293 of to:
the Internal Revenue Code (relating to certain passive
foreign investment companies). a. Foreign trade income, or
b. Interest and carrying charges derived from a
If you receive foreign source distributions from a mutual transaction that results in foreign trade income.
fund or other regulated investment company that elects to
pass through to you the foreign tax credit, in most cases, General Category Income
the income is considered passive. The mutual fund will
provide you with a Form 1099-DIV or substitute statement General category income is income that is not section
showing the amount of foreign taxes it elected to pass 951A category income, foreign branch category income,
through to you. or passive category income, or does not fall into one of the
other separate limit categories discussed later. In most ca-
What is not passive income. Passive income does not ses, it includes active business income and wages, salar-
include any of the following. ies, and overseas allowances of an individual as an em-
• Gains or losses from the sale of inventory property or ployee. General category income includes high-taxed
property held mainly for sale to customers in the ordi- income that would otherwise be passive income. See
nary course of your trade or business. High-taxed income, earlier, under What is not passive in-
come.
• Export financing interest.
Financial services income. In general, financial serv-
• High-taxed income.
ices income is treated as general category income if it is
• Active business rents and royalties. derived by a financial services entity. You are a financial
• Any income that is defined in another separate limit services entity if you are predominantly engaged in the ac-
category. tive conduct of a banking, insurance, financing, or similar
business for the tax year. Financial services income of a
Passive income also does not include financial services financial services entity includes income derived in the ac-
income derived by a financial services entity. You are a fi- tive conduct of a banking, financing, insurance, or similar
nancial services entity if you are predominantly engaged business.
in the active conduct of a banking, insurance, financing, or If you qualify as a financial services entity because you
similar business for any tax year. Financial services in- treat certain items of income as active financing income
come of a financial services entity generally includes in- under Regulations section 1.904-4(e)(2)(i)(Y), you must
come derived in the active conduct of a banking, financ- show the type and amount of each item on an attachment
ing, insurance, or similar business. If you qualify as a to Form 1116.
financial services entity because you treat certain items of
income as active financing income under Regulations sec-
Section 901(j) Income
tion 1.904-4(e)(2)(i)(Y), you must show the type and
amount of each item on an attachment to Form 1116. This is income earned from activities conducted in sanc-
Export financing interest. This is interest derived tioned countries. Income derived from each sanctioned
from financing the sale or other disposition of property for country is subject to a separate foreign tax credit limita-
use outside the United States if: tion. Therefore, you must use a separate Form 1116 for in-
come earned from each such country. See Taxes Imposed
• The property is manufactured, produced, grown, or by Sanctioned Countries (Section 901(j) Income) under
extracted in the United States by you or a related per- Taxes for Which You Can Only Take an Itemized Deduc-
son; and tion, earlier.
• 50% or less of the FMV of the property is due to im-
ports into the United States.

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Certain Income Re-Sourced by Treaty law, they are apportioned under the principles of the for-
eign law. If the foreign law does not provide for apportion-
If a sourcing rule in an applicable income tax treaty treats ment, use the principles covered in the regulations under
U.S. source income as foreign source, and you elect to Internal Revenue Code sections 861 and 904.
apply the treaty, the income will be treated as foreign
source. Example. You paid foreign income taxes of $3,200 to
Country A on wages of $80,000 and interest income of
You must figure a separate foreign tax credit limitation $3,000. These were the only items of income on your for-
for any such income for which you claim benefits under a eign return. You also have deductions of $4,400 that, un-
treaty, using a separate Form 1116 for each amount of der foreign law, are not definitely related to either the wa-
re-sourced income from a treaty country. This rule does ges or interest income. Your total net income is $78,600
not apply to income that is re-sourced by reason of the re- ($83,000 – $4,400).
lief from double taxation rules in any U.S. income tax Because the foreign tax is not specifically for either item
treaty that is solely applicable to U.S. citizens who are res- of income, you must allocate the tax between the wages
idents of the foreign treaty country. See Internal Revenue and the interest under the tax laws of Country A. For pur-
Code sections 865(h), 904(d)(6), and 904(h)(10) and the poses of this example, assume that the laws of Country A
regulations under those sections (including Regulations do this in a manner similar to the Internal Revenue Code.
section 1.904-4(k)) for any grouping rules and other ex- First, figure the net income in each category by allocating
ceptions. those expenses that are not definitely related to either cat-
egory of income.
See Tax Treaties, later, for further information regarding You figure the expenses allocable to wages (general
income re-sourced by treaty. category income) as follows.

Lump-Sum Distributions (LSDs) $80,000 (wages) × $4,400 = $4,241
$83,000 (total income)
If you receive a foreign source LSD from a retirement plan, The net wages are $75,759 ($80,000 − $4,241).
and you figure the tax on it using the special averaging
treatment for LSDs, you must make a special computa- You figure the expenses allocable to interest (passive
tion. Follow the Form 1116 instructions and complete the category income) as follows.
worksheet in those instructions to determine your foreign
tax credit on the LSD. $3,000 (interest) × $4,400 = $159
$83,000 (total income)
The special averaging treatment for LSDs is elec- The net interest is $2,841 ($3,000 − $159).
TIP ted by filing Form 4972, Tax on Lump-Sum Distri-
butions. Then, to figure the foreign tax on the wages, you multi-
ply the total foreign income tax by the following fraction.

Allocation of Foreign Taxes $75,759 (net wages) × $3,200 = $3,084
$78,600 (total net income)
Solely for purposes of allocating foreign taxes to separate
limit income categories, those separate limit categories in-
clude any U.S. source income that is taxed by the foreign You figure the foreign tax on the interest income as fol-
country or U.S. possession. lows.

If you paid or accrued foreign income tax for a tax year $2,841 (net interest) × $3,200 = $116
on income in more than one separate limit income cate- $78,600 (total net income)
gory, allocate the tax to the income category to which the
tax specifically relates. If the tax is not specifically related Foreign Taxes From a Partnership or
to any one category, you must allocate the tax to each cat- an S Corporation
egory of income.
If foreign taxes were paid or accrued on your behalf by a
You do this by multiplying the foreign income tax related
partnership or an S corporation, you will figure your credit
to more than one category by a fraction. The numerator of
using certain foreign tax information from the Sched-
the fraction is the net income taxed by the foreign country
ule K-3 you received from the partnership or S corpora-
in a separate category. The denominator is the total net in-
tion. See the Instructions for Form 1116, and the partner
come.
and shareholder instructions for Schedule K-3 (Form 1065
You figure net income by deducting from the gross in- or 1120-S) for instructions on how to report that informa-
come in each category and from the total gross income tion.
taxed by the foreign country or U.S. possession any ex-
penses, losses, and other deductions definitely related to
them under the laws of the foreign country or U.S. posses-
sion. If the expenses, losses, and other deductions are not
definitely related to a category of income under foreign

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Figuring the Limit Number of days you performed services in the foreign
country during the year
Before you can determine the limit on your credit, you Total number of days you performed services during the
must first figure your total taxable income from all sources year
before the deduction for personal exemptions. For individ-
uals, this is the amount shown on line 15 of Form 1040, You can use a unit of time less than a day in the above
1040-SR, or 1040-NR. Then, for each category of income, fraction, if appropriate. The time period for which the com-
you must figure your taxable income from sources outside pensation is made does not have to be a year. Instead,
the United States. you can use another distinct, separate, and continuous
time period if you can establish to the satisfaction of the
Before you can figure your taxable income in each cate- IRS that this other period is more appropriate.
gory from sources outside the United States, you must
first determine whether your gross income in each cate- Example 1. Christina, a U.S. citizen, worked 240 days
gory is from U.S. sources or foreign sources. Some of the for a U.S. company during the tax year. Christina received
general rules for figuring the source of income are outlined $80,000 in compensation. None of it was for fringe bene-
in Table 2. fits. Christina performed services in the United States for
60 days and performed services in the United Kingdom for
See Determining the foreign tax credit limit if you elect 180 days. Using the time basis for determining the source
to be taxed at corporate tax rates under section 962, ear- of compensation, $60,000 ($80,000 × 180/240) is Christina’s
lier, for more details that apply to you if you make a section foreign source income.
962 election.
Example 2. Robert, a U.S. citizen, is employed by a
See Determining the Source of Compensation for La-
U.S. corporation. Robert’s principal place of work is in the
bor or Personal Services and Determining the Source of
United States. Robert’s annual salary is $100,000. None
Income From the Sales or Exchanges of Certain Personal
of Robert’s annual salary is for fringe benefits. During the
Property, later, for a more detailed discussion on deter-
first quarter of the year, Robert worked entirely within the
mining the source of these types of income.
United States. On April 1, Robert was transferred to Sin-
Determining the source of income from U.S. posses- gapore for the remainder of the year. Robert is able to es-
sions. In most cases, the rules for determining whether tablish that the first quarter of the year and the last 3 quar-
income is from sources in a U.S. possession are the same ters of the year are two separate, distinct, and continuous
as those for determining whether income is from U.S. periods of time. Accordingly, $25,000 of Robert’s annual
sources. However, exceptions do apply. See Pub. 570 for salary is attributable to the first quarter of the year (0.25 ×
more information. $100,000). All of it is U.S. source income because Robert
worked entirely within the United States during that quar-
ter. The remaining $75,000 is attributable to the last 3
Determining the Source of Compensation
quarters of the year. During those quarters, Robert worked
for Labor or Personal Services 150 days in Singapore and 30 days in the United States.
If you are an employee and receive compensation for la- Robert’s periodic performance of services in the United
bor or personal services performed both inside and out- States did not result in distinct, separate, and continuous
side the United States, special rules apply in determining periods of time. Of Robert’s $75,000 salary, $62,500
the source of the compensation. Compensation (other ($75,000 × 150/180) is foreign source income for the year.
than certain fringe benefits) is sourced on a time basis. Multi-year compensation. In most cases, the source
Certain fringe benefits (such as housing and education) of multi-year compensation is determined on a time basis
are sourced on a geographical basis. over the period to which the compensation is attributable.
Multi-year compensation is compensation that is included
Or, you may be permitted to use an alternative basis to in your income in 1 tax year but that is attributable to a pe-
determine the source of compensation. See Alternative riod that includes 2 or more tax years.
basis, later. You determine the period to which the compensation is
attributable based on the facts and circumstances of your
If you are self-employed, you determine the source of case. For example, an amount of compensation that spe-
compensation for labor or personal services from self-em- cifically relates to a period of time that includes several
ployment on the basis that most correctly reflects the calendar years is attributable to the entire multi-year pe-
proper source of that income under the facts and circum- riod.
stances of your particular case. In many cases, the facts The amount of compensation treated as from foreign
and circumstances will call for an apportionment on a time sources is figured by multiplying the total multi-year com-
basis as explained next. pensation by a fraction. The numerator of the fraction is
the number of days (or unit of time less than a day, if ap-
Time basis. Use a time basis to figure your foreign
propriate) that you performed labor or personal services in
source compensation (other than the fringe benefits dis-
the foreign country in connection with the project. The de-
cussed later). Do this by multiplying your total compensa-
nominator of the fraction is the total number of days (or
tion (other than the fringe benefits discussed later) by the
unit of time less than a day, if appropriate) that you
following fraction.

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Table 2. Source of Income
Item of Income Factor Determining Source
Salaries, wages, other compensation Where services performed
Business income:
Personal services Where services performed
Sale of inventory—purchased Where sold
Sale of inventory—produced Allocation
Interest Residence of payer
Dividends Whether a U.S. or foreign corporation*
Rents Location of property
Royalties:
Natural resources Location of property
Patents, copyrights, etc. Where property is used
Sale of real property Location of property
Sale of personal property Seller's tax home (but see Determining the Source of Income From the Sales
or Exchanges of Certain Personal Property, later, for exceptions)
Pension distributions attributable to contributions Where services were performed that earned the pension
Investment earnings on pension contributions Location of pension trust
Sale of natural resources Allocation based on FMV of product at export terminal. For more information,
see Regulations section 1.863-1(b).
* Exception: Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation's gross income is effectively connected with a U.S. trade or business for the
3 tax years before the year in which the dividends are declared.

Table 3. Source of Fringe Benefits
Fringe Benefit Factor Determining Source
Housing, education, and local transportation Location of your principal place of work
Tax reimbursement Location of the jurisdiction that imposed the tax for which you were reimbursed
Hazardous or hardship duty pay Location of the hazardous or hardship duty zone for which you received the pay
Moving expense reimbursement Location of your new principal place of work*
* You can determine the source based on the location of your former principal place of work if you have sufficient evidence that such determination of source is more appropriate under
the facts and circumstances of your case.

performed labor or personal services in connection with on your behalf (and your family if your family resides with
the project. you) only for the following.
Geographical basis. Compensation you receive as an • Rent.
employee in the form of the following fringe benefits is • Utilities (except telephone charges).
sourced on a geographical basis.
• Real and personal property insurance.
• Housing.
• Occupancy taxes not deductible under section 164 or
• Education. 216(a).
• Local transportation. • Nonrefundable fees for securing a leasehold.
• Tax reimbursement. • Rental of furniture and accessories.
• Hazardous or hardship duty pay. • Household repairs.
• Moving expense reimbursement. • Residential parking.
The amount of fringe benefits must be reasonable and you • Fair rental value of housing provided in kind by your
must substantiate them by adequate records or by suffi- employer.
cient evidence. Table 3 summarizes the factors used for
A housing fringe benefit does not include:
determining the source of these fringe benefits.
• Deductible interest and taxes (including deductible in-
Housing. The source of a housing fringe benefit is de-
terest and taxes of a tenant-stockholder in a coopera-
termined based on the location of your principal place of tive housing corporation);
work. A housing fringe benefit includes payments to you or

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• The cost of buying property, including principal pay- 5925(b) of title 5 of the U.S. Code to any officer or em-
ments on a mortgage; ployee of the U.S. Government at that place.
• The cost of domestic labor (maids, gardeners, etc.); • The zone is where civil insurrection, civil war, terror-
ism, or wartime conditions threaten physical harm or
• Pay television subscriptions;
imminent danger to your health and well-being.
• Improvements and other expenses that increase the
Compensation is treated as a hazardous or hardship
value or appreciably prolong the life of property;
duty pay fringe benefit only if your employer provides the
• Purchased furniture or accessories; hazardous or hardship duty pay fringe benefit only to em-
• Depreciation or amortization of property or improve- ployees performing labor or personal services in a hazard-
ments; ous or hardship duty zone.
The amount of compensation treated as a hazardous or
• The value of meals or lodging that you exclude from hardship duty pay fringe benefit cannot exceed the maxi-
gross income; or mum amount that the U.S. Government would allow its of-
• The value of meals or lodging that you deduct as mov- ficers or employees present at that location.
ing expenses. Moving expense reimbursement. In most cases, the
Education. The source of an education fringe benefit source of a moving expense reimbursement is based on
for the education expenses of your dependents is deter- the location of your new principal place of work. However,
mined based on the location of your principal place of the source is determined based on the location of your for-
work. An education fringe benefit includes payments only mer principal place of work if you have sufficient evidence
for the following expenses for education at an elementary that such determination of source is more appropriate un-
or secondary school. der the facts and circumstances of your case. Sufficient
evidence generally requires an agreement between you
• Tuition, fees, academic tutoring, special needs serv- and your employer in most cases, or a written statement of
ices for a special needs student, books, supplies, and company policy, which is reduced to writing before the
other equipment. move and which is entered into or established to induce
• Room and board and uniforms that are required or you or other employees to move to another country. The
provided by the school in connection with enrollment written statement or agreement must state that your em-
or attendance. ployer will reimburse you for moving expenses that you in-
cur to return to your former principal place of work regard-
Local transportation. The source of a local transpor- less of whether you continue to work for your employer
tation fringe benefit is determined based on the location of after returning to that location. It may contain certain con-
your principal place of work. Your local transportation ditions upon which the right to reimbursement is deter-
fringe benefit is the amount that you receive as compen- mined as long as those conditions set forth standards that
sation for your local transportation or that of your spouse are definitely ascertainable and can only be fulfilled prior
or dependents at the location of your principal place of to, or through completion of, your return move to your for-
work. The amount treated as a local transportation fringe mer principal place of work.
benefit is limited to actual expenses incurred for local
transportation and the fair rental value of any em- Alternative basis. If you are an employee, you can de-
ployer-provided vehicle used predominantly by you or your termine the source of your compensation under an alter-
spouse or dependents for local transportation. Actual ex- native basis if you establish to the satisfaction of the IRS
penses do not include the cost (including interest) of any that, under the facts and circumstances of your case, the
vehicle purchased by you or on your behalf. alternative basis more properly determines the source of
Tax reimbursement. The source of a foreign tax reim- your compensation than the time or geographical basis. If
bursement fringe benefit is determined based on the loca- you use an alternative basis, you must keep (and have
tion of the jurisdiction that imposed the tax for which you available for inspection) records to document why the al-
are reimbursed. ternative basis more properly determines the source of
your compensation. Also, if your total compensation from
Hazardous or hardship duty pay. The source of a all sources was $250,000 or more, you must check the
hazardous or hardship duty pay fringe benefit is deter- box on Form 1116, line 1b, and attach a written statement
mined based on the location of the hazardous or hardship to your tax return that sets forth all of the following.
duty zone for which the hazardous or hardship duty pay
fringe benefit is paid. A hazardous or hardship duty zone 1. Your name and social security number (written across
is any place in a foreign country which meets either of the the top of the statement).
following conditions. 2. The specific compensation income, or the specific
• The zone is designated by the Secretary of State as a fringe benefit, for which you are using the alternative
place where living conditions are extraordinarily diffi- basis.
cult, notably unhealthy, or where excessive physical 3. For each item in (2), the alternative basis of allocation
hardships exist, and for which a post differential of of source used.
15% or more would be provided under section

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4. For each item in (2), a computation showing how the property only if an income tax of at least 10% of the gain
alternative allocation was computed. on the sale is paid to a foreign country.
This rule also applies to losses if the foreign country
5. A comparison of the dollar amount of the U.S. com-
would have imposed a 10% or higher marginal tax rate
pensation and foreign compensation sourced under
had the sale resulted in a gain.
both the alternative basis and the time or geographi-
cal basis discussed earlier. Inventory. Gains, profits, and income from the sale or ex-
change of inventory property produced partly in, and
Transportation Income partly outside, the United States must be sourced on the
basis of the location of production with respect to that
Transportation income is income from the use of a vessel property. For example, income derived from the sale of in-
or aircraft or for the performance of services directly rela- ventory property to a foreign jurisdiction is sourced wholly
ted to the use of any vessel or aircraft. This is true whether within the United States if the property was produced en-
the vessel or aircraft is owned, hired, or leased. The term tirely in the United States, even if title passage occurred
“vessel or aircraft” includes any container used in connec- elsewhere. Likewise, income derived from inventory prop-
tion with a vessel or aircraft. erty sold in the United States, but produced entirely in an-
other country, is sourced in that country even if title pas-
All income from transportation that begins and ends in sage occurs in the United States. If the inventory property
the United States is treated as derived from sources in the is produced partly in, and partly outside, the United
United States. If the transportation begins or ends in the States, the income derived from its sale is sourced partly
United States, 50% of the transportation income is treated in the United States. See Internal Revenue Code section
as derived from sources in the United States. 863(b).

For transportation income from personal services, 50% Intangibles. Intangibles include patents, copyrights,
of the income is U.S. source income if the transportation is trademarks, and goodwill. The gain from the sale of amor-
between the United States and a U.S. possession. For tizable or depreciable intangible property, up to the previ-
nonresident aliens, this only applies to income derived ously allowable amortization or depreciation deductions, is
from, or in connection with, an aircraft. sourced in the same way as the original deductions were
sourced. This is the same as the source rule for gain from
Determining the Source of Income From the the sale of depreciable property. See Depreciable prop-
Sales or Exchanges of Certain Personal erty next for details on how to apply this rule.
Gain in excess of the amortization or depreciation de-
Property
duction is sourced in the country where the property is
used if the income from the sale is contingent on the pro-
In most cases, if personal property is sold by a U.S. resi-
ductivity, use, or disposition of that property. If the income
dent, the gain or loss from the sale is treated as U.S.
is not contingent on the productivity, use, or disposition of
source. If personal property is sold by a nonresident, the
the property, the income is sourced according to the sell-
gain or loss is treated as foreign source.
er's tax home, as discussed earlier. Payments for goodwill
are sourced in the country where the goodwill was gener-
This rule does not apply to the sale of inventory, intangi-
ated if the payments are not contingent on the productivity,
ble property, or depreciable property, or property sold
use, or disposition of the property.
through a foreign office or fixed place of business. The
rules for these types of property are discussed later. Depreciable property. The gain from the sale of depre-
ciable personal property, up to the amount of the previ-
U.S. resident. The term “U.S. resident,” for this purpose,
ously allowable depreciation, is sourced in the same way
means a U.S. citizen or resident alien who does not have a
as the original deductions were sourced. Thus, to the ex-
tax home in a foreign country. The term also includes a
tent the previous deductions for depreciation were alloca-
nonresident alien who has a tax home in the United
ble to U.S. source income, the gain is U.S. source. To the
States. In most cases, your tax home is the general area
extent the depreciation deductions were allocable to for-
of your main place of business, employment, or post of
eign sources, the gain is foreign source income. Gain in
duty, regardless of where you maintain your family home.
excess of the depreciation deductions is sourced the
Your tax home is the place where you are permanently or
same as inventory.
indefinitely engaged to work as an employee or self-em-
If personal property is used predominantly in the United
ployed individual. If you do not have a regular or main
States, treat the gain from the sale, up to the amount of
place of business because of the nature of your work, then
the allowable depreciation deductions, entirely as U.S.
your tax home is the place where you regularly live. If you
source income.
do not fit either of these categories, you are considered an
If the property is used predominantly outside the United
itinerant and your tax home is wherever you work.
States, treat the gain, up to the amount of the depreciation
Nonresident. A nonresident is any person who is not a deductions, entirely as foreign source income.
U.S. resident. A loss is sourced in the same way as the depreciation
U.S. citizens and resident aliens with a foreign tax deductions were sourced. However, if the property was
home will be treated as nonresidents for a sale of personal

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used predominantly outside the United States, the entire • Income from life insurance and endowment contracts.
loss reduces foreign source income.
• Income from canceled debts.
Depreciation includes amortization and any other allow-
able deduction for a capital expense that is treated as a • Your share of partnership gross income.
deductible expense. • Income in respect of a decedent.
Sales through foreign office or fixed place of busi- • Income from an estate or trust.
ness. In most cases, income earned by U.S. residents Global intangible low-taxed income (GILTI).
•
from the sale of personal property through an office or
other fixed place of business outside the United States is Exempt income. When you allocate deductions that
treated as foreign source if: are definitely related to one or more classes of gross in-
come, you take exempt income into account for the alloca-
• The income from the sale is from the business opera-
tion. However, do not take exempt income into account to
tions located outside the United States, and
apportion deductions that are not definitely related to a
• At least 10% of the income is paid as tax to the foreign separate limit category.
country.
Interest expense and state income taxes. You must
If less than 10% is paid as tax, the income is U.S. source. allocate and apportion your interest expense and state in-
This rule also applies to losses if the foreign country come taxes under the special rules discussed later under
would have imposed a 10% or higher marginal tax rate Interest expense and State income taxes.
had the sale resulted in a gain.
This rule does not apply to income sourced under the Class of gross income that includes more than
rules for inventory property, depreciable personal property, one separate limit category. If the class of gross in-
intangible property (when payments in consideration for come to which a deduction definitely relates includes ei-
the sale are contingent on the productivity, use, or disposi- ther:
tion of the property), or goodwill. • More than one separate limit category, or
• At least one separate limit category and U.S. source
Determining Taxable Income From Sources income,
Outside the United States
you must apportion the definitely related deductions within
To figure your taxable income in each category from sour- that class of gross income.
ces outside the United States, you first allocate to specific To apportion, you can use any method that reflects a
classes (kinds) of gross income the expenses, losses, and reasonable relationship between the deduction and the in-
other deductions (including the deduction for foreign come in each separate limit category. One acceptable
housing costs) that are definitely related to that income. method for many individuals is based on a comparison of
the gross income in a class of income to the gross income
Definitely related. A deduction is definitely related to a in a separate limit income category.
specific class of gross income if it is incurred either: Use the following formula to figure the amount of the
• As a result of, or incident to, an activity from which that definitely related deduction apportioned to the income in
income is derived; or the separate limit category.

• In connection with property from which that income is Gross income in separate limit category × Deduction
derived. Total gross income in the class
Do not take exempt income into account when you appor-
Classes of gross income. You must determine which of tion the deduction. However, income excluded under the
the following classes of gross income your deductions are foreign earned income or foreign housing exclusion is not
definitely related to. considered exempt. You must, therefore, apportion deduc-
• Compensation for services, including wages, salaries, tions to that income.
fees, and commissions.
Interest expense. In most cases, you apportion your in-
• Gross income from business. terest expense on the basis of your assets. However, cer-
• Gains from dealings in property. tain special rules apply. If you have gross foreign source
income (including income that is excluded under the for-
• Interest.
eign earned income exclusion) of $5,000 or less, your in-
• Rents. terest expense can be allocated entirely to U.S. source in-
• Royalties. come.
• Dividends. Business interest. Apportion interest incurred in a
trade or business using the asset method based on your
• Alimony and separate maintenance. business assets.
• Annuities. Under the asset method, you apportion the interest ex-
pense to your separate limit categories based on the value
• Pensions. of the assets that produced the income. You can value

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assets at the tax book value or the alternative book value. your business is $50,000. Your investment portfolio gener-
For more information about the asset method, see Regu- ated $4,000 in U.S. source income and $6,000 in foreign
lations section 1.861-9T(g). source passive income. All of your debts bear interest at
the annual rate of 10%.
Investment interest. Apportion this interest on the ba-
The interest expense for your business is $2,000. It is
sis of your investment assets.
apportioned on the basis of the business assets. All of
Passive activity interest. Apportion interest incurred your business assets generate U.S. source income; there-
in a passive activity on the basis of your passive activity fore, they are U.S. assets. This $2,000 is interest expense
assets. allocable to U.S. source income.
The interest expense for your investments is also
Partnership interest. General partners and limited
$2,000. It is apportioned on the basis of investment as-
partners with partnership interests of 10% or more must
sets. $800 ($40,000/$100,000 × $2,000) of your invest-
classify their distributive shares of partnership interest ex-
ment interest is apportioned to U.S. source income and
pense under the three categories listed above. They must
$1,200 ($60,000/$100,000 × $2,000) is apportioned to for-
apportion the interest expense according to the rules for
eign source passive income.
those categories by taking into account their distributive
Your home mortgage interest expense is $12,000. It is
shares of partnership gross income or pro rata shares of
apportioned on the basis of all your gross income. Your
partnership assets. For special rules that may apply, see
gross income is $60,000, $54,000 of which is U.S. source
Regulations section 1.861-9(e).
income and $6,000 of which is foreign source passive in-
Limited partners with partnership interests of less than
come. Thus, $1,200 ($6,000/$60,000 × $12,000) of the
10% must directly allocate their distributive shares of part-
home mortgage interest is apportioned to foreign source
nership interest expense to their distributive shares of
passive income.
partnership gross income. They must apportion the inter-
est expense according to their relative distributive shares State income taxes. State income taxes (and certain
of gross foreign source income in each income category taxes measured by taxable income) are definitely related
and of U.S. source income from the partnership. For spe- and allocable to the gross income on which the taxes are
cial rules that may apply, see Regulations sections imposed. If state income tax is imposed in part on foreign
1.861-9T(e) and 1.861-9(e)(2) and (3). Also, see the Part- source income, the part of your state tax imposed on the
ner's Instructions for Schedule K-3 (Form 1065) for further foreign source income is definitely related and allocable to
information. foreign source income.
Home mortgage interest. This is your deductible Foreign income not exempt from state tax. If the
home mortgage interest, including points from Schedule A state does not specifically exempt foreign income from
(Form 1040). Apportion it under the gross income method, tax, the following rules apply.
taking into account all income (including business, pas-
sive activity, and investment income), but excluding in- • If the total income taxed by the state is greater than
come that is exempt under the foreign earned income ex- the amount of U.S. source income for federal tax pur-
clusion. The gross income method is based on a poses, then the state tax is allocable to both U.S.
comparison of the gross income in a separate limit cate- source and foreign source income.
gory with total gross income. • If the total income taxed by the state is less than or
The Instructions for Form 1116 have a worksheet for equal to the U.S. source income for federal tax purpo-
apportioning your deductible home mortgage interest ex- ses, none of the state tax is allocable to foreign source
pense. income.
For this purpose, however, any qualified home (as de-
fined in Pub. 936) that is rented is considered a business Foreign income exempt from state tax. If state law
asset for the period in which it is rented. You therefore ap- specifically exempts foreign income from tax, the state
portion this interest under the rules for passive activity or taxes are allocable to the U.S. source income.
business interest. Example. Your total income for federal tax purposes,
before deducting state tax, is $100,000. Of this amount,
Example. You are operating a business as a sole pro- $25,000 is foreign source income and $75,000 is U.S.
prietorship. Your business generates only U.S. source in- source income. Your total income for state tax purposes is
come. Your investment portfolio consists of several $90,000, on which you pay state income tax of $6,000.
less-than-10% stock investments. You have stocks with an The state does not specifically exempt foreign source in-
adjusted basis of $100,000. Some of your stocks (with an come from tax. The total state income of $90,000 is
adjusted basis of $40,000) generate U.S. source income. greater than the U.S. source income for federal tax purpo-
Your other stocks (with an adjusted basis of $60,000) gen- ses. Therefore, the $6,000 is definitely related and alloca-
erate foreign passive income. You own your main home, ble to both U.S. and foreign source income.
which is subject to a mortgage of $120,000. Interest on Assuming that $15,000 ($90,000 − $75,000) is the for-
this loan is home mortgage interest. You also have a bank eign source income taxed by the state, $1,000 of state in-
loan in the amount of $40,000. The proceeds from the come tax is apportioned to foreign source income, figured
bank loan were divided equally between your business as follows.
and your investment portfolio. Your gross income from

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$15,000 those instructions to make adjustments or if you must use
× $6,000 = $1,000
$90,000 the instructions in this publication to make adjustments.
If you use the instructions in this publication, see Ad-
Deductions not definitely related. You must apportion justments to Foreign Source Capital Gains and Losses be-
to your foreign income in each separate limit category a low to determine the adjustments you must make.
fraction of your other deductions that are not definitely re-
lated to a specific class of gross income. If you itemize, Form 1116, line 18. If you have U.S. or foreign source
these deductions are medical expenses, general sales capital gains, you may be required to adjust the amount
taxes, and real estate taxes for your home. If you do not you enter on line 18 of Form 1116. Use the instructions for
itemize, this is your standard deduction. You should also line 18 in the Instructions for Form 1116 to determine
apportion any other deductions that are not definitely rela- whether you are required to make an adjustment and to
ted to a specific class of income, including deductions determine the amount of the adjustment.
shown on Schedule 1 (Form 1040), Part II, Adjustments to
Income. Adjustments to Foreign Source Capital
The numerator of the fraction is your gross foreign in- Gains and Losses
come in the separate limit category, and the denominator
is your total gross income from all sources. For this pur- You may have to make the following adjustments to your
pose, gross income includes income that is excluded un- foreign source capital gains and losses.
der the foreign earned income provisions but does not in-
• U.S. capital loss adjustment.
clude any other exempt income.
• Capital gain rate differential adjustment.
Itemized deduction limit. The overall limitation on item-
Before you make these adjustments, you must reduce
ized deductions is suspended for tax years beginning after
your net capital gain by the amount of any gain you elec-
2017 and before 2026.
ted to include in investment income on line 4g of Form
4952. Your net capital gain is the excess of your net
Qualified Dividends long-term capital gain for the year over any net short-term
capital loss for the year. Foreign source gain you elected
Qualified dividends are the amounts you entered on to include on line 4g of Form 4952 must be entered di-
line 3a of Form 1040, 1040-SR, or 1040-NR. If you have rectly on line 1a of Form 1116 without adjustment.
any qualified dividends, you may be required to make ad-
justments to the amount of those qualified dividends be- U.S. capital loss adjustment. You must adjust the
fore you take them into account on line 1a or line 18 of amount of your foreign source capital gains to the extent
Form 1116. See Foreign Qualified Dividends and Capital that your foreign source capital gain exceeds the amount
Gains (Losses) in the Form 1116 instructions to determine of your worldwide capital gain (the “U.S. capital loss ad-
the adjustments you may be required to make before tak- justment”).
ing foreign qualified dividends into account on line 1a of Your “foreign source capital gain” is the amount of your
Form 1116. See the instructions for line 18 in the Instruc- foreign source capital gains in excess of your foreign
tions for Form 1116 to determine the adjustments you may source capital losses. If your foreign source capital gains
be required to make before taking U.S. or foreign qualified do not exceed your foreign source capital losses, you do
dividends into account on line 18 of Form 1116. not have a foreign source capital gain and you do not
need to make the U.S. capital loss adjustment. See Capi-
Capital Gains and Losses tal gain rate differential adjustment, later, for adjustments
you must make to your foreign source capital gains or los-
If you have capital gains (including any capital gain distri- ses.
butions) or capital losses, you may have to make certain Your “worldwide capital gain” is the amount of your
adjustments to those gains or losses before taking them worldwide (U.S. and foreign) capital gains in excess of
into account on line 1a (gains), line 5 (losses), or line 18 your worldwide (U.S. and foreign) capital losses. If your
(taxable income before subtracting exemptions) of Form worldwide capital losses equal or exceed your worldwide
1116. capital gains, your “worldwide capital gain” is zero.
Your U.S. capital loss adjustment is the amount of your
Form 1116, lines 1a and 5. If you have foreign source foreign source capital gain in excess of your worldwide
capital gains or losses, you may be required to make cer- capital gain. (If the amount of your foreign source capital
tain adjustments to those foreign source capital gains or gain does not exceed the amount of your worldwide capi-
losses before you take them into account on line 1a or tal gain, you do not have a U.S. capital loss adjustment.)
line 5 of Form 1116. Use the instructions under Foreign See Capital gain rate differential adjustment, later, for ad-
Qualified Dividends and Capital Gains (Losses) in the In- justments you must make to your foreign source capital
structions for Form 1116 to determine if you are required gains or losses. If you have a U.S. capital loss adjustment,
to make adjustments. Also, use the instructions under For- you must reduce your foreign source capital gains by the
eign Qualified Dividends and Capital Gains (Losses) in amount of the U.S. capital loss adjustment. To make this
the Instructions for Form 1116 to determine if you can use adjustment, you must allocate the total amount of the U.S.

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Table 4. Rate Groups
A capital gain or loss is in the... IF...
28% rate group it is included on the 28% Rate Gain Worksheet in the Instructions for
Schedule D.
25% rate group it is included on lines 1 through 13 of the Unrecaptured Section 1250
Gain Worksheet in the Instructions for Schedule D.
20% rate group it is a long-term capital gain that is not in the 28% or 25% rate group
and is taxed at a 20% rate or it is a long-term capital loss that is not in
the 28%, 25%, or 15% rate group.
15% rate group it is a long-term capital gain that is not in the 28% or 25% rate group
and is taxed at a 15% rate or it is a long-term capital loss that is not in
the 28%, 25%, or 20% rate group.
0% rate group it is a long-term capital gain that is not in the 25% or 28% rate group
and is taxed at a rate of 0%.
Short-term rate group it is a short-term capital gain or loss.

capital loss adjustment among your foreign source capital Step 2. If you apportioned any amount of the total U.S.
gains using the following steps. capital loss adjustment to a separate category with a net
capital gain in more than one rate group, you must further
Step 1. You must apportion the U.S. capital loss ad-
apportion the U.S. capital loss adjustment among the rate
justment among your separate categories that have a net
groups in that separate category (separate category rate
capital gain. A separate category has a net capital gain if
groups) that have a net capital gain.
the amount of foreign source capital gains in the separate
The rate groups are the 28% rate group, the 25% rate
category exceeds the amount of foreign source capital
group, the 20% rate group, the 15% rate group, the 0%
losses in the separate category. You must apportion the
rate group, and the short-term rate group. The 28% rate
U.S. capital loss adjustment pro rata based on the amount
group, the 25% rate group, the 20% rate group, the 15%
of net capital gain in each separate category.
rate group, and the 0% rate group are “long-term” rate
Example 1. Alfie has a $300 foreign source capital groups. Table 4 explains the rate groups.
gain that is passive category income, a $1,000 foreign You must apportion the U.S. capital loss adjustment pro
source capital gain that is general category income, a rata based on the amount of net capital gain in each sepa-
$400 foreign source capital loss that is general category rate category rate group. Your net capital gain in a sepa-
income, and a $150 U.S. source capital loss. Alfie figures rate category rate group is the amount of your foreign
the net gains and U.S. capital loss adjustment as follows. source capital gains in that separate category in the rate
group in excess of your foreign source capital losses in
Foreign source capital gain = $900 that separate category in the rate group. If your foreign
(($1,000 + $300) − $400) source capital losses exceed your foreign source capital

Worldwide capital gain = $750 gains, you have a net capital loss in the separate category
(($1,000 + $300) − ($400 + $150)) rate group.

U.S. capital loss adjustment = $150
($900 − $750) Example 2. Dennis has a $300 U.S. source long-term
capital loss. Dennis also has foreign source capital gains
Alfie must then apportion the U.S. capital loss adjustment and losses in the following categories.
($150) between the passive category income and the gen-
eral category income based on the amount of net capital Income category 28% rate 15% rate short-term
gain in each separate category.
Passive $200 ($100) $100
$50 apportioned to passive category income General $700
($150 × $300/$900) ($300)
Alfie reduces the $300 net capital gain that is passive cat- Dennis figures the U.S. capital loss adjustment as fol-
egory income by $50 and includes the resulting $250 on lows.
line 1a of the Form 1116 for the passive category income.
Dennis’ foreign source capital gain is $600.
$100 apportioned to general category income (($200 + $700 + $100) − ($100 + $300))
($150 × $600/$900)
Dennis’ worldwide capital gain is $300.
Alfie reduces the $600 of net capital gain that is general (($200 + $700 + $100) − ($100 + $300 + $300))
category income by $100 and includes the resulting $500
on line 1a of the Form 1116 for the general category in- Dennis’ U.S. capital loss adjustment is $300.
come. ($600 − $300)

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Dennis must apportion the $300 U.S. capital loss ad- 1. First, determine the amount of your net capital gain in
justment between passive category income and general each separate category rate group that must be ad-
category income based on the amount of net capital gain justed.
in each separate category.
2. Then, make the capital gain rate differential adjust-
Dennis’ net capital gain, passive category income is $200. ment. See Capital gain rate differential adjustment for
(($100 + $200) − $100) net capital gains, later.
Dennis apportions $100 to passive category income.
($300 × $200/$600) How to determine the amount of net capital gain
that must be adjusted. You must adjust the net capital
Dennis' net capital gain, general category income is $400. gain in each separate category long-term rate group that
($700 − $300)
Dennis apportions $200 to general category income. remains after the U.S. capital loss adjustment. You must
($300 × $400/$600) adjust the entire amount of that remaining net capital gain
if you do not have a net long-term capital loss from U.S.
Dennis has net capital gain in more than one rate group sources or you do not have any short-term capital gains. If
that is passive category income. Therefore, the $100 ap- you have a net long-term capital loss from U.S. sources
portioned to passive category income must be further ap- and you have any short-term capital gains, you only need
portioned between the short-term rate group and the 28% to adjust a portion of the remaining net capital gain in each
rate group based on the amount of net capital gain in each separate category long-term rate group. In that case, the
rate group. portion you must adjust is limited to the portion of the re-
maining net capital gain in the separate category
Dennis apportions $33.33 to the short-term rate group. long-term rate group in excess of the U.S. long-term loss
($100 × $100/$300) adjustment amount (if any) allocated to that separate cate-

Dennis apportions $66.67 to the 28% rate group. gory long-term rate group. You have a net long-term capi-
($100 × $200/$300) tal loss from U.S. sources if your long-term capital losses
from U.S. sources exceed your long-term capital gains
After the U.S. capital loss adjustment, Dennis has $100 from U.S. sources.
of foreign source 15% capital loss that is passive category The U.S. long-term loss adjustment amount is the ex-
income, $66.67 of foreign source short-term capital gain cess of your net long-term capital loss from U.S. sources
that is passive category income, $133.33 of foreign source over the amount by which you reduced your long-term
28% gain that is passive category income, and $200 of capital gains from foreign sources under U.S. capital loss
foreign source 15% capital gain that is general category adjustment, earlier. If only one separate category
income, as shown in the following table. long-term rate group has a net capital gain after the U.S.
capital loss adjustment, your U.S. long-term loss adjust-
Income ment amount is allocated to that separate category
category 28% rate 15% rate Short-term long-term rate group. If more than one separate category
Passive $200.00 $100.00 long-term rate group has a net capital gain after the U.S.
−66.67 ($100) –33.33 capital loss adjustment, you must allocate the U.S.
$133.33 $66.67 long-term loss adjustment amount among the separate
General $700.00 category long-term rate groups pro rata based on the
(300.00) amount of the remaining net capital gain in each separate
−200.00 category long-term rate group.
$200.00 You must adjust the portion of your net capital gain in a
separate category long-term rate group in excess of the
Capital gain rate differential adjustment. After you U.S. long-term loss adjustment amount you allocated to
have made your U.S. capital loss adjustment, you must that separate category long-term rate group. See Capital
make additional adjustments (capital gain rate differential gain rate differential adjustment for net capital gains, later.
adjustments) to your foreign source capital gains and los- The remaining portion of your net capital gain in the sepa-
ses. rate category long-term rate group must be entered on
You must make adjustments to each separate category line 1a of Form 1116 without adjustment.
rate group that has a net capital gain or loss. See Step 2
under U.S. capital loss adjustment, earlier, for instructions Example 3. Mary has a $200 15% capital loss from
on how to determine whether you have a net capital gain U.S. sources, a $50 15% capital gain from U.S. sources,
or loss in a separate category rate group. and a $200 short-term capital gain from U.S. sources.
Mary also has a $300 28% capital gain and a $150 15%
How to make the adjustment. How you make the
capital gain from foreign sources that are passive cate-
capital gain rate differential adjustment depends on
gory income.
whether you have a net capital gain or net capital loss in a
Mary does not have a U.S. capital loss adjustment be-
separate category rate group.
cause the foreign source capital gain ($450) does not ex-
Net capital gain in a separate category rate group. ceed the worldwide capital gain ($500).
If you have a net capital gain in a separate category rate Mary’s net long-term capital loss from U.S. sources is
group, you must do the following. $150 ($200 − $50). The U.S. long-term loss adjustment

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amount is $150 ($150 − $0). Mary allocates the $150 be- Mary includes $251.36 of the 28% capital gain
tween the 28% rate group and the 15% rate group as fol- ($200 × 0.7568) + $100
lows.
Mary allocates $100 ($150 x $300/$450) to the 28% Mary includes $90.54 of the 15% capital gain ($100 × 0.4054) +
rate group that is passive category income. Therefore, $50
$200 ($300 − $100) of the $300 28% capital gain must be
adjusted before it is included on line 1a. The remaining Example 6. The facts are the same as in Example 2,
$100 of 28% capital gain is included on line 1a without ad- earlier. After making the U.S. capital loss adjustment, Den-
justment. nis has the following.
Mary allocates $50 ($150 x $150/$450) to the 15% rate
group that is passive category income. Therefore, only Income
$100 ($150 − $50) of the $150 15% capital gain must be category 28% rate 15% rate short-term
adjusted before it is included on line 1a. The remaining Passive $133.33 ($100) $66.67
$50 of 15% capital gain is included on line 1a without ad- General $200
justment.
Dennis now determines the amount of the remaining net
Capital gain rate differential adjustment for net
capital gain in each separate category long-term rate
capital gains. Adjust your net capital gain (or the appli-
group that must be adjusted.
cable portion of your net capital gain) in each separate
Dennis' net long-term capital loss from U.S. sources is
category long-term rate group as follows.
$300. The U.S. long-term loss adjustment amount is
• For each separate category that has a net capital gain $33.33 ($300 − $266.67). Dennis must allocate this
in the 0% rate group, do not include the applicable amount between the $133.33 of net capital gain remaining
amount on Form 1116. in the 28% rate group that is passive category income and
• For each separate category that has a net capital gain the $200 of net capital gain remaining in the 15% rate
in the 15% rate group, multiply the applicable amount group that is general category income.
of the net capital gain by 0.4054. Dennis allocates $13.33 ($33.33 × $133.33 ÷ $333.33)
of the U.S. long-term loss adjustment to passive category
• For each separate category that has a net capital gain income in the 28% rate group. Therefore, Dennis must ad-
in the 20% rate group, multiply the applicable amount just $120 ($133.33 − $13.33) of the $133.33 net capital
of the net capital gain by 0.5405. gain remaining in the 28% rate group that is passive cate-
• For each separate category that has a net capital gain gory income. Dennis includes $104.15 (($120 × 0.7568) +
in the 25% rate group, multiply the applicable amount $13.33) of 28% capital gain and $66.67 of short-term capi-
of the net capital gain by 0.6757. tal gain on line 1a of Form 1116 for passive category in-
come.
• For each separate category that has a net capital gain Dennis allocates $20 ($33.33 × $200 ÷ $333.33) to the
in the 28% rate group, multiply the applicable amount 15% rate group for general category income. Therefore,
of the foreign source net capital gain by 0.7568. Dennis must adjust $180 ($200 − $20) of the $200 net
Add each result to any net capital gain in the same capital gain remaining in the 15% rate group that is gen-
long-term separate category rate group that you were not eral category income. Dennis includes $92.97 (($180 ×
required to adjust and include the combined amounts on 0.4054) + $20) of 15% capital gain on line 1a of Form
line 1a of the applicable Form 1116. 1116 for general category income.
No adjustment is required if you have a net capital gain
Net capital loss in a separate category rate group.
in a short-term rate group. Include the amount of net capi-
If you have a net capital loss in a separate category rate
tal gain in any short-term rate group on line 1a of the appli-
group, you must do the following.
cable Form 1116 without adjustment.
1. First, determine the rate group of the capital gain off-
Example 4. Beth has $200 of capital gains in the 28% set by that net capital loss. See How to determine the
rate group that are general category income and no other rate group of the capital gain offset by the net capital
items of capital gain or loss. Beth must adjust the capital loss next.
gain before it is included on line 1a as follows.
2. Then, make the capital gain rate differential adjust-
$200 × 0.7568 = $151.36 ment. See Capital gain rate differential adjustment for
net capital loss, later.
Beth includes $151.36 of capital gain on line 1a of Form How to determine the rate group of the capital
1116 for the general category income. gain offset by the net capital loss. Use the following
ordering rules to determine the rate group of the capital
Example 5. The facts are the same as in Example 3, gain offset by the net capital loss.
earlier. Mary includes the following amounts of passive Determinations under the following ordering rules are
category income on line 1a of Form 1116 for passive cate- made after you have taken into account any U.S. capital
gory income. loss adjustment. However, determinations under the fol-
lowing ordering rules do not take into account any capital

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gain rate differential adjustments that you made to any net the capital gain offset by the net capital loss, you make the
capital gain in a separate category rate group. capital gain rate differential adjustment by doing the fol-
lowing.
Step 1. Net capital losses from each separate cate-
gory rate group are netted against net capital gains in the • To the extent a net capital loss in a separate category
same rate group in other separate categories. rate group offsets capital gain in the 0% rate group,
multiply the net capital loss by zero.
Step 2. U.S. source capital losses are netted against
U.S. source capital gains in the same rate group. • To the extent a net capital loss in a separate category
rate group offsets capital gain in the 15% rate group,
Step 3. Net capital losses from each separate cate- multiply that amount of the net capital loss by 0.4054.
gory rate group in excess of the amount netted against for-
eign source net capital gains in Step 1 are netted against • To the extent a net capital loss in a separate category
your remaining foreign source net capital gains and your rate group offsets capital gain in the 20% rate group,
U.S. source net capital gains as follows. multiply that amount of the net capital loss by 0.5405.
1. First, against U.S. source net capital gains in the • To the extent that a net capital loss in a separate cate-
same rate group. gory rate group offsets capital gain in the 25% rate
group, multiply that amount of the net capital loss by
2. Next, against net capital gains in other rate groups 0.6757.
(without regard to whether such net capital gains are
U.S. or foreign source net capital gains) as follows. • To the extent that a net capital loss in a separate cate-
gory rate group offsets capital gain in the 28% rate
a. A foreign source net capital loss in the short-term group, multiply that amount of the net capital loss by
rate group is first netted against any net capital 0.7568.
gain in the 28% rate group, then against any net Include the results on line 5 of the applicable Form 1116.
capital gain in the 25% rate group, then against No adjustment is required to the extent a net capital
any net capital gain in the 20% rate group, then loss offsets short-term capital gain. Thus, a net capital
against any net capital gain in the 15% rate group, loss is included on line 5 of the applicable Form 1116 with-
and finally to offset capital gain net income in the out adjustment to the extent the net capital loss offsets net
0% rate group. capital gain in the short-term rate group.
b. A foreign source net capital loss in the 28% rate
group is netted first against any net capital gain in Example 7. The facts are the same as in Example 2,
the 25% rate group, then against any net capital earlier. Dennis has a $100 foreign source 15% capital loss
gain in the 20% rate group, then against any net that is passive category income.
capital gain in the 15% rate group, and finally to This loss is netted against the $200 foreign source 15%
offset capital gain net income in the 0% rate capital gain that is general category income according to
group. Step 1.
Dennis includes $40.54 of the capital loss on line 5 of
c. A foreign source net capital loss in the 20% rate the Form 1116 for general category income.
group is netted first against any net capital gain in
the 15% rate group, then against any net capital ($100 × 0.4054)

gain in the 0% rate group, then against any net Example 8. Dawn has a $20 net capital loss in the
capital gain in the 28% rate group, and finally to 15% rate group that is passive category income, a $40 net
offset net capital gain in the 25% rate group. capital loss in the 15% rate group that is general category
d. A foreign source net capital loss in the 15% rate income, a $50 U.S. source net capital gain in the 15% rate
group is netted first against any net capital gain in group, and a $50 net capital gain in the 28% rate group
the 0% rate group, then against any net capital that is passive category income, as shown in the following
gain in the 28% rate group, and finally against any table.
net capital gain in the 25% rate group.
Income category 28% rate 15% rate
The net capital losses in any separate category rate group
are treated as coming pro rata from each separate cate- Foreign
gory that contains a net capital loss in that rate group to Passive $50 ($20)
the extent netted against: Foreign
General ($40)
• Net capital gains in any other separate category under U.S. Source $50
Step 1,
• Any U.S. source net capital gain under Step 3(1), or Of the total $60 of foreign source net capital losses in the
15% rate group, $50 is treated as offsetting the $50 U.S.
• Net capital gains in any other rate group under Step source net capital gain in the 15% rate group. (See Step
3(2). 3(1).)
Capital gain rate differential adjustment for net
capital loss. After you have determined the rate group of

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$16.67 of the $50 is treated as coming from passive category income. Example. You have a $2,000 loss that is general cate-
($50 × $20/$60) gory income, $3,000 of passive category income, and
$33.33 of the $50 is treated as coming from general category income. $2,000 of income re-sourced by treaty. You must allocate
($50 × $40/$60)
the $2,000 loss to the income in the other separate cate-
The remaining $10 of foreign source net capital losses in gories. 60% ($3,000/$5,000) of the $2,000 loss (or
the 15% rate group is treated as offsetting net capital gain $1,200) reduces passive category income and 40%
in the 28% rate group. (See Step 3(2c).) ($2,000/$5,000) (or $800) reduces the income re-sourced
by treaty.
$3.33 is treated as coming from passive category income.
($10 × $20/$60) Loss more than foreign income. If you have a loss
$6.67 is treated as coming from general category income. remaining after reducing the income in other separate limit
($10 × $40/$60)
categories, use the remaining loss to reduce U.S. source
Dawn includes $9.28 of the capital loss in the amount en- income. For this purpose, the amount of your U.S. source
tered on line 5 of Form 1116 for passive category income. income is your taxable income from U.S. sources in-
This is $6.76 creased by the amount of capital losses from U.S. sources
($16.67 × 0.4054) that reduced foreign source capital gains as part of a U.S.
plus $2.52 capital loss adjustment. See U.S. capital loss adjustment,
($3.33 × 0.7568) earlier, under Adjustments to Foreign Source Capital
Dawn includes $18.56 of capital loss in the amount en- Gains and Losses. When you use a foreign loss to offset
tered on line 5 of Form 1116 for general category income. U.S. source income, you must recapture the loss as ex-
plained later under Recapture of Prior Year Overall For-
This is $13.51 eign Loss Accounts.
($33.33 × 0.4054)
plus $5.05
($6.67 × 0.7568) U.S. Losses
Dawn also includes $37.84 ($50 × 0.7568) of capital gain
in the amount entered on line 1a of Form 1116 for passive You should allocate any net loss from sources in the Uni-
category income. ted States among the different categories of foreign in-
come after allocating all foreign losses as described ear-
lier, and before any of the adjustments discussed later.
Allocation of Foreign and U.S. Losses
The amount of your net loss from sources in the United
You must allocate foreign losses for any tax year and U.S.
States is equal to the excess of (1) your foreign source
losses for any tax year (to the extent such losses do not
taxable income in all of your separate categories in the ag-
exceed the separate limitation incomes for such year)
gregate, after taking into account any adjustments under
among incomes on a proportionate basis.
Qualified Dividends and Adjustments to Foreign Source
Capital Gains and Losses, earlier; over (2) the amount of
Foreign Losses taxable income you enter on Form 1116, line 18.
If you have a foreign loss when figuring your taxable in-
come in a separate limit income category, and you have Recapture of Prior Year Overall Foreign Loss
income in one or more of the other separate categories, Accounts
you must first reduce the income in these other categories
by the loss before reducing income from U.S. sources. If you have only losses in your separate limit categories, or
if you have a loss remaining after allocating your foreign
Note. The amount of your taxable income (or loss) in a losses to other separate categories, you have an overall
separate category is determined after any adjustments foreign loss. If you use this loss to offset U.S. source in-
you make to your foreign source qualified dividends or come (resulting in a reduction of your U.S. tax liability),
your foreign source capital gains (losses). See Qualified you must recapture your loss in each succeeding year in
Dividends and Adjustments to Foreign Source Capital which you have taxable income from foreign sources in
Gains and Losses, earlier, under Capital Gains and Los- the same separate limit category. You must recapture the
ses. overall loss regardless of whether you chose to claim the
foreign tax credit for the loss year.
Example. You have $10,000 of passive category in-
come and incur a loss of $5,000 of general category in- You recapture the loss by treating part of your taxable
come. You must use the $5,000 loss to offset $5,000 of income from foreign sources in a later year as U.S. source
passive category income. income. In addition, if, in a later year, you sell or otherwise
How to allocate. You must allocate foreign losses among dispose of property used in your foreign trade or business,
the separate limit income categories in the same propor- you may have to recognize gain and treat it as U.S. source
tion as each category's income bears to total foreign in- income, even if the disposition would otherwise be non-
come. taxable. See Dispositions, later. The amount you treat as
U.S. source income reduces the foreign source income
and therefore reduces the foreign tax credit limit.

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You must establish separate accounts for each type of come, part of your foreign source taxable income (in the
foreign loss that you sustain. The balances in these ac- same separate limit category as the loss) for each suc-
counts are the overall foreign loss subject to recapture. ceeding year is treated as U.S. source taxable income.
Reduce these balances at the end of each tax year by the The part that is treated as U.S. source taxable income is
loss that you recaptured. You must attach a statement to the smaller of the following.
your Form 1116 to report the balances (if any) in your
1. The total amount of maximum potential recapture in
overall foreign loss accounts.
all overall foreign loss accounts. The maximum poten-
Overall foreign loss. You have an overall foreign loss if tial recapture in any account for a category is the
your gross income from foreign sources for a tax year is lesser of:
less than the sum of your expenses, losses, or other de- a. The current year taxable income from foreign
ductions that you allocated and apportioned to foreign in- sources in that category (the amount from Form
come under the rules explained earlier under Determining 1116, line 15, less any adjustment for allocation of
Taxable Income From Sources Outside the United States. foreign losses and U.S. losses for that category,
But see Losses not considered, later, for exceptions. discussed earlier); or
Example. You are single and have gross dividend in- b. The balance in the overall foreign loss account for
come of $75,000 from U.S. sources. You also have a that category.
greater-than-10% interest in a foreign partnership in which
2. 50% (or more, if you choose) of your total taxable in-
you materially participate. The partnership has a loss for
come from foreign sources.
the year, and your distributive share of the loss is $15,000.
Your share of the partnership's gross income is $220,000, If the total foreign income subject to recharacterization is
and your share of its expenses is $235,000. Your only for- the amount described in (1) above, then for each separate
eign source income is your share of partnership income, category the recapture amount is the maximum potential
which is foreign branch category income. You are a bona recapture amount for that category. If the total foreign in-
fide resident of a foreign country and you elect to exclude come subject to recharacterization is the amount descri-
your foreign earned income. You exclude the maximum bed in (2) above, then for each separate category the re-
$120,000. You also have itemized deductions of $34,000 capture amount is figured by multiplying the total
that are not definitely related to any item of income. recapture amount by the following fraction.
In figuring your overall foreign loss for foreign branch
category income for the year, you must allocate a ratable Maximum potential recapture amount for the overall foreign
part of the $34,000 in itemized deductions to the foreign loss account in the separate category
source income. You figure the ratable part of the $34,000 Total amount of maximum potential recapture in all overall
that is for foreign source income, based on gross income, foreign loss accounts
as follows.
Example. During 2022 and 2023, you were single and
$220,000 (Foreign gross income) × $34,000 = $25,356 a 20% general partner in a partnership that derived its in-
$295,000 (Total gross income)
come from Country X. You also received dividend income
Therefore, your overall foreign loss for the year is from U.S. sources during those years.
$32,174 figured as follows. For 2022, the partnership had a loss and your share
was $20,000, consisting of $225,000 gross income less
Foreign gross income. . . . . . . . . . . . . . . . . . . . . $220,000 $245,000 expenses. Your net loss from the partnership
Less:
Foreign earned income was $10,044, after deducting the foreign earned income
exclusion. . . . . . . . . . . . . . . . . $120,000 exclusion and definitely related allowable expenses. This
Allowable definitely loss is related to foreign branch category income. Your
related expenses U.S. dividend income was $20,000. Your itemized deduc-
[($100,000/$220,000) ×
$235,000]. . . . . . . . . . . . . . . . . 106,818 tions totaled $30,000 and were not definitely related to
Ratable part of itemized any item of income. In figuring your taxable income for
deductions. . . . . . . . . . . . . . . . 25,356 252,174 2022, you deducted your share of the partnership loss
Overall foreign loss. . . . . . . . . . . . . . . . . . . . . . $ 32,174 from Country X from your U.S. source income.
During 2023, the partnership had net income from
Losses not considered. You do not consider the fol-
Country X. Your share of the net income was $140,000,
lowing in figuring an overall foreign loss in a given year.
consisting of $200,000 gross income less $60,000 expen-
• Net operating loss deduction. ses. Your net income from the partnership was $56,000 af-
• Foreign expropriation loss not compensated by insur- ter deducting the foreign earned income exclusion and the
ance or other reimbursement. definitely related allowable expenses. This is foreign
branch category income. You also received dividend in-
• Casualty or theft loss not compensated by insurance come of $20,000 from U.S. sources. Your itemized deduc-
or other reimbursement. tions were $30,000, which are not definitely related to any
item of income. You paid income taxes of $14,000 to
Recapture provision. If you have an overall foreign loss Country X on your share of the partnership income.
for any tax year and use the loss to offset U.S. source in-

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When figuring your foreign tax credit for 2023, you must • The foreign source taxable income of the same sepa-
find the foreign source taxable income that you must treat rate limit category that resulted in the overall foreign
as U.S. source income because of the foreign loss recap- loss minus the foreign taxes imposed on that income.
ture provisions.
You figure the foreign taxable income that you must re- Dispositions. If you dispose of appreciated trade or busi-
characterize as follows. ness property used predominantly outside the United
States, and that property generates foreign source taxable
A. Determination of 2022 Overall Foreign Loss income of the same separate limit category that resulted
1) Partnership loss from Country X. . . . . . . . . . . . . . . $10,044 in an overall foreign loss, the disposition is subject to the
2) Add: Part of itemized deductions recapture rules. In most cases, you are considered to rec-
allocable to gross income from ognize foreign source taxable income in the same sepa-
Country X rate limit category as the overall foreign loss to the extent
of the lesser of:
$225,000 × $30,000 = $27,551
$245,000 The FMV of the property that is more than your adjus-
•
ted basis in the property, or
3) Overall foreign loss for 2022. . . . . . . . . . . . . . . . . $37,595
• The remaining amount of the overall foreign loss not
B. Amount of Recapture for 2023 recaptured in prior years or in the current year as de-
1) Balance for foreign branch category scribed earlier under Recapture provision and Recap-
income foreign loss account. . . . . . . . . . . . . . . . . $37,595
2) Taxable foreign branch category income after turing more overall foreign loss than required.
allocation of foreign losses—Foreign branch This rule applies to a disposition whether or not you ac-
category income. . . . . . . . . . . . . . . . . $56,000 tually recognized gain on the disposition and irrespective
Less: Itemized deductions of the source (U.S. or foreign) of any gain recognized on
allocable to that income
[($200,000/$220,000) the disposition.
× $30,000]. . . . . . . . . . . . . . . . . . . . 27,273 In most cases, this rule also applies to a gain on the
Foreign branch category taxable disposition of stock in a CFC if you owned more than 50%
income less allocated (by vote or value) of the stock right before you disposed of
foreign losses ($28,727 − 0). . . . . . . . . . . . . . . . . $28,727 it. See Internal Revenue Code section 904(f)(3)(D) for
3) Total amount of maximum potential recapture in more information.
all foreign loss accounts (smaller of (1) or
(2)). . . . . . . . . . . . . . . . . . . . . . . . $28,727 All of the foreign source taxable income that you are
4) Foreign source net income . . . . . . . . . . . $56,000 considered to recognize under these rules is subject to re-
Less: Itemized deductions characterization as U.S. source income in most cases.
allocable to foreign source See Regulations section 1.904(f)-2(d).
net income [($200,000/ If you actually recognized foreign source gain in the
$220,000) × $30,000]. . . . . . . . . . . . . . 27,273 $28,727 same separate limit category as the overall foreign loss on
5) 50% of foreign source taxable income subject to a disposition of property described earlier, you must re-
recharacterization. . . . . . . . . . . . . . . . . . . . . . . $14,364
duce the foreign source taxable income in that separate
6) Recapture for 2023 (smaller of (3) or (5)). . . . . . . . . . $14,364
limit category by the amount of gain you are required to re-
The amount of the recapture is shown on Form 1116, characterize. If you recognized foreign source gain in a dif-
line 16. ferent separate limit category than the overall foreign loss
on a disposition of property described earlier, you are re-
Recapturing more overall foreign loss than re- quired to reduce your foreign source taxable income in
quired. If you want to make an election or change a prior that separate limit category for gain that is considered for-
election to recapture a greater part of the balance of an eign source taxable income in the overall foreign loss cat-
overall foreign loss account than is required (as discussed egory and subject to recharacterization. If you did not oth-
earlier), you must attach a statement to your Form 1116. If erwise recognize gain on a disposition of property
you change a prior year's election, you should file Form described earlier, you must include in your U.S. source in-
1040-X. come the foreign source taxable income you are required
The statement you attach to Form 1116 must show: to recognize and recharacterize.
• The percentage and amount of your foreign taxable in- Predominant use outside United States. Property is
come that you are treating as U.S. source income, and used predominantly outside the United States if it was lo-
• The percentage and amount of the balance (both be- cated outside the United States more than 50% of the
fore and after the recapture) in the overall foreign loss time during the 3-year period ending on the date of dispo-
account that you are recapturing. sition. If you used the property fewer than 3 years, count
the use during the period it was used in a trade or busi-
Deduction for foreign taxes. You must recapture part ness.
(or all, if applicable) of an overall foreign loss in tax years
in which you deduct, rather than credit, your foreign taxes. Disposition defined. A disposition includes the fol-
You recapture the lesser of: lowing transactions.
• The balance in the applicable overall foreign loss ac- • A sale, exchange, distribution, or gift of property.
count, or

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• A transfer upon the foreclosure of a security interest separate categories. 60% ($3,000 ÷ $5,000) of the $2,000
(but not a mere transfer of title to a creditor or debtor loss (or $1,200) reduced passive category income and
upon creation or termination of a security interest). 40% ($2,000 ÷ $5,000) (or $800) reduced the income
re-sourced by treaty.
• An involuntary conversion.
In 2023, you have $4,000 of passive category income,
• A contribution to a partnership, trust, or corporation. $1,000 of income re-sourced by treaty, and $5,000 of gen-
• A transfer at death. eral category income. Because $1,200 of the general cat-
egory loss was used to reduce your passive category in-
• Any other transfer of property whether or not gain or come in 2022, $1,200 of the 2023 general category
loss is normally recognized on the transfer. income of $5,000 must be recharacterized as passive cat-
The character of the income (for example, as ordinary in- egory income. This makes the 2023 total passive category
come or capital gain) recognized solely because of the income $5,200 ($4,000 + $1,200). Similarly, because
disposition rules is the same as if you had sold or ex- $800 of the general category loss was used to reduce
changed the property. your income re-sourced by treaty, $800 of the general cat-
However, a disposition does not include either of the egory income must be recharacterized as income
following. re-sourced by treaty. This makes the 2023 total of income
re-sourced by treaty $1,800 ($1,000 + $800). The total
• A disposition of property that is not a material factor in
general category income is $3,000 ($5,000 − $1,200 −
producing income. (This exception does not apply to
$800).
the disposition of stock in a CFC to which Internal
Revenue Code section 904(f)(3)(D) applies.) If you dispose of appreciated property that gener-
ates, or would generate, gain in a separate limita-
• A transaction in which gross income is not realized. CAUTION!
tion loss account, the disposition is subject to re-
Basis adjustment. If gain is recognized on a disposi- capture rules similar to those applicable to overall foreign
tion solely because of an overall foreign loss account bal- loss accounts. See Internal Revenue Code section 904(f)
ance at the time of the disposition, the recipient of the (5)(F).
property must increase its basis by the amount of gain
deemed recognized. If the property was transferred by gift,
its basis in the hands of the donor immediately prior to the Recapture of Overall Domestic Loss
gift is increased by the amount of gain deemed recog- Accounts
nized.
If you have an overall domestic loss for any tax year begin-
ning after 2006, you create, or increase the balance in, an
Recapture of Separate Limitation Loss overall domestic loss account and you must recharacter-
Accounts ize a portion of your U.S. source taxable income as foreign
source taxable income in succeeding years for purposes
If, in a prior tax year, you reduced your foreign taxable in- of the foreign tax credit.
come in the separate limit category by a pro rata share of
a loss from another category, you must recharacterize in The part that is treated as foreign source taxable in-
2023 all or part of any income you receive in 2023 in that come for the tax year is the smaller of:
loss category. If you have separate limitation loss ac-
counts in the loss category relating to more than one other • The total balance in your overall domestic loss ac-
count in each separate category (less amounts recap-
category and the total balances in those loss accounts ex-
tured in earlier years), or
ceed the income you receive in 2023 in the loss category,
then income in the loss category is recharacterized as in- • 50% of your U.S. source taxable income for the tax
come in those other categories in proportion to the balan- year.
ces of the separate limitation loss accounts for those other Internal Revenue Code section 904(g)(5) allows
categories. You recharacterize the income by: ! for an election to recapture up to 100% of an un-
• Increasing foreign taxable income (adjusted by any of CAUTION used pre-2018 overall domestic loss from a prior
the other adjustments previously mentioned) for each year, as opposed to the 50% stated in the previous para-
of the separate categories (other than the loss cate- graph. This election is applicable for any tax year begin-
gory) previously reduced by any separate limitation ning after 2017 and before January 1, 2028.
loss, and
• Decreasing foreign taxable income (adjusted by any of You must establish and maintain separate overall do-
the other adjustments previously mentioned) for the mestic loss accounts for each separate category in which
loss category by the amount of recharacterized in- foreign source income is offset by the domestic loss. The
come. balance in each overall domestic loss account is the
amount of the overall domestic loss subject to recapture.
Example. In 2022, you had a $2,000 loss that was The recharacterized income is allocated among and in-
general category income, $3,000 of passive category in- creases foreign source income in separate categories in
come, and $2,000 of income re-sourced by treaty. You had proportion to the balances of the overall domestic loss ac-
to allocate the $2,000 loss to the income in the other counts for those separate categories.

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For more information, see the Instructions for Form tax year, you are allowed a 1-year carryback and then a
1116. 10-year carryover of the unused foreign taxes.
This means that you can treat the unused foreign tax of
Tax Treaties a tax year as though the tax were paid or accrued in your
first preceding and 10 succeeding tax years up to the
The United States is a party to tax treaties that are de- amount of any excess limit in those years. A period of less
signed, in part, to prevent double taxation of the same in- than 12 months for which you make a return is considered
come by the United States and the treaty country. Many a tax year.
treaties do this by allowing you to treat U.S. source income
as foreign source income. Certain treaties have special The unused foreign tax in each category is the amount
rules you must consider when figuring your foreign tax by which the qualified taxes paid or accrued are more than
credit if you are a U.S. citizen residing in the treaty country. the limit for that category. The excess limit in each cate-
These rules generally limit the amount of U.S. source in- gory is the amount by which the limit is more than the
come that is treated as foreign source income. The trea- qualified taxes paid or accrued for that category.
ties that provide for this type of restriction include those
Figure your carrybacks or carryovers separately for
with Australia, Austria, Bangladesh, Belgium, Bulgaria,
each separate limit income category.
Canada, the Czech Republic, Denmark, Finland, France,
Germany, Iceland, Ireland, Israel, Italy, Japan, Luxem- The 1-year carryback and 10-year carryover do not ap-
bourg, Malta, Mexico, the Netherlands, New Zealand, Por- ply to unused taxes in the section 951A category.
tugal, the Slovak Republic, Slovenia, South Africa, Spain,
Use Schedule B (Form 1116) to reconcile your prior
Sweden, Switzerland, and the United Kingdom. There is a
year foreign tax carryover with your current year foreign
worksheet near the end of this publication to help you fig-
tax carryover. See Schedule B (Form 1116) and its in-
ure the additional credit that is allowed by reason of these
structions for more information.
limited re-sourcing rules. But do not use this worksheet to
figure the additional credit under the treaties with Australia The mechanics of the carryback and carryover are illus-
and New Zealand. In addition, the worksheet only applies trated by the following examples.
for tax years beginning on or before August 10, 2010, and
tax years after the 2017 tax year. Example 1. All of your foreign income is general cate-
gory income for 2022 and 2023. The limit on your credit
You can get more information by writing to: and the qualified foreign taxes paid on the income are as
follows.

Internal Revenue Service
International Section Your Tax Unused foreign tax (+)
limit paid or excess limit (−)
Philadelphia, PA 19255-0725
2022 $200 $100 −100
2023 $300 $500 +200
Report required. You may have to report certain informa-
tion with your return if you claim a foreign tax credit under
a treaty provision. For example, if a treaty provision allows In 2023, you had unused foreign tax of $200 to carry to
you to take a foreign tax credit for a specific tax that is not other years. You are considered to have paid this unused
allowed by the Internal Revenue Code, you must report foreign tax first in 2022 (the first preceding tax year) up to
this information with your return. To report the necessary the excess limit in that year of $100. You can then carry
information, use Form 8833, Treaty-Based Return Position forward the remaining $100 of unused tax.
Disclosure Under Section 6114 or 7701(b). See the in-
Example 2. All your foreign income is general cate-
structions for Form 8833, and Regulations section
gory income for 2019 through 2024. In 2019, you had an
301.6114-1 for more information.
unused foreign tax of $200. Because you had no foreign
If you do not report this information, you may have to
income in 2018, you cannot carry back the unused foreign
pay a penalty of $1,000.
tax to that year. However, you may be able to carry for-
You do not have to file Form 8833 if you are claim- ward the unused tax to the next 10 years. The limit on your
TIP ing the additional foreign tax credit that is allowed credit and the qualified foreign taxes paid on general cate-
by reason of the limited re-sourcing rules dis- gory income for 2019 through 2024 are as follows.
cussed previously. See Regulations section 301.6114-1(c)
for more information.

Carryback and Carryover

If, because of the limit on the credit, you cannot use the
full amount of qualified foreign taxes paid or accrued in the

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Your Tax Unused foreign tax (+) Time Limit on Tax Assessment
limit paid or excess limit (−)
2019 $600 $800 +200 When you carry back an unused foreign tax, the IRS is
2020 $600 $700 +100 given additional time to assess any tax resulting from the
carryback. An assessment can be made up to the end of 1
2021 $500 $700 +200 year after the expiration of the statutory period for an as-
2022 $550 $400 −150 sessment relating to the year in which the carryback origi-
nated.
2023 $800 $700 −100
2024 $500 $550 + 50
Claim for Refund
You cannot carry the $200 of unused foreign tax from
2019 to 2020 or 2021 because you have no excess limit in If you have an unused foreign tax that you are carrying
any of those years. Therefore, you carry the tax forward to back to the first preceding tax year, you should file Form
2022, up to the excess limit of $150. The carryover re- 1040-X for that tax year and attach a revised Form 1116.
duces your excess limit in that year to zero. The remaining
unused foreign tax of $50 from 2019 can be carried to Taxes All Credited or All Deducted
2023. At this point, you have fully absorbed the unused
foreign tax from 2019 and can carry it no further. You can In a given year, you must either claim a credit for all foreign
also carry forward the unused foreign tax from 2020 and taxes that qualify for the credit or claim a deduction for all
2021. of them. This rule is applied with the carryback and carry-
over procedure, as follows.
Special rules for carryforwards of pre-2018 unused
foreign taxes. Unused foreign taxes in the pre-2018 sep- • You cannot claim a credit carryback or carryover from
arate category for general income carried forward are gen- a year in which you deducted qualified foreign taxes.
erally allocated to your post-2017 separate category for • You cannot deduct unused foreign taxes in any year to
general income. Alternatively, you can allocate those for- which you carry them, even if you deduct qualified for-
eign taxes to the post-2017 separate category for foreign eign taxes actually paid in that year.
branch category income to the extent the unused foreign
taxes would have been allocated to your post-2017 sepa- • You cannot claim a credit for unused foreign taxes in a
rate category for foreign branch category income, and year to which you carry them unless you also claim a
would have been unused foreign taxes with respect to that credit for foreign taxes actually paid or accrued in that
separate category, if that separate category had applied in year.
the year or years the unused foreign taxes arose. A simpli- • You cannot carry back or carry over any unused for-
fied safe harbor is also available for determining the por- eign taxes to or from a year for which you elect not to
tion of the unused foreign taxes that may be allocated to be subject to the foreign tax credit limit. See Exemp-
the post-2017 separate category for foreign branch cate- tion from foreign tax credit limit under How To Figure
gory income. See Regulations section 1.904-2(j)(1)(iii) for the Credit, earlier.
further details.
Unused taxes carried to deduction year. If you carry
Effect of bankruptcy or insolvency. If your debts are unused foreign taxes to a year in which you chose to de-
canceled because of bankruptcy or insolvency, you may duct qualified foreign taxes, you must compute a foreign
have to reduce your unused foreign tax carryovers to or tax credit limit for the deduction year as if you had chosen
from the tax year of the debt cancellation by 33 / cents for 1 3 to credit foreign taxes for that year. If the credit computa-
each $1 of canceled debt that you exclude from your tion results in an excess limit (as defined earlier) for the
gross income. Your bankruptcy estate may have to make deduction year, you must treat the unused foreign taxes
this reduction if it has acquired your unused foreign tax carried to the deduction year as absorbed in that year. You
carryovers. Also, you may not be allowed to carry back cannot actually deduct or claim a credit for the unused for-
any unused foreign tax to a year before the year in which eign taxes carried to the deduction year. But this treatment
the bankruptcy case began. For more information, see Re- reduces the amount of unused foreign taxes that you can
duction of Tax Attributes in Pub. 908. carry to another year.
Because you cannot deduct or claim a credit for un-
Note. No foreign tax carryovers are allowed for foreign used foreign taxes treated as absorbed in a deduction
taxes paid or accrued on section 951A category income. year, you will get no tax benefit for them unless you file an
Leave line 10 of Form 1116 blank if you complete a Form amended return to change your choice from deducting the
1116 for section 951A category income, as carrybacks taxes to claiming the credit. You have 10 years from the
and carryovers are not allowed for this category of in- regular due date of the return for the deduction year to
come. make this change. See Making or Changing Your Choice
under Choosing To Take Credit or Deduction, earlier.

Example. In 2023, you paid foreign taxes of $600 on
general category income. You have a foreign tax credit

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carryover of $200 from the same category from 2022. For joint return. This allocation is needed in the following three
2023, your foreign tax credit limit is $700. situations.
If you choose to claim a credit for your foreign taxes in
1. You and your spouse file separate returns for the cur-
2023, you would be allowed a credit of $700, consisting of
rent tax year, to which you carry an unused foreign tax
$600 paid in 2023 and $100 of the $200 carried over from
from a tax year for which you and your spouse filed a
2022. You will have a credit carryover to 2024 of $100,
joint return.
which is your unused 2022 foreign tax credit carryover.
If you choose to deduct your foreign taxes in 2023, your 2. You and your spouse file separate returns for the cur-
deduction will be limited to $600, which is the amount of rent tax year, to which you carry an unused foreign tax
taxes paid in 2023. You are not allowed a deduction for from a tax year for which you and your spouse filed
any part of the carryover from 2022. However, you must separate returns, but through a tax year for which you
treat $100 of the credit carryover as used in 2023, be- and your spouse filed a joint return.
cause you have an unused credit limit of $100 ($700 limit
3. You and your spouse file a joint return for the current
minus $600 of foreign taxes paid in 2023). This reduces
tax year, to which you carry an unused foreign tax
your carryover to later years.
from a tax year for which you and your spouse filed a
If you claimed the deduction for 2023 and later decided
joint return, but through a tax year for which you and
you wanted to receive a benefit for that $100 part of the
your spouse filed separate returns.
2022 carryover, you could change the choice of a deduc-
tion for 2023. You would have to claim a credit for those These three situations are illustrated in Figure A. In each
taxes by filing an amended return for 2023 within the time of the situations, 2023 is the current year.
allowed.
Method of allocation. For a tax year in which you must
allocate the unused foreign tax or the excess limit for your
Married Couples
separate income categories between you and your
For a tax year in which you and your spouse file a joint re- spouse, you must take the following steps.
turn, you must figure the unused foreign tax or excess limit 1. Figure a percentage for each separate income cate-
in each separate limit category on the basis of your com- gory by dividing the taxable income of each spouse
bined income, deductions, taxes, and credits. from sources outside the United States in that cate-
gory by the joint taxable income from sources outside
For a tax year in which you and your spouse file sepa-
the United States in that category. Then, apply each
rate returns, you figure the unused foreign tax or excess
percentage to its category's joint foreign tax credit
limit by using only your own separate income, deductions,
limit to find the part of the limit allocated to each
taxes, and credits. However, if you file a joint return for any
spouse.
other year involved in figuring a carryback or carryover of
unused foreign tax to the current tax year, you will need to 2. Figure the part of the unused foreign tax, or of the ex-
make an allocation, as explained under Allocations Be- cess limit, for each separate income category alloca-
tween Spouses, later. ble to each spouse. You do this by comparing the allo-
cated limit (figured in (1)) with the foreign taxes paid
Continuous use of joint return. If you and your spouse or accrued by each spouse on income in that cate-
file a joint return for the current tax year, and file joint re- gory. If the foreign taxes you paid or accrued for that
turns for each of the other tax years involved in figuring the category are more than your part of its limit, you have
carryback or carryover of unused foreign tax to the current an unused foreign tax. If, however, your part of that
tax year, you figure the joint carryback or carryover to the limit is more than the foreign taxes you paid or ac-
current tax year using the joint unused foreign tax and the crued, you have an excess limit for that category.
joint excess limits.
Allocation of the carryback and carryover. The me-
Joint and separate returns in different years. If you chanics of the carryback and carryover, when allocations
and your spouse file a joint return for the current tax year, between spouses are needed, are illustrated by the follow-
but file separate returns for all the other tax years involved ing example.
in figuring the carryback or carryover of the unused foreign
tax to the current tax year, your separate carrybacks or Example. H and W filed joint returns for 2019, 2021,
carryovers will be a joint carryback or carryover to the cur- and 2022, and separate returns for 2020 and 2023. Nei-
rent tax year. ther H nor W had any unused foreign tax or excess limit for
In other cases in which you and your spouse file joint any year before 2019. For the tax years involved, the in-
returns for some years and separate returns for other come, unused foreign tax, excess limits, and carrybacks
years, you must make the allocation described in Alloca- and carryovers are general category income and are
tions Between Spouses next. shown in Table 5.
W's allocated part of the unused foreign tax from 2019
Allocations Between Spouses ($30) is partly absorbed by her separate excess limit of
$20 for 2020 and then fully absorbed by her allocated part
You may have to allocate an unused foreign tax or excess of the joint excess limit for 2021 ($20). H's allocated part
limit for a tax year in which you and your spouse filed a of the unused foreign tax from 2019 ($50) is fully absorbed

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Figure A. Allocation Between Spouses

 (In the following situations, you have to allocate an unused foreign tax or excess limit for a tax year in 
 which you and your spouse led a joint return.)
   You and your spouse le                     2022 (Joint return—Unused foreign tax year)
                                                                                                 J
   separate returns for the 
   current tax year (2023), to 
   which you carry an unused 
   foreign tax from a tax year 
   for which you and your 
                                                                                              S     S
   spouse led a joint return.                 2023 (Separate return—Excess limit year)

   You and your spouse le 
   separate returns for the                    2021 (Separate returns—Unused foreign tax year)
   current tax year (2023), to                                                                S     S
   which you carry an unused 
   foreign tax from a tax year 
   for which you and your                      2022 (Joint return—Excess limit year)             J
   spouse led separate 
   returns, but through a tax                                                                 S     S
   year for which you and your 
   spouse led a joint return.                 2023 (Separate returns—Excess limit year)

   You and your spouse le a 
   joint return for the current 
   tax year (2023), to which 
                                               2021 (Joint return—Unused foreign tax year)       J
   you carry an unused foreign 
   tax from a tax year for 
                                               2022 (Separate returns—Excess limit year)      S     S
   which you and your spouse 
   led a joint return, but 
                                               2023 (Joint return—Excess limit year)             J
   through a tax year for which 
   you and your spouse led 
   separate returns.
 J—Joint return led
 S—Separate return led
Table 5. Carryback/Carryover
Tax year                                                           2019  2020              2021   2022      2023
Return                                                             Joint Separate          Joint  Joint     Separate
H's unused foreign tax to be carried back or over, or 
 excess limit* (enclosed in parentheses). . . . . . . . . .        $50   $25               ($65)  $104      ($50)
W's unused foreign tax to be carried back or over, or 
 excess limit* (enclosed in parentheses). . . . . . . . . .        $30   ($20)             ($20)  $69       ($10)
Carryover absorbed:
 W's from 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . —     20W               10W    —                      —
 H's from 2019. . . . . . . . . . . . . . . . . . . . . . . . . .  —     —                 50H    —                      —
 H's from 2020. . . . . . . . . . . . . . . . . . . . . . . . . .  —     —                 15H    —                      —
   ″   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —     —                 10W    —                      —
 W's from 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . —     —                 —      —         10W
 H's from 2022. . . . . . . . . . . . . . . . . . . . . . . . . .  —     —                 —      —         50H
W = Absorbed by W's excess limit
H = Absorbed by H's excess limit

* General category income only
 
by  his  allocated  part  of  the  joint  excess  limit  ($65)  for      the joint excess limit for 2021 ($10). Each spouse's excess 
2021.                                                                    limit on the 2021 joint return is reduced by the following.
 H's  separate  unused  foreign  tax  from  2020  ($25)  is 
                                                                         1. Each spouse's carryover from earlier years. (W's car-
partly absorbed (up to $15) by his remaining excess limit 
                                                                         ryover of $10 from 2019 and H's carryovers of $50 
in 2021, and then fully absorbed by W's remaining part of 
                                                                         from 2019 and $15 from 2020.)

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2. The other spouse's carryover. (H's carryover of $10 1. Part I—Taxable Income or Loss From Sources Out-
from 2020 is absorbed by W's remaining excess limit.) side the United States (for category checked above).
Enter the gross amounts of your foreign, or U.S. pos-
W's allocated part of the unused foreign tax of $69 from
session, source income in the separate limit category
2022 is partly absorbed by her excess limit in 2023 ($10),
for which you are completing the form. Do not include
and the remaining $59 will be a carryover to general cate-
income you excluded on Form 2555. From these, sub-
gory income for 2024 and the following 8 years unless ab-
tract the deductions that are definitely related to the
sorbed sooner. H's allocated part of the unused foreign
separate limit income, and a ratable share of the de-
tax of $104 from 2022 is partly absorbed by his excess
ductions not definitely related to that income. If, in a
limit in 2023 ($50), and the remaining $54 will be a carry-
separate limit category, you received income from
over to 2024 and the following 8 years unless absorbed
more than one foreign country or U.S. possession,
sooner.
complete a separate column for each. You do not
need to report income passed through from a mutual
Joint Return Filed in a Deduction Year fund or other regulated investment company (RIC) on
a country-by-country basis. Total all income, in the
When you file a joint return in a deduction year, and carry applicable category, passed through from the mutual
unused foreign tax through that year from the prior year in fund or other RIC and enter the total in a single col-
which you and your spouse filed separate returns, the umn in Part I. Enter "RIC" on line i of Part I. Total all
amount absorbed in the deduction year is the unused for- foreign taxes passed through and enter the total on a
eign tax of each spouse deemed paid or accrued in the single line in Part II for the applicable category. Be-
deduction year up to the amount of that spouse's excess cause computations for inclusions under section
limit in that year. You cannot reduce either spouse's ex- 951A are reported on separate Form 8992, U.S.
cess limit in the deduction year by the other's unused for- Shareholder Calculation of Global Intangible
eign taxes in that year. Low-Taxed Income (GILTI), you do not need to report
those inclusions on a country-by-country basis. Enter
the total inclusion in a single column in Part l and en-
How To Claim the Credit ter "951A" on line i. See the instructions for line i in the
Instructions for Form 1116 for information about re-
You must file Form 1116 to claim the foreign tax credit un- porting section 863(b) gross income and deductions
less you meet one of the following exceptions. and high-taxed income.
Exceptions. If you meet the requirements discussed un- 2. Part II—Foreign Taxes Paid or Accrued. This part
der Exemption from foreign tax credit limit, earlier, and shows the foreign taxes you paid or accrued on the in-
choose to be exempt from the foreign tax credit limit, do come in the separate limit category in foreign cur-
not file Form 1116. Instead, enter your foreign taxes di- rency and U.S. dollars. If you paid (or accrued) foreign
rectly on Schedule 3 (Form 1040), line 1. tax to more than one foreign country or U.S. posses-
If you are a shareholder of a CFC and chose to be sion, complete a separate line for each. If you receive
taxed at corporate rates on the amount you must include income passed through from a RIC, aggregate all for-
in gross income from that corporation, use Form 1118 to eign taxes paid or accrued on that income on a single
claim the credit. See Controlled foreign corporation (CFC) line in Part II.
shareholder under You Must Have Paid or Accrued the 3. Part III—Figuring the Credit. You use this part to figure
Tax, earlier. the foreign tax credit that is allowable. No foreign tax
carryovers are allowed for foreign taxes paid or ac-
Form 1116 crued on section 951A category income. Leave
line 10 of Form 1116 blank if you complete a Form
You must file a Form 1116 with your U.S. income tax re- 1116 for section 951A category income, as carry-
turn, Form 1040, 1040-SR, or 1040-NR. You must file a backs and carryovers are not allowed for this category
separate Form 1116 for each of the following categories of of income.
income for which you claim a foreign tax credit. 4. Part IV—Summary of Credits From Separate Parts III.
• Section 951A category income. You use this part on one Form 1116 (the one with the
largest amount entered on line 24) to summarize the
• Foreign branch category income. foreign tax credits figured on separate Forms 1116.
• Passive category income.
• General category income. Records To Keep
• Section 901(j) income. You should keep the following records in case you
are later asked to verify the taxes shown on your
• Certain income re-sourced by treaty. RECORDS
Form 1116, 1040, 1040-SR, or 1040-NR. You do
• Lump-sum distributions. not have to attach these records to your Form 1040,
1040-SR, or 1040-NR.
A Form 1116 consists of four parts.

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                                                              The receipt or return you keep as proof should either be 
•  A receipt for each foreign tax payment.
                                                              the original, a duplicate original, or a duly certified or au-
•  The foreign tax return if you claim a credit for taxes ac- thenticated copy. If the receipt or return is in a foreign lan-
   crued.                                                     guage,  you  should  also  have  a  certified  translation  of  it. 
•  Any payee statement (such as Form 1099-DIV or              Revenue Ruling 67-308 in Cumulative Bulletin 1967-2 dis-
   Form 1099-INT) showing foreign taxes reported to           cusses in detail the requirements of the certified transla-
   you.                                                       tion.  Issues  of  the  Cumulative  Bulletin  are  available  in 
                                                              most IRS offices and you are welcome to read them there.

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Worksheet. Additional Foreign Tax Credit on U.S. Income*                                                                                         Keep for Your Records
Note. File this worksheet with your Form 1040 or 1040-SR as an attachment to Form 1116.

I. U.S. tax on U.S. source income (U.S. source rules)                                                                                              COL. A               COL. B
         1.       Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          
         2.       Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       
         3.       Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          
         4.       Capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           
         5. a.        Gross earned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 
                  b.  Allocable employee business expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              
                  c.  Net compensation. Subtract line 5b from line 5a . . . . . . . . . . . . . . . . . . . . . . .                                                    
         6. a.        Gross rent, real property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 
                  b.  Direct expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             
                  c.  Net rent. Subtract line 6b from line 6a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                            
                  Other 
         7.                                                                                                                                                             
         8.       In column A, enter the sum of column A, lines 1–5a, 6a, and 7. In column B, enter 
                  the sum of column B, lines 1–4, 5c, 6c, and 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                              
         9.       Enter tax from Form 1040 or 1040-SR. (See instructions.)         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               
         10.      Enter adjusted gross income (AGI) from line 11 of Form 1040 or 1040-SR . . . . . . . . . . . . . . . . . . . . . . .                                 
         11.      Divide line 9 by line 10. Enter the result as a decimal. This is the average tax rate on your AGI                                . . . . . . .       
         12.      Multiply line 11 by line 8 (column B). This is your estimated U.S. tax on your U.S. source income . . . . .                                          
II. Tax at source allowable under treaty
      A. Items fully taxable by the United States.
         13. a.       Identify                                                                                                                     
                  b.  Multiply line 13a by line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     
      B. Items partly taxable by the United States.
         14. a.       Identify                                                                                                                     
                  b.  Treaty rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         
                  c.  Allowable tax at source (Multiply line 14a by line 14b.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     
         15. a.       Identify                                                                                                                     
                  b.  Treaty rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         
                  c.  Allowable tax at source (Multiply line 15a by line 15b.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     
         16.      Total (Add lines 13b, 14c, and 15c.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       
      C. Identify each item of U.S. source income from Step I, column A, on which the United 
         States
          may not, under treaty, tax residents of the other country who are not U.S. citizens.
                                                                                                                                                   
III. Additional credit
         17.      Residence country tax on U.S. source income before foreign tax credit . . . . . . . . . . . . . . . . . . . . . . . . .                              
         18.      Foreign tax credit allowed by residence country for U.S. income tax paid . . . . . . . . . . . . . . . . . . . . . . . .                             
         19.      Maximum credit. Subtract the greater of line 16 or line 18 from line 12 . . . . . . . . . . . . . . . . . . . . . . . . . .                          
         20. a.       Enter the amount from line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     
                  b.  Enter the greater of line 16 or line 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     
                  c.  Subtract line 20b from line 20a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        
         21.      Additional credit. Enter the smaller of line 19 or line 20c. Add this amount to line 12 of Part III and line 32 
                  of Part IV of Form 1116 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  

* See Tax Treaties, earlier, for information on when you should use this worksheet.

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Worksheet Instructions. Additional Foreign Tax Credit on U.S.
Income Keep for Your Records
Note. Complete a separate worksheet for each separate limit income category.

STEP I
Figure the estimated tax on U.S. source income in the separate limit income category using U.S. rules for determining the source of income.
Lines 1–7 Enter the gross amount for each type of income in column A, and the net amount in column B.
Line 9 Enter the amounts from Form 1040 or 1040-SR, line 16, and Schedule 2 (Form 1040), line 2, less any decrease in tax reported on Form
8978, line 14.

STEP II
Determine the amount of tax that the United States is allowed to collect at source under the treaty on income in the separate limit income category of
residents of the other country who are not U.S. citizens. (In most cases, this amount should be claimed, to the extent allowable, as a foreign tax
credit on your foreign tax return.)
PART A Income in the separate limit income category fully taxable by the United States. In most cases, this includes income from a U.S. trade
or business and gains from dispositions of U.S. real property. Identify the type and amount on line 13a.
PART B Income in the separate limit income category for which treaty limits U.S. tax at source. This may include dividends, interest, royalties,
and certain pensions.
Lines 14 and 15 Identify each type and amount of income. Use the specified treaty rate. (The current treaty rates are available at IRS.gov/
Individuals/International-Taxpayers/Tax-Treaty-Tables.)
PART C Identify the items in the separate limit income category not taxable at source by the United States under the treaty.

STEP III
Figure the amount of the additional credit for foreign taxes paid or accrued on U.S. source income. The additional credit is limited to the difference
between the estimated U.S. tax (Step I) and the greater of the allowable U.S. tax at source (Step II) or the foreign tax credit allowed by the residence
country (line 18).
Line 17 Enter the amount of the residence country tax on your U.S. source income before reduction for foreign tax credits. If possible, use the
fraction of the pre-credit residence country tax which U.S. source taxable income bears to total taxable income. Otherwise, report that fraction
of the pre-credit foreign tax which gross U.S. income bears to total gross income for foreign tax purposes.
Line 21 This amount may be claimed as a foreign tax credit on Form 1116. First, add this amount to the reduction in foreign taxes on Part III,
line 12, and complete Form 1116 according to the instructions. Add this amount as an additional credit to Form 1116, Part IV, line 32, as well
and report that total on your Form 1040 or 1040-SR. File this worksheet with your Form 1040 or 1040-SR as an attachment to Form 1116.
federal tax preparation, e-filing, and direct deposit or
payment options.
How To Get Tax Help
• VITA. The Volunteer Income Tax Assistance (VITA)
If you have questions about a tax issue; need help prepar- program offers free tax help to people with
ing your tax return; or want to download free publications, low-to-moderate incomes, persons with disabilities,
forms, or instructions, go to IRS.gov to find resources that and limited-English-speaking taxpayers who need
can help you right away. help preparing their own tax returns. Go to IRS.gov/
VITA, download the free IRS2Go app, or call
Preparing and filing your tax return. After receiving all 800-906-9887 for information on free tax return prepa-
your wage and earnings statements (Forms W-2, W-2G, ration.
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
• TCE. The Tax Counseling for the Elderly (TCE) pro-
compensation statements (by mail or in a digital format) or
gram offers free tax help for all taxpayers, particularly
other government payment statements (Form 1099-G);
those who are 60 years of age and older. TCE volun-
and interest, dividend, and retirement statements from
teers specialize in answering questions about pen-
banks and investment firms (Forms 1099), you have sev-
sions and retirement-related issues unique to seniors.
eral options to choose from to prepare and file your tax re-
Go to IRS.gov/TCE or download the free IRS2Go app
turn. You can prepare the tax return yourself, see if you
for information on free tax return preparation.
qualify for free tax preparation, or hire a tax professional to
prepare your return. • MilTax. Members of the U.S. Armed Forces and quali-
fied veterans may use MilTax, a free tax service of-
Free options for tax preparation. Your options for pre- fered by the Department of Defense through Military
paring and filing your return online or in your local com- OneSource. For more information, go to
munity, if you qualify, include the following. MilitaryOneSource MilitaryOneSource.mil/MilTax ( ).
• Free File. This program lets you prepare and file your Also, the IRS offers Free Fillable Forms, which can
federal individual income tax return for free using soft- be completed online and then e-filed regardless of in-
ware or Free File Fillable Forms. However, state tax come.
preparation may not be available through Free File. Go
to IRS.gov/FreeFile to see if you qualify for free online

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Using online tools to help prepare your return. Go to Employers can register to use Business Services On-
IRS.gov/Tools for the following. line. The Social Security Administration (SSA) offers on-
line service at SSA.gov/employer for fast, free, and secure
• The Earned Income Tax Credit Assistant IRS.gov/ (
W-2 filing options to CPAs, accountants, enrolled agents,
EITCAssistant) determines if you’re eligible for the
and individuals who process Form W-2, Wage and Tax
earned income credit (EIC).
Statement, and Form W-2c, Corrected Wage and Tax
• The Online EIN Application IRS.gov/EIN ( ) helps you Statement.
get an employer identification number (EIN) at no
cost. IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest
• The Tax Withholding Estimator IRS.gov/W4App ( )
information on tax changes, scam alerts, initiatives, prod-
makes it easier for you to estimate the federal income
ucts, and services. At the IRS, privacy and security are our
tax you want your employer to withhold from your pay-
highest priority. We use these tools to share public infor-
check. This is tax withholding. See how your withhold-
mation with you. Don’t post your social security number
ing affects your refund, take-home pay, or tax due.
(SSN) or other confidential information on social media
• The First-Time Homebuyer Credit Account Look-up sites. Always protect your identity when using any social
(IRS.gov/HomeBuyer) tool provides information on networking site.
your repayments and account balance. The following IRS YouTube channels provide short, in-
• The Sales Tax Deduction Calculator IRS.gov/ ( formative videos on various tax-related topics in English,
SalesTax) figures the amount you can claim if you Spanish, and ASL.
itemize deductions on Schedule A (Form 1040). • Youtube.com/irsvideos.
Getting answers to your tax questions. On • Youtube.com/irsvideosmultilingua.
IRS.gov, you can get up-to-date information on
• Youtube.com/irsvideosASL.
current events and changes in tax law.
• IRS.gov/Help: A variety of tools to help you get an- Watching IRS videos. The IRS Video portal
swers to some of the most common tax questions. (IRSVideos.gov) contains video and audio presentations
for individuals, small businesses, and tax professionals.
• IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro- Online tax information in other languages. You can
vide answers on a number of tax topics. find information on IRS.gov/MyLanguage if English isn’t
• IRS.gov/Forms: Find forms, instructions, and publica- your native language.
tions. You will find details on the most recent tax
Free Over-the-Phone Interpreter (OPI) Service. The
changes and interactive links to help you find answers
IRS is committed to serving taxpayers with limited-English
to your questions.
proficiency (LEP) by offering OPI services. The OPI Serv-
• You may also be able to access tax information in your ice is a federally funded program and is available at Tax-
e-filing software. payer Assistance Centers (TACs), most IRS offices, and
every VITA/TCE tax return site. The OPI Service is acces-
sible in more than 350 languages.
Need someone to prepare your tax return? There are
various types of tax return preparers, including enrolled Accessibility Helpline available for taxpayers with
agents, certified public accountants (CPAs), accountants, disabilities. Taxpayers who need information about ac-
and many others who don’t have professional credentials. cessibility services can call 833-690-0598. The Accessi-
If you choose to have someone prepare your tax return, bility Helpline can answer questions related to current and
choose that preparer wisely. A paid tax preparer is: future accessibility products and services available in al-
• Primarily responsible for the overall substantive accu- ternative media formats (for example, braille, large print,
racy of your return, audio, etc.). The Accessibility Helpline does not have ac-
cess to your IRS account. For help with tax law, refunds, or
• Required to sign the return, and
account-related issues, go to IRS.gov/LetUsHelp.
• Required to include their preparer tax identification
number (PTIN).
Although the tax preparer always signs the return,
! you're ultimately responsible for providing all the
CAUTION information required for the preparer to accurately
prepare your return and for the accuracy of every item re-
ported on the return. Anyone paid to prepare tax returns
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax pre-
parer, go to Tips for Choosing a Tax Preparer on IRS.gov.

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Note. Form 9000, Alternative Media Preference, or which securely and electronically transfers your refund di-
Form 9000(SP) allows you to elect to receive certain types rectly into your financial account. Direct deposit also
of written correspondence in the following formats. avoids the possibility that your check could be lost, stolen,
• Standard Print. destroyed, or returned undeliverable to the IRS. Eight in
10 taxpayers use direct deposit to receive their refunds. If
• Large Print. you don’t have a bank account, go to IRS.gov/
• Braille. DirectDeposit for more information on where to find a bank
or credit union that can open an account online.
• Audio (MP3).
• Plain Text File (TXT). Reporting and resolving your tax-related identity
theft issues.
• Braille Ready File (BRF).
• Tax-related identity theft happens when someone
Disasters. Go to IRS.gov/DisasterRelief to review the steals your personal information to commit tax fraud.
available disaster tax relief. Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit.
Getting tax forms and publications. Go to IRS.gov/
Forms to view, download, or print all the forms, instruc- • The IRS doesn’t initiate contact with taxpayers by
tions, and publications you may need. Or, you can go to email, text messages (including shortened links), tele-
IRS.gov/OrderForms to place an order. phone calls, or social media channels to request or
verify personal or financial information. This includes
Getting tax publications and instructions in eBook requests for personal identification numbers (PINs),
format. Download and view most tax publications and in- passwords, or similar information for credit cards,
structions (including the Instructions for Form 1040) on banks, or other financial accounts.
mobile devices as eBooks at IRS.gov/eBooks. Go to IRS.gov/IdentityTheft, the IRS Identity Theft
•
IRS eBooks have been tested using Apple's iBooks for Central webpage, for information on identity theft and
iPad. Our eBooks haven’t been tested on other dedicated data security protection for taxpayers, tax professio-
eBook readers, and eBook functionality may not operate nals, and businesses. If your SSN has been lost or
as intended. stolen or you suspect you’re a victim of tax-related
Access your online account (individual taxpayers identity theft, you can learn what steps you should
only). Go to IRS.gov/Account to securely access infor- take.
mation about your federal tax account. • Get an Identity Protection PIN (IP PIN). IP PINs are
• View the amount you owe and a breakdown by tax six-digit numbers assigned to taxpayers to help pre-
year. vent the misuse of their SSNs on fraudulent federal in-
come tax returns. When you have an IP PIN, it pre-
• See payment plan details or apply for a new payment vents someone else from filing a tax return with your
plan. SSN. To learn more, go to IRS.gov/IPPIN.
• Make a payment or view 5 years of payment history
and any pending or scheduled payments. Ways to check on the status of your refund.
• Access your tax records, including key data from your • Go to IRS.gov/Refunds.
most recent tax return, and transcripts. • Download the official IRS2Go app to your mobile de-
• View digital copies of select notices from the IRS. vice to check your refund status.
• Approve or reject authorization requests from tax pro- • Call the automated refund hotline at 800-829-1954.
fessionals. The IRS can’t issue refunds before mid-February
• View your address on file or manage your communica- ! for returns that claimed the EIC or the additional
tion preferences. CAUTION child tax credit (ACTC). This applies to the entire
refund, not just the portion associated with these credits.
Get a transcript of your return. With an online account,
you can access a variety of information to help you during Making a tax payment. Payments of U.S. tax must be
the filing season. You can get a transcript, review your remitted to the IRS in U.S. dollars. Digital assets are not
most recently filed tax return, and get your adjusted gross accepted. Go to IRS.gov/Payments for information on how
income. Create or access your online account at IRS.gov/ to make a payment using any of the following options.
Account.
• IRS Direct Pay: Pay your individual tax bill or estimated
Tax Pro Account. This tool lets your tax professional tax payment directly from your checking or savings ac-
submit an authorization request to access your individual count at no cost to you.
taxpayer IRS online account. For more information, go to • Debit Card, Credit Card, or Digital Wallet: Choose an
IRS.gov/TaxProAccount. approved payment processor to pay online or by
phone.
Using direct deposit. The safest and easiest way to re-
ceive a tax refund is to e-file and choose direct deposit,

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• Electronic Funds Withdrawal: Schedule a payment taxpayers is part of a multi-year timeline that began pro-
when filing your federal taxes using tax return prepara- viding translations in 2023. You will continue to receive
tion software or through a tax professional. communications, including notices and letters, in English
until they are translated to your preferred language.
• Electronic Federal Tax Payment System: Best option
for businesses. Enrollment is required. Contacting your local TAC. Keep in mind, many ques-
• Check or Money Order: Mail your payment to the ad- tions can be answered on IRS.gov without visiting a TAC.
dress listed on the notice or instructions. Go to IRS.gov/LetUsHelp for the topics people ask about
most. If you still need help, TACs provide tax help when a
• Cash: You may be able to pay your taxes with cash at
tax issue can’t be handled online or by phone. All TACs
a participating retail store.
now provide service by appointment, so you’ll know in ad-
• Same-Day Wire: You may be able to do same-day vance that you can get the service you need without long
wire from your financial institution. Contact your finan- wait times. Before you visit, go to IRS.gov/TACLocator to
cial institution for availability, cost, and time frames. find the nearest TAC and to check hours, available serv-
ices, and appointment options. Or, on the IRS2Go app,
Note. The IRS uses the latest encryption technology to under the Stay Connected tab, choose the Contact Us op-
ensure that the electronic payments you make online, by tion and click on “Local Offices.”
phone, or from a mobile device using the IRS2Go app are
safe and secure. Paying electronically is quick, easy, and
faster than mailing in a check or money order. The Taxpayer Advocate Service (TAS)
Is Here To Help You
What if I can’t pay now? Go to IRS.gov/Payments for
more information about your options. What Is TAS?

• Apply for an online payment agreement IRS.gov/ ( TAS is an independent organization within the IRS that
OPA) to meet your tax obligation in monthly install- helps taxpayers and protects taxpayer rights. TAS strives
ments if you can’t pay your taxes in full today. Once to ensure that every taxpayer is treated fairly and that you
you complete the online process, you will receive im- know and understand your rights under the Taxpayer Bill
mediate notification of whether your agreement has of Rights.
been approved.
• Use the Offer in Compromise Pre-Qualifier to see if How Can You Learn About Your Taxpayer
you can settle your tax debt for less than the full Rights?
amount you owe. For more information on the Offer in
Compromise program, go to IRS.gov/OIC. The Taxpayer Bill of Rights describes 10 basic rights that
all taxpayers have when dealing with the IRS. Go to
Filing an amended return. Go to IRS.gov/Form1040X
TaxpayerAdvocate.IRS.gov to help you understand what
for information and updates.
these rights mean to you and how they apply. These are
Checking the status of your amended return. Go to your rights. Know them. Use them.
IRS.gov/WMAR to track the status of Form 1040-X amen-
ded returns. What Can TAS Do for You?
It can take up to 3 weeks from the date you filed
TAS can help you resolve problems that you can’t resolve
! your amended return for it to show up in our sys- with the IRS. And their service is free. If you qualify for
CAUTION tem, and processing it can take up to 16 weeks.
their assistance, you will be assigned to one advocate
who will work with you throughout the process and will do
Understanding an IRS notice or letter you’ve re- everything possible to resolve your issue. TAS can help
ceived. Go to IRS.gov/Notices to find additional informa- you if:
tion about responding to an IRS notice or letter.
• Your problem is causing financial difficulty for you,
Responding to an IRS notice or letter. You can now your family, or your business;
upload responses to all notices and letters using the • You face (or your business is facing) an immediate
Document Upload Tool. For notices that require additional threat of adverse action; or
action, taxpayers will be redirected appropriately on
IRS.gov to take further action. To learn more about the • You’ve tried repeatedly to contact the IRS but no one
tool, go to IRS.gov/Upload. has responded, or the IRS hasn’t responded by the
date promised.
Note. You can use Schedule LEP (Form 1040), Re-
quest for Change in Language Preference, to state a pref- How Can You Reach TAS?
erence to receive notices, letters, or other written commu-
nications from the IRS in an alternative language. You may TAS has offices in every state, the District of Columbia,
not immediately receive written communications in the re- and Puerto Rico. To find your advocate’s number:
quested language. The IRS’s commitment to LEP
• Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

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• Download Pub. 1546, The Taxpayer Advocate Service Low Income Taxpayer Clinics (LITCs)
Is Your Voice at the IRS, available at IRS.gov/pub/irs-
pdf/p1546.pdf; LITCs are independent from the IRS and TAS. LITCs rep-
• Call the IRS toll free at 800-TAX-FORM resent individuals whose income is below a certain level
(800-829-3676) to order a copy of Pub. 1546; and who need to resolve tax problems with the IRS. LITCs
can represent taxpayers in audits, appeals, and tax collec-
• Check your local directory; or
tion disputes before the IRS and in court. In addition,
• Call TAS toll free at 877-777-4778. LITCs can provide information about taxpayer rights and
responsibilities in different languages for individuals who
How Else Does TAS Help Taxpayers? speak English as a second language. Services are offered
for free or a small fee. For more information or to find an
TAS works to resolve large-scale problems that affect LITC near you, go to the LITC page at
many taxpayers. If you know of one of these broad issues, TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134,
report it to TAS at IRS.gov/SAMS. Be sure to not include Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/
any personal taxpayer information. p4134.pdf.

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                  To help us develop a more useful index, please let us know if you have ideas for index entries.
Index             See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
A                                    E                                    I
Accrual foreign taxes,               Economic benefits  11                Income from sources in U.S. 
 adjustments   5                     Excess limit 37                       possessions    22
Accrual method of accounting     5   Exchange rates   6                   Income re-sourced by treaty, 
Allocation:                          Excluded income:                      separate limit 21
 Carryback/carryover between           Foreign earned 13                  Income tax bond      5
  spouses     39                       Taxes on 13                        Interest 12
 Foreign losses  33                  Exemption from foreign tax credit    Interest expense, apportioning                   26
 Foreign taxes 21                      limit 18                           International boycott  16
 U.S. losses  33                     Export financing interest 20         Itemized deduction    14
Alternative minimum tax  2           Extraterritorial income   14
Amended return   38                                                       J
American Samoa, resident of      14  F                                    Joint return:
Assistance (See Tax help)            Financial services income   20        Carryback and carryover                       39
                                     Foreign corporation—U.S.              Credit based on foreign tax of both 
B                                      shareholders, filing                spouses      9
Bankruptcy, effect of 38               requirements   17                   Filed in a deduction year 41
Beneficiary 10                       Foreign country  9
Bond, income tax  5                  Foreign currency and exchange        L
Boycotting countries  16               rates 6                            Limit on credit 18
                                     Foreign income, translating    6     Losses, foreign 33
C                                    Foreign losses:                       Allocation of 33
Capital gains and losses 28            Allocation of 33                    Recapture of   33
Carryback and carryover   3 37,        Recapture of  33                   Losses, U.S. 33
 Allocations between spouses     39  Foreign mineral income, taxes         Allocation of 33
                                       on 16
 Claim for refund 38                                                      Lump-sum distributions (LSDs)                         21
                                     Foreign oil and gas extraction 
 Joint return 39
                                       income, taxes on  17
 Joint return–deduction year 41                                           M
                                     Foreign partnerships—U.S. 
 Taxes all credited or deducted  38    partners, filing requirement   17  Making or changing your choice                        4
 Time limit on tax assessment    38  Foreign tax refund 8 10,             Married couples:
Choice to take credit or deduction:  Foreign tax(es):                      Carryback and carryover                       39
 Changing your choice  4               Allocation to income categories 21  Joint return 9
 Choice applied to all qualified       For which you cannot take a        Mineral income, foreign,   16
  foreign taxes  3                     credit   13                        Mutual fund distributions                      10 20, 
Claim for refund 38                    Imposed on foreign refund    8     Mutual fund shareholder    10
Classes of gross income   26           Qualifying for credit 9
Compensation for labor or              Redetermination  6                 N
 personal services    22                                                  Nonresident aliens    9
                                       Refund 8
 Geographical basis  23                                                   Notice to the IRS of change in tax                     7
                                     Form:
Controlled foreign corporation 
                                       1040-X 38
 (CFC) shareholder    10 19,                                              O
                                       1116  41
Covered asset acquisition 16                                              Overall foreign loss  34
                                       5471  17
Credit:
                                       5713  16
 How to claim  41                                                         P
                                       7204  5
 How to figure 18
                                       8833  37                           Partner  10 19 21, , 
 Limit on 18
                                       8865  17                           Passive category income                        19
Credit for taxes paid or accrued 5
                                       8873  14                           Penalties 8 12, 
D                                    Functional currency     6             Failure to file Form 5471, 8865                 17
                                                                           Failure to file Form 5713 17
Deduction for foreign taxes that are G                                     Failure to notify, foreign tax 
 not income taxes   3                                                      change      8
Distributions:                       General category income, separate 
                                       limit 20                            Failure to report treaty 
 Lump-sum    21                                                            information    37
Dividends:                           H                                    Pension, employment, and 
 Taxes on   15                                                             disability fund payments                      11
Dual-capacity taxpayers  11          High-taxed income   20
                                                                          Personal property, sales or 
                                                                           exchanges of   25

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Possession exclusion  14           Separate limit income  19            Paid or accrued 5
Publications (See Tax help)          General category income    20      Withheld on income or gain                       15
Purchase or sale of oil or gas,      Income re-sourced by treaty    21 Taxes related to a foreign tax credit 
  taxes in connection with  16       Lump-sum distribution   21         splitting event 17
                                     Passive category income   19      Time limit:
Q                                    Section 901(j) income   20         Refund claims 8
Qualified business unit (QBU)   6  Shareholder  10                      Tax assessment  38
Qualified dividends 28             Soak-up taxes  12                   Translating foreign currency                      6
                                   Social security taxes  11
R                                  Source of compensation for labor    U
Rate of exchange  6                  or personal services:             U.S. citizens 9
Recapture of foreign losses 33       Alternative basis 24              U.S. losses:
Records to keep 41                   Multi-year compensation 22         Allocation of 33
Redetermination of foreign tax  6    Time basis 22                     U.S. possessions 9
Refund claims, time limit 8          Transportation income   25        Unused foreign tax credits, 
Refund, foreign tax 10             State income taxes  27               carryback or carryover                           3 37, 
Reporting requirements             Subsidy  11
  (international boycott) 16                                           W
Resident aliens 9                  T                                   Wages 13
                                   Tax help 44                         When refunds can be claimed                         8
S                                  Tax treaties 37                     When tax can be assessed                          38
S corporation shareholder   10 21, Taxable income from sources         Who can take the credit 9
Sanctioned countries 14              outside the U.S., determination   Why choose the credit 4
Schedule B (Form 1116) 37            of 26
Schedule C (Form 1116) 7           Taxes:
Section 901(j) income 20             Excluded income   13
Section 901(j) sanctioned            In lieu of income taxes 12
  income 14                          On dividends  15

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