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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? . . . . . . . . . . . . . . . . . . .             8
Credit for                                                    What Foreign Taxes Qualify for the Credit? . . . . . .                     9
                                                              Foreign Taxes for Which You Cannot Take a 
Individuals                                                   Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       12
                                                              How To Figure the Credit . . . . . . . . . . . . . . . . . . .             18
For use in preparing
                                                              Carryback and Carryover . . . . . . . . . . . . . . . . . . .              37
2022 Returns                                                  How To Claim the Credit           . . . . . . . . . . . . . . . . . . .    40
                                                              How To Get Tax Help         . . . . . . . . . . . . . . . . . . . . . .    43
                                                              Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  48

                                                              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
                                                              Schedule  K-3.      Beginning  in  2021,  certain  information 
                                                              that  was  previously  reported  on  Schedule  K-1  (Form 
                                                              1065),  Schedule  K-1  (Form  1120-S),  and  Schedule  K-1 
                                                              (Form  8865)  is  now  reported  on  Schedule  K-3  (Form 
                                                              1065),  Schedule  K-3  (Form  1120-S),  and  Schedule  K-3 
                                                              (Form  8865),  respectively.  In  2022,  certain  partnerships 
                                                              and  S  corporations  are  excepted  from  providing  Sched-
                                                              ule K-3 to partners and shareholders that might otherwise 
                                                              benefit  from  Schedule  K-3  information  in  claiming  a  for-
                                                              eign tax credit. However, you have the right to request the 
                                                              Schedule K-3 from the partnership or S corporation to ob-
                                                              tain this information. See the partnership and S corpora-
                                                              tion  instructions  for  Forms  1065  and  1120-S,  Schedules 
                                                              K-2 and K-3 and the partner and shareholder instructions 
                                                              for  Forms  1065  and  1120-S,  Schedule  K-3  available  at 
                                                              IRS.gov/Form1065  and             IRS.gov/Form1120S,  respec-
                                                              tively, for further information.
                                                              Form 7204, Consent To Extend the Time To Assess 
                                                              Tax  Related  to  Contested  Foreign  Income  Taxes—
                                                              Provisional Foreign Tax Credit Agreement.                       New Form 
                                                              7204  has  been  developed  pursuant  to  Regulations  sec-
                                                              tion 1.905-1(d)(4) to allow taxpayers, under the conditions 
Get forms and other information faster and easier at:         provided  in  Regulations  sections  1.905-1(c)(3)  and 
• IRS.gov (English)         • IRS.gov/Korean (한국어)            1.905-1(d)(4),  to  elect  to  claim  a  provisional  foreign  tax 
• IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)       credit for a contested foreign income tax liability (or a por-
• IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt) 
                                                              tion  of  it)  that  the  taxpayer  has  remitted  to  the  foreign 

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country, before the contest has been resolved. See Form Comments and suggestions. We welcome your com-
7204 and its instructions for details. ments about this publication and suggestions for future
Final foreign tax credit regulations. Final foreign tax editions.
credit regulations were published January 4, 2022. The You can send us comments through IRS.gov/
new regulations made changes to the rules relating to the FormComments. Or, you can write to the Internal Reve-
creditability of foreign taxes under Internal Revenue Code nue Service, Tax Forms and Publications, 1111 Constitu-
section 901 and 903, the applicable period for claiming a tion Ave. NW, IR-6526, Washington, DC 20224.
credit or deduction for foreign taxes, and the new election Although we can’t respond individually to each com-
to claim a provisional credit for contested foreign taxes. ment received, we do appreciate your feedback and will
For more information, see Treasury Decision 9959, consider your comments and suggestions as we revise
2022-03 I.R.B. 328, available at IRS.gov/irb/ our tax forms, instructions, and publications. Don’t send
2022-03_IRB#TD-9959. tax questions, tax returns, or payments to the above ad-
dress.
Getting answers to your tax questions. If you have
a tax question not answered by this publication or the How
Reminders
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,
Change of Address, to notify the IRS. Ordering tax forms, instructions, and publications.
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-
nize a child. Useful Items
You may want to see:

Publication
Introduction 54 54 Tax Guide for U.S. Citizens and Resident Aliens
If you paid or accrued income taxes to a foreign country Abroad
on foreign source income and are subject to U.S. tax on 519 519 U.S. Tax Guide for Aliens
the same income, you may be able to take either a credit 570 570 Tax Guide for Individuals With Income From
or an itemized deduction for those taxes. Taken as a de-
duction, foreign income taxes reduce your U.S. taxable in- U.S. Possessions
come. Taken as a credit, foreign income taxes reduce
Form (and Instructions)
your U.S. tax liability.
In most cases, it is to your advantage to take foreign in- 1116 1116 Foreign Tax Credit
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.
Unless you qualify for exemption from the foreign tax
credit limit, you claim the credit by filing Form 1116 with
your U.S. income tax return.

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not otherwise eligible to purchase defense articles or
services under the Arms Export Control Act.
Choosing To Take Credit or
• You paid withholding tax on dividends from foreign
Deduction corporations whose stock you did not hold for the re-
quired period of time.
You can choose whether to take the amount of any quali-
• You paid withholding tax on income or gain (other
fied foreign taxes paid or accrued during the year as a for-
than dividends) from property you did not hold for the
eign tax credit or as an itemized deduction. You can
required period of time.
change your choice for each year's taxes.
• You paid withholding tax on income or gain to the ex-
To choose the foreign tax credit, in most cases, you tent you had to make related payments on positions in
must complete Form 1116 and attach it to your U.S. tax substantially similar or related property.
return. However, you may qualify for the exception that al-
lows you to claim the foreign tax credit without using Form • You participated in or cooperated with an international
1116. See How To Figure the Credit, later. To claim the boycott.
taxes as an itemized deduction, use Schedule A (Form • You paid taxes in connection with the purchase or
1040). sale of oil or gas.
Figure your tax both ways—claiming the credit • You paid or accrued taxes on income or gain in con-
TIP and claiming the deduction. Then, fill out your re- nection with a covered asset acquisition. Covered as-
turn the way that benefits you more. See Why set acquisitions include certain acquisitions that result
Choose the Credit, later. in a stepped-up basis for U.S. tax purposes. For more
information, see Internal Revenue Code section
901(m) and the regulations under that section, includ-
Choice Applies to All Qualified
ing Treasury Decision 9895, 2020-15 I.R.B. 565, avail-
Foreign Taxes able at IRS.gov/irb/2020-15_IRB#TD-9895.
As a general rule, you must choose each year to take ei- For more information on these items, see Taxes for
ther a credit or a deduction for all qualified foreign taxes Which You Can Only Take an Itemized Deduction, later,
paid or accrued in that year. under Foreign Taxes for Which You Cannot Take a Credit.

If you choose to take a credit for any qualified foreign Foreign taxes that are not income taxes. In most ca-
taxes in a year, you must take the credit for all qualified ses, only foreign income taxes qualify for the foreign tax
foreign taxes paid or accrued in that year. You cannot de- credit. Other taxes, such as foreign real and personal
duct any of them. Conversely, if you choose to deduct property taxes, do not qualify. But you may be able to de-
qualified foreign taxes, you must deduct all of them. You duct these other taxes even if you claim the foreign tax
cannot take a credit for any of them. credit for foreign income taxes if they are expenses incur-
See What Foreign Taxes Qualify for the Credit, later, red in a trade or business or in the production of income.
for the meaning of qualified foreign taxes. Final foreign tax credit regulations issued on Jan-
There are exceptions to this general rule, which are de- ! uary 4, 2022, revised the creditability require-
scribed next. CAUTION ments under Regulations sections 1.901-2 and
1.903-1, applicable for foreign taxes paid or accrued in
Exception for taxes that relate to a prior year in taxable years beginning on or after December 28, 2021.
which you deducted foreign income taxes. If you are For more information, see Treasury Decision 9959,
an accrual basis taxpayer (or you elected to claim your 2022-03 I.R.B. 328, available at IRS.gov/irb/
foreign tax credit on an accrual basis see Credit for Taxes 2022-03_IRB#TD-9959.
Paid or Accrued, later) that has chosen to claim a credit
for foreign taxes this year, and you paid additional quali- Carrybacks and carryovers. There is a limit on the
fied foreign tax this year that relates to a prior year in credit you can claim in a tax year. If your qualified foreign
which you chose to deduct foreign taxes, then you may taxes exceed the credit limit, you may be able to carry
claim a deduction for the additional tax paid. See Regula- over or carry back the excess to another tax year. If you
tions section 1.901–1(c)(3). deduct qualified foreign taxes in a tax year, you cannot
take a credit for qualified foreign taxes that are carried
Exceptions for foreign taxes not allowed as a credit. back or carried over to that tax year from another tax year.
Even if you claim a credit for other foreign taxes, you can That is because you cannot take both a deduction and a
deduct any foreign tax that is not allowed as a credit if you credit for qualified foreign taxes in the same tax year.
did any of the following. For more information on the limit, see How To Figure
• You paid the tax to a country for which a credit is not the Credit, later. For more information on carrybacks and
allowed because it provides support for acts of inter- carryovers, see Carryback and Carryover, later.
national terrorism, or because the United States does
not have or does not conduct diplomatic relations with
it or recognize its government and that government is

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Making or Changing Your Choice foreign tax rate is lower than the U.S. rate, U.S. tax on the
foreign income will be limited to the difference between
You can choose to claim a credit or to change from claim- the rates. The foreign tax credit can only reduce U.S.
ing a deduction to claiming a credit at any time during the taxes on foreign source income; it cannot reduce U.S.
period within 10 years from the regular due date for filing taxes on U.S. source income.
the return (without regard to any extension of time to file) Although no one rule covers all situations, in most ca-
for the tax year in which the taxes were actually paid or ses, it is better to take a credit for qualified foreign taxes
accrued. You can also choose to claim a deduction or to than to deduct them as an itemized deduction. The follow-
change from claiming a credit to claiming a deduction at ing bullets explain why the credit may provide a greater
any time during the period within 3 years from the time tax benefit.
you filed the return or 2 years from when you paid the tax,
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
you do not itemize your deductions. You are then al-
Example. You paid foreign taxes for the last 13 years lowed the standard deduction in addition to the credit.
and chose to deduct them on your U.S. income tax re-
turns. You always filed your returns and paid your taxes • If you choose to take the foreign tax credit, and the
by April 15. In February 2022, you file an amended return taxes paid or accrued exceed the credit limit for the
for tax year 2011, choosing to take a credit for your 2011 tax year, you may be able to carry over or carry back
foreign taxes because you now realize that the credit is the excess to another tax year. (See Limit on the
more advantageous than the deduction for that year. Be- Credit under How To Figure the Credit, later.)
cause your 2011 return is treated as though filed on April
Example 1. For 2022, you and your spouse have ad-
15, 2012, this choice is timely (within 10 years).
justed gross income of $80,300, including $20,000 of divi-
Because there is a limit on the credit for your 2011 for-
dend income from foreign sources. None of the dividends
eign tax, you have unused 2011 foreign taxes. Ordinarily,
are qualified dividends. You file a joint return. You had to
you first carry back unused foreign taxes arising in 2011
pay $1,900 in foreign income taxes on the dividend in-
to, and claim them as a credit in, the preceding tax year. If
come. If you take the foreign taxes as an itemized deduc-
you are unable to claim all of them in that year, you carry
tion, your total itemized deductions are $15,000. Your tax-
them forward to the 10 years following the year in which
able income then is $65,300 and your tax is $7,428.
they arose.
If you take the credit instead, your itemized deductions
Because you originally chose to deduct your foreign
are only $13,100. Your taxable income then is $67,200
taxes and the 10-year period for changing the choice for
and your tax before the credit is $7,656. After the credit,
2010 has passed, you cannot change your choice and
however, your tax is only $5,756. Therefore, your tax is
carry the unused 2011 foreign taxes back to tax year
$1,672 lower ($7,428 − $5,756) by taking the credit.
2010.
Because the 10-year period for changing the choice Example 2. In 2022, you receive investment income of
have not passed for your 2012 through 2021 income tax $5,000 from a foreign country, which imposes a tax of
returns, you can still choose to claim the credit for those $1,500 on that income. You report on your U.S. return this
years and carry forward any unused 2011 foreign taxes. income as well as $56,000 of U.S. source wages and an
However, you must reduce the unused 2011 foreign taxes allowable $40,000 partnership loss from a U.S. partner-
that you carry forward by the amount that would have ship. Your share of the partnership's gross income is
been allowed as a carryback if you had timely carried $25,000 and your share of its expenses is $65,000. You
back the foreign tax to tax year 2010. are single and have other itemized deductions of $15,850.
You cannot take a credit or a deduction for foreign If you deduct the foreign tax on your U.S. return, your tax-
able income is $3,650 ($5,000 + $56,000 − $40,000 −
CAUTION eign earned income exclusion or the foreign hous-
! taxes paid on income you exclude under the for- $1,500 − $15,850) and your tax is $368.
ing exclusion. See Foreign Earned Income and Housing If you take the credit instead, your taxable income is
Exclusions under Foreign Taxes for Which You Cannot $5,150 ($5,000 + $56,000 − $40,000 − $15,850) and your
Take a Credit, later. tax before the credit is $518. You can take a credit of only
$410 because of limits discussed in Limit on the Credit,
later. Your tax after the credit is $108 ($518 − $410),
which is $260 ($368 – $108) less than if you deduct the
Why Choose the Credit? foreign tax.
If you choose the credit, you will have unused foreign
The foreign tax credit is intended to relieve you of a dou- taxes of $1,090 ($1,500 − $410). When deciding whether
ble tax burden when your foreign source income is taxed to take the credit or the deduction, you should also con-
by both the United States and the foreign country. In most sider whether you can benefit from a carryback or carry-
cases, if the foreign tax rate is higher than the U.S. rate, over of that unused foreign tax.
there will be no U.S. tax on the foreign income. If the

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

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your expenses in foreign currency, you must translate the average exchange rate for the tax year to which the taxes
foreign currency into U.S. dollars. How and when you do relate. This rule applies to accrued taxes only under the
this depends on your functional currency. In most cases, following conditions.
your functional currency is the U.S. dollar unless you are
1. The foreign taxes are paid on or after the first day of
required to use the currency of a foreign country.
the tax year to which they relate.
You must make all federal income tax determinations in
your functional currency. The U.S. dollar is the functional 2. The foreign taxes are paid not later than 24 months
currency for all taxpayers except some qualified business after the close of the tax year to which they relate.
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.
Even if you are self-employed and have a QBU, your For all other foreign taxes, you should use the ex-
functional currency is the U.S. dollar if any of the following change rate in effect on the date you paid them.
apply.
Election to use exchange rate on date paid. If you
• You conduct the business primarily in dollars. have accrued foreign taxes that you are otherwise re-
• The principal place of business is located in the Uni- quired to convert using the average exchange rate, you
ted States. may elect to use the exchange rate in effect on the date
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. dol-
• The business books and records are not kept in the lars using the exchange rate on the last day of the U.S. tax
currency of the economic environment in which a sig- year to which those taxes relate. You may make the elec-
nificant part of the business activities is conducted. tion for all nonfunctional currency foreign income taxes or
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
tax return. Foreign Tax Redetermination

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 Reg-
Internal Revenue Service
ulations section 1.905-3(a) for more information.
International Section
Philadelphia, PA 19255-0725 If a foreign tax redetermination occurs, a redetermina-
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
discussed next. If your tax was withheld in foreign cur- 2. The accrued taxes you claimed as a credit in a tax
rency, use the rate of exchange in effect for the date on year are not paid within 24 months after the end of
which the tax was withheld. If you make foreign estimated that tax year.
tax payments, you use the rate of exchange in effect for If this applies to you, you must reduce the credit
the date on which you made the estimated tax payment. previously claimed by the amount of the unpaid taxes.
The exchange rate rules discussed here apply even if You will not be allowed a credit for the unpaid taxes
the foreign taxes are paid or accrued with respect to a for- until you pay them. When you pay the accrued taxes,
eign tax credit splitting event (discussed later). a new foreign tax redetermination occurs and you
must translate the taxes into U.S. dollars using the ex-
Exception. If you claim the credit for foreign taxes on
change rate as of the date they were paid. The foreign
an accrual basis, in most cases, you must use the
tax credit is allowed for the year to which the foreign

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tax relates. See Rate of exchange for foreign taxes redetermination, you must file Schedule C (Form 1116)
paid, earlier, under Foreign Currency and Exchange with your current year tax return summarizing the foreign
Rates. tax redeterminations that occurred in the current year that
relate to prior tax years. You must file Schedule C (Form
3. The foreign taxes you paid are refunded in whole or in
1116) for each applicable separate category of income.
part.
4. You change your election and claim a credit for for- No change in U.S. tax liability. If a foreign tax redeter-
eign income taxes that you previously deducted, or mination doesn't change the amount of U.S. tax due for
you change your election and claim a deduction for any tax year including in instances where the additional
foreign income taxes that you previously credited. U.S. tax due by reason of the redetermination is elimina-
ted by a carryback or carryover of an unused foreign tax,
5. There is a change in foreign tax liability that affects you don't need to file an amended return and may instead
the amount of distributions or inclusions under sec- notify the IRS of the redetermination by attaching for each
tions 951, 951A, or 1293, or affects the application of applicable separate category of income a completed
the high-tax exception described in section 954(b)(4). 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 information.
of the tax paid because of fluctuations in the ex-
change rate between the date of accrual and the date You are not required to attach Form 1116 for a tax year
of payment. However, no redetermination is required affected by a redetermination if you meet both of the fol-
if the change in foreign tax liability for each foreign lowing criteria.
country is solely attributable to exchange rate fluctua- 1. The amount of your creditable taxes paid or accrued
tions and is less than the smaller of: 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
tax redetermination.
b. 2% of the total dollar amount of the foreign tax ini-
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
Credit, later.
In this case, you must adjust your U.S. tax in the
tax 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
• Information sufficient to determine any interest due
Form 1040-X, Amended U.S. Individual Income Tax Re-
from or owing to you, including the amount of any in-
turn, or other amended return, to notify the IRS so that
terest paid to you by the foreign government, and the
your U.S. tax for the year or years affected can be redeter-
dates received.
mined. Complete and attach to Form 1040-X (or other
amended return) a revised Form 1116 for the tax year(s) In the case of any foreign taxes that were not paid be-
affected and a statement that contains information suffi- fore the date 24 months after the close of the tax year to
cient for the IRS to redetermine your U.S. tax liability. See which those taxes relate, you must provide the amount of
Contents of statement, later. In some cases, you may not those taxes in foreign currency and the exchange rate that
have to file Form 1040-X or attach Form 1116. was used to translate that amount when originally claimed
as a credit.
In addition to filing an amended return with Form 1116 If any foreign tax was refunded in whole or in part, you
and attached statement for your tax year(s) for which your must provide the date and amount (in foreign currency) of
U.S. tax liability is changed as a result of the foreign tax each refund, the exchange rate that was used to translate

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each amount when originally claimed as a credit, and the from the adjustment to your U.S. tax for the time before
exchange rate for the date the refund was received (for the date of the refund.
purposes of figuring foreign currency gain or loss under However, if you receive a foreign tax refund with inter-
Internal Revenue Code section 988). est, you must pay interest to the IRS up to the amount of
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-
rect U.S. tax due. If you pay more foreign tax than you Foreign tax imposed on foreign refund. If your for-
originally claimed a credit for, you have 10 years to file a eign tax refund is taxed by the foreign country, you cannot
claim for refund of U.S. taxes. See Time Limit on Refund take a separate credit or deduction for this additional for-
Claims, later. eign tax. However, when you refigure the foreign tax credit
Exceptions to this due date are explained in the next taken for the original foreign tax, reduce the amount of the
two paragraphs. refund by the foreign tax paid on the refund.

Multiple redeterminations of U.S. tax liability for Example. You paid a foreign income tax of $3,000 in
same tax year. Where more than one foreign tax rede- 2020, and received a foreign tax refund of $500 in 2022
termination requires a redetermination of U.S. tax liability on which a foreign tax of $100 was imposed. When you
for the same tax year and those redeterminations occur in refigure your credit for 2020, you must reduce the $3,000
the same tax year or within 2 consecutive tax years, you you paid by $400.
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-
cation for multiple redeterminations which, taken together, You have 10 years to file a claim for refund of U.S. tax if
increase your U.S. tax liability for the tax year, the due you find that you paid or accrued a larger foreign tax than
date for that notification is the due date (with extensions) you claimed a credit for. The 10-year period begins the
for the year in which the first foreign tax redetermination day after the regular due date for filing the return (without
that increased your U.S. tax liability occurred. On the extensions) for the year in which the taxes were actually
other hand, if multiple redeterminations, taken together, paid or accrued.
decrease your U.S. tax liability for the tax year, the due
date for that notification is the applicable due date for filing You have 10 years to file your claim regardless of
a claim for credit or refund for an overpayment of U.S. tax. whether you claim the credit for taxes paid or taxes ac-
However, foreign tax redeterminations with respect to the crued. The 10-year period applies to claims for refund or
tax year for which a redetermination of U.S. tax liability is credit based on:
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
than one Form 1040-X for that tax year. 2. Reporting qualified foreign taxes not originally repor-
ted on the return, or
Additional U.S. tax due eliminated by foreign tax
credit carryback or carryover. If a foreign tax redeter- 3. Any other change in the size of the credit (including
mination requires a redetermination of U.S. tax liability one caused by correcting the foreign tax credit limit).
that would otherwise result in an additional amount of U.S.
The special 10-year period also applies to claiming a
tax due, but the additional tax is eliminated by a carryback
credit or to changing from claiming a deduction to claiming
or 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, discussed earlier under Choosing To Take Credit
mination. Instead, you can notify the IRS by attaching
or Deduction.
Schedule C (Form 1116) to the original return for the tax
year in which the foreign tax redetermination occurred.

Failure-to-notify penalty. If you fail to notify the IRS of a Who Can Take the Credit?
foreign tax redetermination and cannot show reasonable
cause for the failure, you may have to pay a penalty. U.S. citizens, resident aliens, and nonresident aliens who
For each month, or part of a month, that the failure con- paid foreign income tax and are subject to U.S. tax on for-
tinues, you pay a penalty of 5% of the tax due resulting eign source income may be able to take a foreign tax
from a redetermination of your U.S. tax. This penalty can- credit.
not be more than 25% of the tax due.

Foreign tax refund. If you receive a foreign tax refund
without interest from the foreign government, you will not
have to pay interest on the amount of tax due resulting

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U.S. Citizens Tax Must Be Imposed on You

If you are a U.S. citizen, you are taxed by the United You can claim a credit only for foreign taxes that are im-
States on your worldwide income wherever you live. You posed on you by a foreign country or U.S. possession. For
are normally entitled to take a credit for foreign taxes you example, a tax that is deducted from your wages is con-
pay or accrue. sidered to be imposed on you. You cannot shift the right to
claim the credit by contract or other means.

Resident Aliens Foreign country. A foreign country includes any foreign
state and its political subdivisions. Income, war profits,
If you are a resident alien of the United States, you can and excess profits taxes paid or accrued to a foreign city
take a credit for foreign taxes subject to the same general or province qualify for the foreign tax credit.
rules as U.S. citizens. If you are a bona fide resident of
Puerto Rico for the entire tax year, you also come under U.S. possessions. For foreign tax credit purposes, all
the same rules. qualified taxes paid to U.S. possessions are considered
foreign taxes. For this purpose, U.S. possessions include
Usually, you can take a credit only for those foreign Puerto Rico, the U.S. Virgin Islands, Guam, the Northern
taxes imposed on income you actually or constructively Mariana Islands, and American Samoa.
received while you had resident alien status. When the term “foreign country” is used in this publica-
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
Nonresident Aliens Tax

If you are a nonresident alien, you cannot take the credit in In most cases, you can claim the credit only if you paid or
most cases. However, you may be able to take the credit accrued the foreign tax to a foreign country or U.S. pos-
if you meet either of the following conditions. session. However, the paragraphs that follow describe
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.
• You pay or accrue tax to a foreign country or U.S. pos- Joint return. If you file a joint return, you can claim the
session on income from foreign sources that is effec- credit based on the total foreign income taxes paid or ac-
tively connected with a trade or business in the United crued by you and your spouse.
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
What Foreign Taxes Qualify for figured separately, and the tax on that combined income
is allocated separately.
the Credit?
Example. You and your spouse reside in Country X,
In most cases, the following four tests must be met for any which imposes income tax on your combined incomes.
foreign tax to qualify for the credit. Both of you use the “u” as your functional currency. Coun-
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-
2. You must have paid or accrued the tax. ing status on your U.S. income tax return is married filing
separately. You can claim only 60% (30,000u/50,000u) of
3. The tax must be the legal and actual foreign tax liabil- the foreign taxes imposed on your income on your U.S in-
ity. come tax return. Your spouse can claim only 40%
(20,000u/50,000u).
4. The tax must be an income tax (or a tax in lieu of an
income tax). Partner or S corporation shareholder. If you are a
Certain foreign taxes do not qualify for the credit member of a partnership, or a shareholder in an S corpo-
ration, you can claim the credit based on your proportion-
CAUTION for Which You Cannot Take a Credit, later.
! even if the four tests are met. See Foreign Taxes ate share of the foreign income taxes paid or accrued by
the partnership or the S corporation. These amounts will

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be shown on the Schedule K-3 you receive from the part- If you are a shareholder in a CFC who has made
nership or S corporation. However, if you are a share- TIP a section 962 election and you figured a foreign
holder in an S corporation that in turn owns stock in a for- tax credit, see the instructions for Form 1040 or
eign corporation, you cannot claim a credit for your share 1040-SR, line 16.
of foreign taxes paid by the foreign corporation unless you
make a section 962 election discussed later, under Con- Controlled foreign corporation (CFC). A CFC is a
trolled foreign corporation (CFC) shareholder. foreign corporation in which U.S. shareholders own more
than 50% of the voting power or value of the stock. You
Beneficiary. If you are a beneficiary of an estate or trust, are considered a U.S. shareholder if you own, directly or
you may be able to claim the credit based on your propor- indirectly, 10% or more of the total voting power or value
tionate share of foreign income taxes paid or accrued by of all classes of the foreign corporation's stock. For tax
the estate or trust. This amount will be shown on the years beginning after 2017, the definition of U.S. share-
Schedule K-1 you receive from the estate or trust. How- holder is expanded to include U.S. persons who own 10%
ever, you must show that the tax was imposed on income or more of the total value of shares of all classes of stock
of the estate and not on income received by the decedent. of such 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),
you may be able to claim the credit based on your share Tax Must Be the Legal and Actual
of foreign income taxes paid by the fund if it chooses to Foreign Tax Liability
pass the credit on to its shareholders. You should receive
from the mutual fund or other RIC a Form 1099-DIV, or The amount of foreign tax that qualifies is not necessarily
similar statement, showing your share of the foreign in- the amount of tax withheld by the foreign country. Only the
come, and your share of the foreign taxes paid. If you do legal and actual foreign tax liability that you paid or ac-
not receive this information, you will need to contact the crued during the year qualifies for the credit.
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 re-
ment of earnings in U.S. property), and your global intan- ductions in the rates of tax of those foreign countries.
gible low-taxed income (GILTI) inclusion for the tax year, However, some treaty countries require U.S. citizens and
you may be able to claim a credit for certain foreign taxes residents 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 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-
cludes foreign taxes offset or reduced by a tax credit that
• Your section 951(a) amount broken out between sub- is refundable to you in cash only if an excess credit re-
part F income and section 956 amount. mains after offsetting your foreign income tax liability as
• Your GILTI inclusion. well as a tax credit purchased from another taxpayer. See
Regulations section 1.901-2(e)(2)(ii). However, if the for-
• The amount of your deduction under section 250 with
eign income taxes are offset or reduced by a tax credit
respect to your GILTI inclusion (your section 250 de-
that is fully refundable to you in cash at your option, with-
duction).
out having to first offset your foreign income tax liability,
• The amount of the foreign tax credit taken on your you can claim a foreign tax credit against your U.S. in-
section 951(a) amount broken out between subpart F come tax for those foreign taxes. See Regulations section
income and section 956 amount, and your GILTI inclu- 1.901-2(e)(2)(iii).
sion.
Subsidy received. Tax payments a foreign country re-
• The amount of your U.S. tax liability with respect to
turns to you in the form of a subsidy do not qualify for the
amounts subject to section 962.
foreign tax credit. This rule applies even if the subsidy is
See Internal Revenue Code sections 951(a), 951A, 960, given to a person related to you, or persons who participa-
and 962 and Regulations section 1.962-2 for more infor- ted with you in a transaction or a related transaction. A
mation.

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subsidy can be provided by any means but must be deter- You are considered to receive a specific economic
mined, directly or indirectly, in relation to the amount of benefit if you have a business transaction with a person
tax, or to the base used to figure the tax. who 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 govern- • Goods.
ment. You must include the refund (including any amount
withheld) in your income in the year received. Any tax • Services.
withheld 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-
In most cases, the right or privilege merely to engage in
holding tax ($15) on the refund you received. You receive
business is not an economic benefit.
a check for $85. You include $100 in your income. The
$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-capacity taxpayer.” As a dual-capacity taxpayer, you
Lieu of Income Tax) cannot claim a credit for any part of the foreign levy, un-
less you establish that the amount paid under a distinct el-
In most cases, only income, war profits, and excess prof-
ement of the foreign levy is a tax, rather than a compul-
its taxes (income taxes) qualify for the foreign tax credit.
sory payment for a direct or indirect specific economic
Furthermore, foreign taxes on income can qualify even
benefit.
though they are not imposed under an income tax law if
the tax is in lieu of an income, war profits, or excess profits For more information on how to establish
tax. See Taxes in Lieu of Income Taxes, later. amounts paid under separate elements of a levy,
write to:
Simply because the levy is called an income tax by the
foreign taxing authority does not make it an income tax for Internal Revenue Service
this purpose. A foreign levy is a foreign income tax only if International Section
it meets both of the following requirements. Philadelphia, PA 19255-0725
1. It is a tax; that is, you have to pay it and you get no
specific economic benefit (discussed below) from
paying it. Pension, unemployment, and disability fund pay-
ments. A foreign tax imposed on an individual to pay for
2. Either (a) the foreign tax is a net income tax that retirement, old-age, death, survivor, unemployment, ill-
meets the requirements of Regulations section ness, or disability benefits, or for substantially similar pur-
1.901-2(b), or (b) the foreign tax is a tax in lieu of an poses, is not payment for a specific economic benefit if
income tax that meets the requirements of Regula- the amount of the tax does not depend on the age, life ex-
tions section 1.903-1. pectancy, or similar characteristics of that individual.
No deduction or credit is allowed, however, for social
Specific economic benefit. In most cases, you get a
security taxes paid or accrued to a foreign country with
specific economic benefit if you receive, or are considered
which the United States has a social security agreement.
to receive, an economic benefit from the foreign country
For more information about these agreements, see Pub.
imposing the levy, and:
54.
1. If there is a generally imposed income tax, the eco-
nomic benefit is not available on substantially the Net income tax. A foreign tax is a net income tax if it is
same terms to all persons subject to the income tax; imposed on realized gross receipts reduced by costs and
or expenses related to those gross receipts. In addition, the
foreign tax must meet the attribution requirement, descri-
2. If there is no generally imposed income tax, the eco- bed next. In order for the foreign tax to be a net income
nomic benefit is not available on substantially the tax, the foreign tax must generally allow for deduction of
same terms to the population of the foreign country in significant costs and expenses, including capital expendi-
general. tures, interest, rents, royalties, wages or other payments
for services, and research and experimentation. However,

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the foreign tax does not need to allow deductions for costs • The tax meets the attribution requirement and is im-
and expenses attributable to wage income or to invest- posed in place of, and not in addition to, a generally
ment income that is not derived from a trade or business. imposed net income tax.
For more information, see Regulations section 1.901-2(b)
(4). A tax in lieu of an income tax does not have to be
based on realized net income. A foreign tax imposed on
Attribution requirement. A foreign tax must meet the gross income, gross receipts or sales, or the number of
attribution requirement in Regulations section 1.901-2(b) units produced or exported can qualify for the credit. How-
(5). For a tax that is imposed on nonresidents of a country, ever, the tax must meet the attribution requirement, de-
the foreign tax must meet one of three requirements: scribed earlier. That means that a withholding tax im-
1. Activities nexus: The base of the foreign tax must be posed on gross interest, dividends, royalties, or other
determined based on gross receipts and costs that gross income of a nonresident is only creditable if the for-
are attributable to the activities (without using the lo- eign country's source rule for those items of income is rea-
cation of customers as a criterion) of the nonresident. sonably similar to U.S. source rules.

2. Source based nexus: For a tax that is imposed on the In most cases, soak-up taxes (discussed earlier) do not
basis of source, the foreign country's source rules qualify as a tax in lieu of an income tax. However, if the
must be reasonably similar to U.S. source rules. foreign country imposes a soak-up tax in lieu of an income
3. Property situs nexus: For a tax imposed on gain from tax, the amount that does not qualify for foreign tax credit
the sale or disposition of property, the base of the tax is the lesser of the following amounts.
only includes gains from the sale or disposition of real • The soak-up tax.
property located in the foreign country (or interest in a
• The foreign tax you paid that is more than the amount
resident entity that owns real property) or gain from
you would have paid if you had been subject to the
the sale or disposition of interest in a passthrough en-
generally imposed income tax.
tity that's attributable to business property forming
part of a taxable presence in the foreign country.

For a tax that is imposed on residents of the foreign Foreign Taxes for Which You
country, the rules for allocating income, deduction, and
losses between related parties must be consistent with Cannot Take a Credit
arm's-length principles.
This part discusses the foreign taxes for which you cannot
Soak-up taxes. An amount paid to a foreign country is take a credit. These are:
not an amount of foreign income tax paid and does not
qualify for the foreign tax credit to the extent it is a soak-up • Taxes on excluded income,
tax. A tax is a soak-up tax to the extent that liability for it • Taxes for which you can only take an itemized deduc-
depends on the availability of a credit for it against income tion,
tax imposed by another country. This rule applies only if
and to the extent that the foreign tax would not be im- • Taxes on foreign mineral income,
posed if the credit were not available. • Taxes from international boycott operations,
Penalties and interest. Amounts paid to a foreign gov- • A portion of taxes on combined foreign oil and gas in-
ernment to satisfy a liability for interest, fines, penalties, or come,
any similar obligation are not taxes and do not qualify for • Taxes of U.S. persons controlling foreign corporations
the credit. and partnerships who fail to file required information
returns,
Taxes not based on income. Foreign taxes based on
gross receipts or the number of units produced, rather • Taxes related to a foreign tax splitting event, and
than on realized net income, do not qualify unless they are • Foreign taxes disallowed under section 965(g) and
imposed in lieu of an income tax, as discussed next. Regulations section 1.965-5.
Taxes based on assets, such as property taxes, do not
qualify for the credit.
Taxes on Excluded Income

Taxes in Lieu of Income Taxes You cannot take a credit for foreign taxes paid or accrued
on certain income that is excluded from U.S. gross in-
A tax paid or accrued to a foreign country qualifies for the come.
credit if it is imposed in lieu of an income tax otherwise
generally imposed. A foreign levy is a tax in lieu of an in-
Foreign Earned Income and Housing
come tax only if it meets both of the following require-
ments. Exclusions

• It is not payment for a specific economic benefit, as You must reduce your foreign taxes available for the credit
discussed earlier. by the amount of those taxes paid or accrued on income

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that is excluded from U.S. income under the foreign Then, find the denominator of the fraction by subtract-
earned income exclusion or the foreign housing exclusion. ing all your deductible expenses from all your foreign
See Pub. 54 for more information on the foreign earned in- earned income ($125,000 − $20,000 = $105,000).
come and housing exclusions. Finally, multiply the foreign tax you paid by the resulting
fraction.
Wages completely excluded. If your wages are com-
pletely excluded, you cannot take a credit for any of the $94,080
foreign taxes paid or accrued on these wages. $30,000 × = $26,880
$105,000
Wages partly excluded. If only part of your wages is ex- The amount of Country A tax you cannot take a credit for
cluded, you cannot take a credit for the foreign income is $26,880.
taxes allocable to the excluded part. You find the amount
allocable to your excluded wages by multiplying the for- Taxes on Income From Puerto Rico Exempt
eign tax paid or accrued on foreign earned income re- From U.S. Tax
ceived or accrued during the tax year by a fraction.
The numerator of the fraction is your foreign earned in- If you have income from Puerto Rican sources that is not
come and housing amounts excluded under the foreign taxable, you must reduce your foreign taxes paid or ac-
earned income and housing exclusions for the tax year crued by the taxes allocable to the exempt income. For in-
minus otherwise deductible expenses definitely related formation on figuring the reduction, see Pub. 570.
and properly apportioned to that income. Deductible ex-
penses do not include the foreign housing deduction. Possession Exclusion
The denominator is your total foreign earned income
received or accrued during the tax year minus all deducti- If you are a bona fide resident of American Samoa and ex-
ble expenses allocable to that income (including the for- clude income from sources in American Samoa, you can-
eign housing deduction). If the foreign law taxes foreign not take a credit for the taxes you pay or accrue on the ex-
earned income and some other income (for example, cluded income. For more information on this exclusion,
earned income from U.S. sources or a type of income not see Pub. 570.
subject to U.S. tax), and the taxes on the other income
cannot be segregated, the denominator of the fraction is
the total amount of income subject to the foreign tax mi- Extraterritorial Income Exclusion
nus deductible expenses allocable to that income.
You cannot take a credit for taxes you pay on qualifying
Example. You are a U.S. citizen and a cash basis tax- foreign trade income excluded on Form 8873. However,
payer, employed by Company X and living in Country A. see Internal Revenue Code section 943(d) for an excep-
Your records show the following. tion for certain withholding taxes.

Foreign earned income received. . . . . . . . . . . . . . $125,000
Taxes for Which You Can Only Take
Unreimbursed business travel expenses . . . . . . . . 20,000
an Itemized Deduction
Income tax paid to Country A. . . . . . . . . . . . . . . . 30,000
Exclusion of foreign earned You cannot claim a foreign tax credit for foreign income
income and housing allowance. . . . . . . . . . . . . . . 112,000 taxes paid or accrued under the following circumstances.
However, you can claim an itemized deduction for these
taxes. See Choosing To Take Credit or Deduction, earlier.
Because you can exclude part of your wages, you can-
not claim a credit for part of the foreign taxes. To find that Taxes Imposed by Sanctioned Countries
part, do the following.
(Section 901(j) Income)
First, find the amount of business expenses allocable
to excluded wages and therefore not deductible. To do
You cannot claim a foreign tax credit for income taxes
this, multiply the otherwise deductible expenses by a frac-
paid or accrued to any country if the income giving rise to
tion. That fraction is the excluded wages over your foreign
the tax is for a period (the sanction period) during which:
earned income.
• The Secretary of State has designated the country as
$112,000 one that repeatedly provides support for acts of inter-
$20,000 × = $17,920
$125,000 national terrorism;
• The United States has severed or does not conduct
Next, find the numerator of the fraction by which you diplomatic relations with the country; or
will multiply the foreign taxes paid. To do this, subtract
• The United States does not recognize the country's
business expenses allocable to excluded wages
government, and that government is not otherwise eli-
($17,920) from excluded wages ($112,000). The result is
gible to purchase defense articles or services under
$94,080.
the Arms Export Control Act.

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The following countries meet this description for 2022. In- ness activities in a sanctioned country, those foreign taxes
come taxes paid or accrued to these countries in 2022 do would be eligible for a foreign tax credit. In this situation,
not qualify for the credit. you would continue completing Form 1116, and not stop
at line 17.
• Iran.
• Libya (but see Note, later). Figuring the credit when a sanction ends. Table 1
lists the countries for which sanctions have ended or for
• North Korea.
which a Presidential waiver has been granted. For any of
• Sudan. these countries, you can claim a foreign tax credit for the
• Syria. taxes paid or accrued to that country on the income for the
period that begins after the end of the sanction period or
Waiver of denial of the credit. A waiver can be granted the date the Presidential waiver was granted.
to a sanctioned country if the President of the United
States determines that granting the waiver is in the na- Example. The sanctions against Country X ended on
tional interest of the United States and will expand trade July 31. On August 19, you receive a distribution from a
and investment opportunities for U.S. companies in the mutual fund of Country X income. The fund paid Country
sanctioned country. The President must report to Con- X income tax for you on the distribution. Because the dis-
gress, not less than 30 days before the date on which the tribution was made after the sanction ended, you may in-
waiver is granted, the intention to grant the waiver and the clude the foreign tax paid on the distribution to figure your
reason for the waiver. foreign tax credit.
Amounts for the nonsanctioned period. If a sanc-
Note. Effective December 10, 2004, the President gran- tion period ends (or a Presidential waiver is granted) dur-
ted a waiver to Libya. Income taxes arising on or after this ing your tax year and you are not able to determine the ac-
date qualify for the credit if they meet the other require- tual income and taxes for that period, you can allocate
ments in this publication. amounts to that period based on the number of days in the
period that fall in your tax year. Multiply the income or
Limit on credit. In figuring the foreign tax credit limit, dis-
taxes for the year by the following fraction to determine
cussed later, income from a sanctioned country is a sepa-
the amounts allocable to that period.
rate category of foreign income unless a Presidential
waiver is granted. You must fill out a separate Form 1116
for this income and check box at the top of the form. Be-e Number of nonsanctioned days in year
Number of days in year
cause no credit is allowed for taxes paid to sanctioned
countries, you would generally complete Form 1116 for Example. You are a calendar year filer and received
this category only through line 17. $20,000 of income from Country X in 2022 on which you
paid tax of $4,500. Sanctions against Country X ended on
Example. You lived and worked in Iran until August,
July 11, 2022. You are unable to determine how much of
when you were transferred to Italy. You paid taxes to each
the income or tax is for the nonsanctioned period. Be-
country on the income earned in that country. You cannot
cause your tax year starts on January 1, and the Country
claim a foreign tax credit for the foreign taxes paid on the
X sanction ended on July 11, 2022, 173 days of your tax
income earned in Iran. Because the income earned in Iran
year are in the nonsanctioned period. You would figure
is a separate category of foreign income, you must fill out
the income for the nonsanctioned period as follows.
a separate Form 1116 for that income. You cannot take a
credit for taxes paid on the income earned in Iran, but that
income is taxable by the United States. 173
× $20,000 = $9,479
365
Note. A foreign tax credit may be claimed for foreign
taxes paid or accrued with respect to section 901(j) in- You would figure the tax for the nonsanctioned period as
come if such tax is paid or accrued to a country other than follows.
a sanctioned country. For example, if a U.S. citizen resi-
dent in a non-sanctioned country pays a residence-based 173
× $4,500 = $2,133
income tax in that country on income derived from busi- 365

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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To figure your foreign tax credit, you would use $9,479 as to claim a foreign tax credit for qualified taxes paid on divi-
the income from Country X and $2,133 as the tax. dends regardless of how long you held the stock or
whether you were obligated to make payments for posi-
Further information. The rules for figuring the foreign
tions in substantially similar or related property. See sec-
tax credit after a country's sanction period ends are more
tion 901(k)(4) of the Internal Revenue Code for more infor-
fully explained in Revenue Ruling 92-62, Cumulative Bul-
mation.
letin 1992-2, page 193. Issues of the Cumulative Bulletin
are available in most IRS offices and you are welcome to
read them there. Taxes Withheld on Income or Gain (Other
Than Dividends)
Taxes Imposed on Certain Dividends
For income or gain (other than dividends) paid or accrued
You cannot claim a foreign tax credit for withholding tax on property, you cannot claim a foreign tax credit for with-
(defined later) on dividends paid or accrued if either of the holding tax (defined later):
following applies to the dividends. • If you have not held the property for at least 16 days
during the 31-day period that begins 15 days before
1. The dividends are on stock you held for less than 16
the date on which the right to receive the payment ari-
days during the 31-day period that begins 15 days be-
ses, or
fore the ex-dividend date (defined later).
• To the extent you have to make related payments on
2. The dividends are for a period or periods totaling
positions in substantially similar or related property.
more than 366 days on preferred stock you held for
less than 46 days during the 91-day period that be- When figuring how long you held the property, count the
gins 45 days before the ex-dividend date. If the divi- day you sold it, but do not count the day you acquired it or
dend is not for more than 366 days, rule (1) applies to any days on which you were protected from risk of loss.
the preferred stock.
Withholding tax. For this purpose, withholding tax in-
When figuring how long you held the stock, count the day cludes any tax determined on a gross basis. It does not in-
you sold it, but do not count the day you acquired it or any clude any tax which is in the nature of a prepayment of a
days on which you were protected from risk of loss. tax imposed on a net basis.

Regardless of how long you held the stock, you cannot Exception for dealers. If you are a dealer in property
claim the credit to the extent you have an obligation under who actively conducts business in a foreign country, you
a short sale or otherwise to make payments related to the may be able to claim a foreign tax credit for qualified taxes
dividend for positions in substantially similar or related withheld on income or gain from that property regardless
property. of how long you held it or whether you have to make rela-
ted payments on positions in substantially similar or rela-
Withholding tax. For this purpose, withholding tax in- ted property. See section 901(I)(2) of the Internal Reve-
cludes any tax determined on a gross basis. It does not in- nue Code for more information.
clude any tax which is in the nature of a prepayment of a
tax imposed on a net basis. Covered Asset Acquisition
Ex-dividend date. The ex-dividend date is the first date
You cannot take a credit for the disqualified portion of any
following the declaration of a dividend on which the pur-
foreign tax paid or accrued in connection with a covered
chaser of a stock is not entitled to receive the next divi-
asset acquisition. A covered asset acquisition includes
dend payment.
certain acquisitions that result in a stepped-up basis for
Example 1. You bought common stock from a foreign U.S. tax purposes but not for foreign tax purposes. For
corporation on November 3. You sold the stock on No- more information, see Internal Revenue Code section
vember 19. You received a dividend on this stock be- 901(m) and the regulations under that section, including
cause you owned it on the ex-dividend date of November Treasury Decision 9895, 2020-15 I.R.B. 565, available at
5. To claim the credit, you must have held the stock for at IRS.gov/irb/2020-15_IRB#TD-9895.
least 16 days within the 31-day period that began on Oc-
tober 21 (15 days before the ex-dividend date). Because
you held the stock for 16 days, from November 4 until No- Taxes in Connection With the Purchase or
vember 19, you are entitled to the credit. Sale of Oil or Gas

Example 2. The facts are the same as in Example 1, You cannot claim a foreign tax credit for taxes paid or ac-
except that you sold the stock on November 14. You held crued to a foreign country in connection with the purchase
the stock for only 11 days. You are not entitled to the or sale of oil or gas extracted in that country if you do not
credit. have an economic interest in the oil or gas, and the pur-
chase price or sales price is different from the fair market
Exception. If you are a securities dealer who actively
value of the oil or gas at the time of purchase or sale.
conducts business in a foreign country, you may be able

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Taxes on Foreign Mineral Income your identity and certain other information will remain con-
fidential.
You must reduce any taxes paid or accrued to a foreign
country or possession on mineral income from that coun- Reporting requirements. You must file a report with the
try or possession if you were allowed a deduction for per- IRS if you or any of the following persons have operations
centage depletion for any part of the mineral income. For in or related to a boycotting country or with the govern-
details, see Regulations section 1.901-3. ment, a company, or a national of a boycotting country.
• A foreign corporation in which you own 10% or more
Taxes From International of the voting power or value of all classes of stock but
only if you own the stock of the foreign corporation di-
Boycott Operations
rectly or through foreign entities.
If you participate in or cooperate with an international boy- • A partnership in which you are a partner.
cott during the tax year, your foreign taxes resulting from
boycott activities will reduce the total taxes available for • A trust you are treated as owning.
credit. See the instructions for line 12 in the Form 1116 in- Form 5713 required. If you have to file a report, you
structions to figure this reduction. must use Form 5713, and attach all supporting schedules.
In most cases, this rule does not apply to employees See the Instructions for Form 5713 for information on
with wages who are working and living in boycotting coun- when and where to file the form.
tries, or to retirees with pensions who are living in these Penalty for failure to file. If you willfully fail to make a
countries. report, in addition to other penalties, you may be fined
$25,000 or imprisoned for no more than 1 year, or both.
List of boycotting countries. A list of the countries that
may require participation in or cooperation with an interna-
tional boycott is published by the Department of the Taxes on Combined Foreign Oil and
Treasury. As of December 2022, the following countries Gas Income
are listed.
You must reduce your foreign taxes by a portion of any
• Iraq. foreign taxes imposed on combined foreign oil and gas in-
• Kuwait. come. The amount of the reduction is the amount by
which your foreign oil and gas taxes exceed the amount of
• Lebanon.
your combined foreign oil and gas income multiplied by a
• Libya. fraction equal to your pre-credit U.S. tax liability divided by
• Qatar. your worldwide taxable income. You may be entitled to
carry over to other years taxes reduced under this rule.
• Saudi Arabia. See Internal Revenue Code section 907(f).
• Syria. Combined foreign oil and gas income means the sum
• Yemen. of foreign oil-related income and foreign oil and gas ex-
traction income. Foreign oil and gas taxes are the sum of
The list is updated quarterly and is available at
foreign oil and gas extraction taxes and foreign oil-related
FederalRegister.gov. Enter "International Boycott" in the
taxes.
search box.

For information concerning changes to the list, Taxes of U.S. Persons Controlling
write to:
Foreign Corporations and
Partnerships
Internal Revenue Service
International Section If you had control of a foreign corporation or a foreign part-
Philadelphia, PA 19255-0725 nership for the annual accounting period of that corpora-
tion or partnership that ended with or within your tax year,
you may have to file an annual information return. If you
Determinations of whether the boycott rule applies. do not file the required information return, you may have
You may request a determination from the IRS as to to reduce the foreign taxes that may be used for the for-
whether a particular operation constitutes participation in eign tax credit. See Penalty for not filing Form 5471 or
or cooperation with an international boycott. The proce- Form 8865, later.
dures for obtaining a determination from the IRS are out-
U.S. persons controlling foreign corporations. If you
lined in Revenue Procedure 77-9 in Cumulative Bulletin
are a U.S. citizen or resident who had control of a foreign
1977-1. Cumulative Bulletins are available in most IRS of-
corporation during the annual accounting period of that
fices and you are welcome to read them there.
corporation, and you owned the stock on the last day of
Public inspection. A determination and any related the foreign corporation's annual accounting period, you
background file are open to public inspection. However, may have to file an annual information return on Form

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5471. Under this rule, you generally had control of a for- • Any person who is related to you. For a list of related
eign corporation if, at any time during your tax year, you persons, see Nondeductible Loss in chapter 2 of Pub.
owned stock possessing: 544.

• More than 50% of the total combined voting power of A covered asset acquisition under Internal Revenue
all classes of stock entitled to vote, or Code section 901(m) is not a foreign tax credit splitting
• More than 50% of the total value of shares of all event under Internal Revenue Code section 909.
classes of stock of the foreign corporation.
For more information, see section 909 and the regula-
U.S. persons controlling foreign partnerships. If you tions under that section.
are a U.S. citizen or resident who had control of a foreign
partnership at any time during the partnership's tax year, Splitter arrangements. The following paragraphs sum-
you may have to file an annual information return on Form marize the splitter arrangements. For more details, see
8865, Return of U.S. Persons With Respect to Certain Regulations section 1.909-2(b).
Foreign Partnerships. Under this rule, you generally had Reverse hybrid splitter arrangement. A reverse hy-
control of the partnership if you owned more than 50% of brid is a splitter arrangement if you pay or accrue foreign
the capital or profits interest, or an interest to which more income taxes with respect to income of a reverse hybrid.
than 50% of the deductions or losses were allocated. A reverse hybrid is an entity that is a corporation for U.S.
You may also have to file Form 8865 if, at any time dur- federal income tax purposes but is a fiscally transparent
ing the tax year of the partnership, you owned a 10% or entity (under the principles of Regulations section
greater interest in the partnership while the partnership 1.894-1(d)(3)) or a branch under the laws of a foreign
was controlled by U.S. persons owning at least a 10% in- country imposing tax on the income of the entity.
terest. See the Instructions for Form 8865 for more infor-
mation. Loss-sharing splitter arrangement. A foreign group
relief or other loss-sharing regime is a loss-sharing splitter
Penalty for not filing Form 5471 or Form 8865. In arrangement to the extent that a shared loss of a U.S.
most cases, there is a penalty of $10,000 for each annual combined income group could have been used to offset
accounting period for which you fail to furnish information. income of that group (usable shared loss) but is used in-
Additional penalties apply if the failure continues for more stead to offset income of another U.S. combined income
than 90 days after the day the IRS mails you notice of the group.
failure to furnish the information.
U.S. equity hybrid instrument splitter arrange-
If you fail to file either Form 5471 or Form 8865 when
ment. A U.S. equity hybrid instrument is a splitter ar-
due, you may also be required to reduce by 10% all for-
rangement if payments or accruals on or with respect to
eign taxes that may be used for the foreign tax credit. Ad-
this instrument meet all of the following conditions.
ditional reductions apply if the failure continues for 90
days or more after the date the IRS mails you notice of the 1. They give rise to foreign income taxes paid or ac-
failure to furnish the information. The total reductions shall crued by the owner of this instrument.
not exceed the greater of $10,000 or the income of the
2. They give rise to income tax deductions for the issuer
foreign corporation or foreign partnership for the account-
under the laws of a foreign jurisdiction in which the is-
ing period for which the failure occurs. This foreign tax
suer is subject to tax.
credit penalty is also reduced by the amount of the dollar
penalty imposed. 3. They do not give rise to income for U.S. federal in-
come tax purposes.
Taxes Related to a Foreign Tax Credit A U.S. equity hybrid instrument is an instrument that is
Splitting Event treated as equity for U.S. federal income tax purposes but
is treated as indebtedness for foreign tax purposes, or
Reduce taxes paid or accrued by any taxes paid or ac- with respect to which the issuer is otherwise entitled to a
crued with respect to a foreign tax credit splitting event. deduction for foreign tax purposes for amounts paid or ac-
For foreign taxes paid or accrued in tax years beginning crued with respect to the instrument.
after 2010, if there is a foreign tax credit splitting event,
you may not take the foreign tax into account before the U.S. debt hybrid instrument splitter arrangement.
tax year in which you take the income into account. There A U.S. debt hybrid instrument is an instrument that is trea-
is a foreign tax credit splitting event with respect to a for- ted as equity for foreign tax purposes but as indebtedness
eign income tax if (in connection with a splitter arrange- for U.S. federal income tax purposes.
ment listed below) the related income is (or will be) taken A U.S. debt hybrid instrument is a splitter arrangement
into account by a covered person. A covered person is ei- if the issuer of the U.S. debt hybrid instrument pays or ac-
ther of the following. crues foreign income taxes with respect to income in an
amount equal to the interest (including original issue dis-
• An entity in which you hold, directly or indirectly, at count) paid or accrued on the instrument that is deductible
least a 10% ownership interest (determined by vote or for U.S. federal income tax purposes but that does not
value). give rise to a deduction under the laws of a foreign juris-
diction in which the issuer is subject to tax.

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Partnership interbranch payment splitter arrange- Limit on the Credit
ment. An allocation of foreign income tax that a partner-
ship pays or accrues with respect to an interbranch pay- Your foreign tax credit cannot be more than your total U.S.
ment as described in Regulations section 1.704-1(b)(4) tax liability multiplied by a fraction. The numerator of the
(viii)(d)(3) (the interbranch payment tax) is a splitter ar- fraction is your taxable income from sources outside the
rangement to the extent the interbranch payment tax is United States. The denominator is your total taxable in-
not allocated to the partners in the same proportion as the come from U.S. and foreign sources.
distributive shares of income in the creditable foreign tax
expenditures (CFTE) category to which the interbranch To determine the limit, you must separate your foreign
payment tax is or would be assigned under Regulations source income into categories, as discussed later under
section 1.704-1(b)(4)(viii)(d) without regard to Regulations Separate Limit Income. The limit treats all foreign income
section 1.704-1(b)(4)(viii)(d)(3). 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.
How To Figure the Credit
Determining the foreign tax credit limit if you elect to
As already indicated, you can claim a foreign tax credit be taxed at corporate tax rates under section 962. If
only for foreign taxes on income, war profits, or excess you elect under Internal Revenue Code section 962 to be
profits, or taxes in lieu of those taxes. In addition, there is taxed initially at corporate rates on your section 951(a)
a limit on the amount of the credit that you can claim. You amount and GILTI inclusion for the tax year, determine the
figure this limit and your credit on Form 1116. Your credit limit on the related foreign tax credit on the applicable
is the amount of foreign tax you paid or accrued or, if separate category Forms 1118. For purposes of complet-
smaller, the limit. ing the Forms 1118, the numerator determined for each
If you have foreign taxes available for credit but you separate category includes only your foreign source sec-
cannot use them because of the limit, you may be able to tion 951(a) amount and your foreign source GILTI inclu-
carry them back 1 tax year and forward to the next 10 tax sion (less its portion of the section 250 deduction), as ap-
years. See Carryback and Carryover, later. plicable. The total taxable income in the denominator is
equal to your total section 951(a) amount and GILTI inclu-
Also, certain tax treaties have special rules that you sion less your section 250 deduction. Your total U.S. tax
must consider when figuring your foreign tax credit. See liability multiplied by this fraction is the amount of your
Tax Treaties, later. U.S. tax liability computed with respect to amounts sub-
ject to section 962 for the tax year (before taking into ac-
Exemption from foreign tax credit limit. You will not count foreign tax credits).
be subject to this limit and will be able to claim the credit Complete Form 1116 to determine the limit on the
without using Form 1116 if the following requirements are credit that you are allowed to take with respect to any
met. other foreign income taxes that you paid or accrued dur-
• Your only foreign source gross income for the tax year ing the tax year, but do not include in the numerator or de-
is passive category income. Passive category income nominator of the fraction your section 951(a) amount, your
is defined later under Separate Limit Income. How- GILTI inclusion, and the amount of your section 250 de-
ever, for purposes of this rule, high-taxed income and duction for the tax year. Do not include in the amount of
export financing interest are also passive category in- your total U.S. tax liability, which you multiply by this frac-
come. tion, the amount of your U.S. tax liability computed with re-
spect to amounts subject to section 962 for the tax year
• Your qualified foreign taxes for the tax year are not
(before taking into account foreign tax credits). See Inter-
more than $300 ($600 if married filing a joint return).
nal Revenue Code sections 960 and 962 and the regula-
• All of your gross foreign income and the foreign taxes tions under those sections for more information. See, in
are reported to you on a payee statement (such as a particular, Regulations section 1.962-1(c) for a detailed
Form 1099-DIV or 1099-INT). example of computing separate foreign tax credit limits re-
• You elect this procedure for the tax year. quired when you are filing both a Form 1116 and a Form
1118.
If you make this election, you cannot carry back or
carry over any unused foreign tax to or from this tax year.
Separate Limit Income
This election exempts you only from the limit fig-
! ured on Form 1116 and not from the other re- You must figure the limit on a separate Form 1116 for
CAUTION quirements described in this publication. For ex- each of the following categories of income.
ample, the election does not exempt you from the
requirements discussed earlier under What Foreign Taxes • Section 951A category income.
Qualify for the Credit. • Foreign branch category income.
• Passive category income.
• General category income.

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• Section 901(j) income. income. See Internal Revenue Code section 904(d)(2)(J)
• Certain income re-sourced by treaty. and Regulations section 1.904-4(f).

• Lump-sum distributions (LSDs). Passive Category Income
In figuring your separate limits, you must combine the
income (and losses) in each category from all foreign Passive category income consists of passive income and
sources, and then apply the limit. specified passive category income.

Income from controlled foreign corporations (CFCs). Passive income. Except as described earlier under In-
As a U.S. shareholder, certain income that you receive or come from controlled foreign corporations and Partner-
accrue from a CFC is treated as separate limit income. ship distributive share, passive income generally includes
You are considered a U.S. shareholder in a CFC if you the following.
own 10% or more of the total voting power or value of all • Dividends.
classes of the corporation's stock.
In most cases, subpart F inclusions are treated as sep- • Interest.
arate limit income in the same category to which they are • Rents.
attributable at the level of the CFC. Interest, rents, and
royalties from a CFC are treated as passive category in- • Royalties.
come if they are attributable to the passive category in- • Annuities.
come of the CFC. A dividend paid or accrued out of the • Net gain from the sale of non-income-producing in-
earnings and profits of a CFC is treated as passive cate- vestment property or property that generates passive
gory income in the same proportion that the part of earn- income.
ings and profits attributable to passive category income
bears to the total earnings and profits of the CFC. The • Net gain from commodities transactions, except for
portions of interest, rents, royalties, and dividends that are hedging and active business gains or losses of pro-
not treated as passive category income are treated as ducers, processors, merchants, or handlers of com-
separate limit income in another category following the modities.
rules described below for each category as applied at the • Amounts includible in income under section 1293 of
level of the U.S. shareholder. the Internal Revenue Code (relating to certain passive
foreign investment companies).
Partnership distributive share. In most cases, a part-
ner's distributive share of partnership income is treated as
separate limit income if it is from the separate limit income If you receive foreign source distributions from a mutual
of the partnership. However, if the partner owns less than fund or other regulated investment company that elects to
a 10% interest in the partnership, the income is treated as pass through to you the foreign tax credit, in most cases,
passive income in most cases. For more information, see the income is considered passive. The mutual fund will
the Partner's Instructions for Schedule K-3 (Form 1065), provide you with a Form 1099-DIV or substitute statement
and Regulations section 1.904-4(n). showing the amount of foreign taxes it elected to pass
through to you.

Section 951A Category Income What is not passive income. Passive income does not
include any of the following.
Section 951A category income, a new category beginning
in 2018, consists of the GILTI a U.S. shareholder of a CFC • Gains or losses from the sale of inventory property or
is required to include in income under section 951A (other property held mainly for sale to customers in the ordi-
than GILTI that is passive category income). A U.S. share- nary course of your trade or business.
holder’s GILTI is determined based on its aggregate pro Export financing interest.
•
rata share of the tested income of all CFCs it owns, offset
by its pro rata share of tested loss of any CFCs it owns, • High-taxed income.
and the shareholder’s net deemed tangible income return • Active business rents and royalties.
with respect to the CFCs. A CFC’s tested income does
not include effectively connected income, subpart F in- • Any income that is defined in another separate limit
come, foreign oil and gas income, or certain related party category.
payments. GILTI is included in income in a manner gener- Passive income also does not include financial services
ally similar to inclusions of subpart F income. See Internal income derived by a financial services entity. You are a fi-
Revenue Code section 951A for more information. nancial services entity if you are predominantly engaged
in the active conduct of a banking, insurance, financing, or
Foreign Branch Category Income similar business for any tax year. Financial services in-
come of a financial services entity generally includes in-
Foreign branch category income consists of the business come derived in the active conduct of a banking, financ-
profits of a U.S. person that are attributable to one or more ing, insurance, or similar business. If you qualify as a
QBUs in one or more foreign countries. Foreign branch financial services entity because you treat certain items of
category income does not include any passive category income as active financing income under Regulations

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section 1.904-4(e)(2)(i)(Y), you must show the type and Section 901(j) Income
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
• The property is manufactured, produced, grown, or income earned from each such country. See Taxes Im-
extracted in the United States by you or a related per- posed by Sanctioned Countries (Section 901(j) Income)
son; and under Taxes for Which You Can Only Take an Itemized
Deduction, earlier.
• 50% or less of the fair market value of the property is
due to imports into the United States.
Certain Income Re-Sourced by Treaty
High-taxed income. High-taxed income is income if
the foreign taxes you paid on the income (after allocation If a sourcing rule in an applicable income tax treaty treats
of expenses) exceed the highest U.S. tax that can be im- U.S. source income as foreign source, and you elect to
posed on the income. See Regulations section 1.904-4(c) apply the treaty, the income will be treated as foreign
for more information. source.

Specified passive category income. Specified passive You must figure a separate foreign tax credit limitation
income consists of: for any such income for which you claim benefits under a
treaty, using a separate Form 1116 for each amount of
1. Dividends from a domestic international sales corpo-
re-sourced income from a treaty country. This rule does
ration (DISC) or former DISC to the extent the divi-
not apply to income that is re-sourced by reason of the re-
dends are treated as foreign source income; and
lief from double taxation rules in any U.S. income tax
2. Distributions from a former foreign sales corporation treaty that is solely applicable to U.S. citizens who are res-
(FSC) out of earnings and profits that are attributable idents of the foreign treaty country. See Internal Revenue
to: Code sections 865(h), 904(d)(6), and 904(h)(10) and the
regulations under those sections (including Regulations
a. Foreign trade income, or
section 1.904-4(k)) for any grouping rules and other ex-
b. Interest and carrying charges derived from a ceptions.
transaction that results in foreign trade income.
See Tax Treaties, later, for further information regard-
ing income re-sourced by treaty.
General Category Income
General category income is income that is not section Lump-Sum Distributions (LSDs)
951A category income, foreign branch category income,
or passive category income, or does not fall into one of If you receive a foreign source LSD from a retirement
the other separate limit categories discussed later. In plan, and you figure the tax on it using the special averag-
most cases, it includes active business income and wa- ing treatment for LSDs, you must make a special compu-
ges, salaries, and overseas allowances of an individual as tation. Follow the Form 1116 instructions and complete
an employee. General category income includes the worksheet in those instructions to determine your for-
high-taxed income that would otherwise be passive in- eign tax credit on the LSD.
come. See High-taxed income, earlier, under What is not The special averaging treatment for LSDs is elec-
passive income. TIP ted by filing Form 4972, Tax on Lump-Sum Distri-
butions.
Financial services income. In general, financial serv-
ices income is treated as general category income if it is
derived by a financial services entity. You are a financial Allocation of Foreign Taxes
services entity if you are predominantly engaged in the ac-
tive conduct of a banking, insurance, financing, or similar Solely for purposes of allocating foreign taxes to separate
business for the tax year. Financial services income of a limit income categories, those separate limit categories in-
financial services entity includes income derived in the ac- clude any U.S. source income that is taxed by the foreign
tive conduct of a banking, financing, insurance, or similar country or U.S. possession.
business.
If you paid or accrued foreign income tax for a tax year
If you qualify as a financial services entity because you
on income in more than one separate limit income cate-
treat certain items of income as active financing income
gory, allocate the tax to the income category to which the
under Regulations section 1.904-4(e)(2)(i)(Y), you must
tax specifically relates. If the tax is not specifically related
show the type and amount of each item on an attachment
to any one category, you must allocate the tax to each cat-
to Form 1116.
egory of income.
You do this by multiplying the foreign income tax rela-
ted to more than one category by a fraction. The

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numerator of the fraction is the net income taxed by the using certain foreign tax information from the Sched-
foreign country in a separate category. The denominator ule K-3 you received from the partnership or S corpora-
is the total net income. tion. See the Instructions for Form 1116, and the partner
and shareholder instructions for Schedule K-3 of Forms
You figure net income by deducting from the gross in- 1065 and 1120-S for instructions on how to report that in-
come in each category and from the total gross income formation.
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- Figuring the Limit

sion. If the expenses, losses, and other deductions are Before you can determine the limit on your credit, you
not definitely related to a category of income under foreign must first figure your total taxable income from all sources
law, they are apportioned under the principles of the for- before the deduction for personal exemptions. For individ-
eign law. If the foreign law does not provide for apportion- uals, this is the amount shown on line 15 of Form 1040,
ment, use the principles covered in the regulations under 1040-SR, or 1040-NR. Then, for each category of income,
Internal Revenue Code sections 861 and 904. you must figure your taxable income from sources outside
Example. You paid foreign income taxes of $3,200 to the United States.
Country A on wages of $80,000 and interest income of Before you can figure your taxable income in each cat-
$3,000. These were the only items of income on your for- egory from sources outside the United States, you must
eign return. You also have deductions of $4,400 that, un- first determine whether your gross income in each cate-
der foreign law, are not definitely related to either the wa- gory is from U.S. sources or foreign sources. Some of the
ges or interest income. Your total net income is $78,600 general rules for figuring the source of income are outlined
($83,000 – $4,400). in Table 2.
Because the foreign tax is not specifically for either See Determining the foreign tax credit limit if you elect
item of income, you must allocate the tax between the wa- to be taxed at corporate tax rates under section 962, ear-
ges and the interest under the tax laws of Country A. For lier, for more details that apply to you if you make a sec-
purposes of this example, assume that the laws of Coun- tion 962 election.
try A do this in a manner similar to the Internal Revenue
Code. First, figure the net income in each category by al- See Determining the Source of Compensation for La-
locating those expenses that are not definitely related to bor or Personal Services and Determining the Source of
either category of income. Income From the Sales or Exchanges of Certain Personal
You figure the expenses allocable to wages (general Property, later, for a more detailed discussion on deter-
category income) as follows. mining the source of these types of income.

Determining the source of income from U.S. posses-
$80,000 (wages) × $4,400 = $4,241 sions. In most cases, the rules for determining whether
$83,000 (total income)
The net wages are $75,759 ($80,000 − $4,241). income is from sources in a U.S. possession are the same
as those for determining whether income is from U.S.
You figure the expenses allocable to interest (passive sources. However, exceptions do apply. See Pub. 570 for
category income) as follows. more information.

$3,000 (interest) × $4,400 = $159 Determining the Source of Compensation
$83,000 (total income) for Labor or Personal Services
The net interest is $2,841 ($3,000 − $159).
If you are an employee and receive compensation for la-
Then, to figure the foreign tax on the wages, you multi- bor or personal services performed both inside and out-
ply the total foreign income tax by the following fraction. side the United States, special rules apply in determining
the source of the compensation. Compensation (other
$75,759 (net wages) × $3,200 = $3,084 than certain fringe benefits) is sourced on a time basis.
$78,600 (total net income)
Certain fringe benefits (such as housing and education)
are sourced on a geographical basis.
You figure the foreign tax on the interest income as fol-
lows. Or, you may be permitted to use an alternative basis to
determine the source of compensation. See Alternative
basis, later.
$2,841 (net interest) × $3,200 = $116
$78,600 (total net income)
If you are self-employed, you determine the source of
compensation for labor or personal services from self-em-
Foreign Taxes From a Partnership or ployment on the basis that most correctly reflects the
an S Corporation proper source of that income under the facts and circum-
stances of your particular case. In many cases, the facts
If foreign taxes were paid or accrued on your behalf by a and circumstances will call for an apportionment on a time
partnership or an S corporation, you will figure your credit basis as explained next.

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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 fair market value 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.

Time basis. Use a time basis to figure your foreign quarters of the year are two separate, distinct, and contin-
source compensation (other than the fringe benefits dis- uous periods of time. Accordingly, $25,000 of Robert’s an-
cussed later). Do this by multiplying your total compensa- nual salary is attributable to the first quarter of the year
tion (other than the fringe benefits discussed later) by the (0.25 × $100,000). All of it is U.S. source income because
following fraction. Robert worked entirely within the United States during that
quarter. The remaining $75,000 is attributable to the last 3
Number of days you performed services in the foreign quarters of the year. During those quarters, Robert
country during the year worked 150 days in Singapore and 30 days in the United
Total number of days you performed services during the States. Robert’s periodic performance of services in the
year United States did not result in distinct, separate, and con-
tinuous periods of time. Of Robert’s $75,000 salary,
You can use a unit of time less than a day in the above $62,500 ($75,000 × 150/180) is foreign source income for
fraction, if appropriate. The time period for which the com- the year.
pensation is made does not have to be a year. Instead,
you can use another distinct, separate, and continuous Multi-year compensation. In most cases, the source
time period if you can establish to the satisfaction of the of multi-year compensation is determined on a time basis
IRS that this other period is more appropriate. over the period to which the compensation is attributable.
Multi-year compensation is compensation that is included
Example 1. Christina, a U.S. citizen, worked 240 days in your income in 1 tax year but that is attributable to a pe-
for a U.S. company during the tax year. Christina received riod that includes 2 or more tax years.
$80,000 in compensation. None of it was for fringe bene- You determine the period to which the compensation is
fits. Christina performed services in the United States for attributable based on the facts and circumstances of your
60 days and performed services in the United Kingdom for case. For example, an amount of compensation that spe-
180 days. Using the time basis for determining the source cifically relates to a period of time that includes several
of compensation, $60,000 ($80,000 × 180/240) is Christi- calendar years is attributable to the entire multi-year pe-
na’s foreign source income. riod.
The amount of compensation treated as from foreign
Example 2. Robert, a U.S. citizen, is employed by a sources is figured by multiplying the total multi-year com-
U.S. corporation. Robert’s principal place of work is in the pensation by a fraction. The numerator of the fraction is
United States. Robert’s annual salary is $100,000. None the number of days (or unit of time less than a day, if ap-
of Robert’s annual salary is for fringe benefits. During the propriate) that you performed labor or personal services in
first quarter of the year, Robert worked entirely within the the foreign country in connection with the project. The de-
United States. On April 1, Robert was transferred to Sin- nominator of the fraction is the total number of days (or
gapore for the remainder of the year. Robert is able to es- unit of time less than a day, if appropriate) that you
tablish that the first quarter of the year and the last 3

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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 • Improvements and other expenses that increase the
the project. value or appreciably prolong the life of property;
Geographical basis. Compensation you receive as an • Purchased furniture or accessories;
employee in the form of the following fringe benefits is • Depreciation or amortization of property or improve-
sourced on a geographical basis. ments;
• Housing. • The value of meals or lodging that you exclude from
• Education. gross income; or
• Local transportation. • The value of meals or lodging that you deduct as mov-
ing expenses.
• Tax reimbursement.
Education. The source of an education fringe benefit
• Hazardous or hardship duty pay. for the education expenses of your dependents is deter-
• Moving expense reimbursement. mined based on the location of your principal place of
The amount of fringe benefits must be reasonable and work. An education fringe benefit includes payments only
you must substantiate them by adequate records or by for the following expenses for education at an elementary
sufficient evidence. Table 3 summarizes the factors used or secondary school.
for determining the source of these fringe benefits. • Tuition, fees, academic tutoring, special needs serv-
ices for a special needs student, books, supplies, and
Housing. The source of a housing fringe benefit is de-
other equipment.
termined based on the location of your principal place of
work. A housing fringe benefit includes payments to you • Room and board and uniforms that are required or
or on your behalf (and your family if your family resides provided by the school in connection with enrollment
with you) only for the following. or attendance.
• Rent. Local transportation. The source of a local transpor-
• Utilities (except telephone charges). tation fringe benefit is determined based on the location of
your principal place of work. Your local transportation
• Real and personal property insurance. fringe benefit is the amount that you receive as compen-
• Occupancy taxes not deductible under section 164 or sation for your local transportation or that of your spouse
216(a). or dependents at the location of your principal place of
work. The amount treated as a local transportation fringe
• Nonrefundable fees for securing a leasehold. benefit is limited to actual expenses incurred for local
• Rental of furniture and accessories. transportation and the fair rental value of any em-
ployer-provided vehicle used predominantly by you or
• Household repairs.
your spouse or dependents for local transportation. Actual
• Residential parking. expenses do not include the cost (including interest) of
• Fair rental value of housing provided in kind by your any vehicle purchased by you or on your behalf.
employer. Tax reimbursement. The source of a foreign tax reim-
A housing fringe benefit does not include: bursement fringe benefit is determined based on the loca-
tion of the jurisdiction that imposed the tax for which you
• Deductible interest and taxes (including deductible in-
are reimbursed.
terest and taxes of a tenant-stockholder in a coopera-
tive housing corporation); Hazardous or hardship duty pay. The source of a
hazardous or hardship duty pay fringe benefit is deter-
• The cost of buying property, including principal pay-
mined based on the location of the hazardous or hardship
ments on a mortgage;
duty zone for which the hazardous or hardship duty pay
• The cost of domestic labor (maids, gardeners, etc.); fringe benefit is paid. A hazardous or hardship duty zone
• Pay television subscriptions;

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is any place in a foreign country which meets either of the 2. The specific compensation income, or the specific
following conditions. fringe benefit, for which you are using the alternative
basis.
• The zone is designated by the Secretary of State as a
place where living conditions are extraordinarily diffi- 3. For each item in (2), the alternative basis of allocation
cult, notably unhealthy, or where excessive physical of source used.
hardships exist, and for which a post differential of
15% or more would be provided under section 4. For each item in (2), a computation showing how the
5925(b) of title 5 of the U.S. Code to any officer or em- alternative allocation was computed.
ployee of the U.S. Government at that place. 5. A comparison of the dollar amount of the U.S. com-
• The zone is where civil insurrection, civil war, terror- pensation and foreign compensation sourced under
ism, or wartime conditions threaten physical harm or both the alternative basis and the time or geographi-
imminent danger to your health and well-being. cal basis discussed earlier.
Compensation is treated as a hazardous or hardship
Transportation Income
duty pay fringe benefit only if your employer provides the
hazardous or hardship duty pay fringe benefit only to em-
Transportation income is income from the use of a vessel
ployees performing labor or personal services in a hazard-
or aircraft or for the performance of services directly rela-
ous or hardship duty zone.
ted to the use of any vessel or aircraft. This is true whether
The amount of compensation treated as a hazardous or
the vessel or aircraft is owned, hired, or leased. The term
hardship duty pay fringe benefit cannot exceed the maxi-
“vessel or aircraft” includes any container used in connec-
mum amount that the U.S. Government would allow its of-
tion with a vessel or aircraft.
ficers or employees present at that location.
Moving expense reimbursement. In most cases, the All income from transportation that begins and ends in
source of a moving expense reimbursement is based on the United States is treated as derived from sources in the
the location of your new principal place of work. However, United States. If the transportation begins or ends in the
the source is determined based on the location of your for- United States, 50% of the transportation income is treated
mer principal place of work if you have sufficient evidence as derived from sources in the United States.
that such determination of source is more appropriate un-
der the facts and circumstances of your case. Sufficient For transportation income from personal services, 50%
evidence generally requires an agreement between you of the income is U.S. source income if the transportation is
and your employer in most cases, or a written statement between the United States and a U.S. possession. For
of company policy, which is reduced to writing before the nonresident aliens, this only applies to income derived
move and which is entered into or established to induce from, or in connection with, an aircraft.
you or other employees to move to another country. The
written statement or agreement must state that your em- Determining the Source of Income From the
ployer will reimburse you for moving expenses that you in- Sales or Exchanges of Certain Personal
cur to return to your former principal place of work regard- Property
less of whether you continue to work for your employer
after returning to that location. It may contain certain con- In most cases, if personal property is sold by a U.S. resi-
ditions upon which the right to reimbursement is deter- dent, the gain or loss from the sale is treated as U.S.
mined as long as those conditions set forth standards that source. If personal property is sold by a nonresident, the
are definitely ascertainable and can only be fulfilled prior gain or loss is treated as foreign source.
to, or through completion of, your return move to your for-
mer principal place of work. This rule does not apply to the sale of inventory, intan-
gible property, or depreciable property, or property sold
Alternative basis. If you are an employee, you can de- through a foreign office or fixed place of business. The
termine the source of your compensation under an alter- rules for these types of property are discussed later.
native basis if you establish to the satisfaction of the IRS
that, under the facts and circumstances of your case, the U.S. resident. The term “U.S. resident,” for this purpose,
alternative basis more properly determines the source of means a U.S. citizen or resident alien who does not have
your compensation than the time or geographical basis. If a tax home in a foreign country. The term also includes a
you use an alternative basis, you must keep (and have nonresident alien who has a tax home in the United
available for inspection) records to document why the al- States. In most cases, your tax home is the general area
ternative basis more properly determines the source of of your main place of business, employment, or post of
your compensation. Also, if your total compensation from duty, regardless of where you maintain your family home.
all sources was $250,000 or more, you must check the Your tax home is the place where you are permanently or
box on Form 1116, line 1b, and attach a written statement indefinitely engaged to work as an employee or self-em-
to your tax return that sets forth all of the following. ployed individual. If you do not have a regular or main
place of business because of the nature of your work,
1. Your name and social security number (written across
then your tax home is the place where you regularly live. If
the top of the statement).
you do not fit either of these categories, you are

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considered an itinerant and your tax home is wherever the allowable depreciation deductions, entirely as U.S.
you work. source income.
If the property is used predominantly outside the United
Nonresident. A nonresident is any person who is not a States, treat the gain, up to the amount of the depreciation
U.S. resident. deductions, entirely as foreign source income.
U.S. citizens and resident aliens with a foreign tax A loss is sourced in the same way as the depreciation
home will be treated as nonresidents for a sale of per- deductions were sourced. However, if the property was
sonal property only if an income tax of at least 10% of the used predominantly outside the United States, the entire
gain on the sale is paid to a foreign country. loss reduces foreign source income.
This rule also applies to losses if the foreign country Depreciation includes amortization and any other al-
would have imposed a 10% or higher marginal tax rate lowable deduction for a capital expense that is treated as
had the sale resulted in a gain. a deductible expense.

Inventory. Gains, profits, and income from the sale or Sales through foreign office or fixed place of busi-
exchange of inventory property produced partly in, and ness. In most cases, income earned by U.S. residents
partly outside, the United States must be sourced on the from the sale of personal property through an office or
basis of the location of production with respect to that other fixed place of business outside the United States is
property. For example, income derived from the sale of in- treated as foreign source if:
ventory property to a foreign jurisdiction is sourced wholly
within the United States if the property was produced en- • The income from the sale is from the business opera-
tirely in the United States, even if title passage occurred tions located outside the United States, and
elsewhere. Likewise, income derived from inventory prop- • At least 10% of the income is paid as tax to the foreign
erty sold in the United States, but produced entirely in an- country.
other country, is sourced in that country even if title pas-
If less than 10% is paid as tax, the income is U.S. source.
sage occurs in the United States. If the inventory property
This rule also applies to losses if the foreign country
is produced partly in, and partly outside, the United
would have imposed a 10% or higher marginal tax rate
States, the income derived from its sale is sourced partly
had the sale resulted in a gain.
in the United States. See Internal Revenue Code section
This rule does not apply to income sourced under the
863(b).
rules for inventory property, depreciable personal prop-
Intangibles. Intangibles include patents, copyrights, erty, intangible property (when payments in consideration
trademarks, and goodwill. The gain from the sale of amor- for the sale are contingent on the productivity, use, or dis-
tizable or depreciable intangible property, up to the previ- position of the property), or goodwill.
ously allowable amortization or depreciation deductions,
is sourced in the same way as the original deductions Determining Taxable Income From Sources
were sourced. This is the same as the source rule for gain Outside the United States
from the sale of depreciable property. See Depreciable
property next for details on how to apply this rule. To figure your taxable income in each category from sour-
Gain in excess of the amortization or depreciation de- ces outside the United States, you first allocate to specific
duction is sourced in the country where the property is classes (kinds) of gross income the expenses, losses,
used if the income from the sale is contingent on the pro- and other deductions (including the deduction for foreign
ductivity, use, or disposition of that property. If the income housing costs) that are definitely related to that income.
is not contingent on the productivity, use, or disposition of
Definitely related. A deduction is definitely related to a
the property, the income is sourced according to the sell-
specific class of gross income if it is incurred either:
er's tax home, as discussed earlier. Payments for goodwill
are sourced in the country where the goodwill was gener- • As a result of, or incident to, an activity from which that
ated if the payments are not contingent on the productiv- income is derived; or
ity, use, or disposition of the property. In connection with property from which that income is
•
Depreciable property. The gain from the sale of depre- derived.

ciable personal property, up to the amount of the previ- Classes of gross income. You must determine which of
ously allowable depreciation, is sourced in the same way the following classes of gross income your deductions are
as the original deductions were sourced. Thus, to the ex- definitely related to.
tent the previous deductions for depreciation were alloca-
ble to U.S. source income, the gain is U.S. source. To the • Compensation for services, including wages, salaries,
extent the depreciation deductions were allocable to for- fees, and commissions.
eign sources, the gain is foreign source income. Gain in • Gross income from business.
excess of the depreciation deductions is sourced the
same as inventory. • Gains from dealings in property.
If personal property is used predominantly in the United • Interest.
States, treat the gain from the sale, up to the amount of
• Rents.

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• Royalties. Business interest. Apportion interest incurred in a
• Dividends. trade or business using the asset method based on your
business assets.
• Alimony and separate maintenance. Under the asset method, you apportion the interest ex-
• Annuities. pense to your separate limit categories based on the
value of the assets that produced the income. You can
• Pensions. value assets at the tax book value or the alternative book
• Income from life insurance and endowment contracts. value. For more information about the asset method, see
Regulations section 1.861-9T(g).
• Income from canceled debts.
• Your share of partnership gross income. Investment interest. Apportion this interest on the ba-
sis of your investment assets.
• Income in respect of a decedent.
Passive activity interest. Apportion interest incurred
• Income from an estate or trust. in a passive activity on the basis of your passive activity
• Global intangible low-taxed income (GILTI). assets.
Exempt income. When you allocate deductions that Partnership interest. General partners and limited
are definitely related to one or more classes of gross in- partners with partnership interests of 10% or more must
come, you take exempt income into account for the allo- classify their distributive shares of partnership interest ex-
cation. However, do not take exempt income into account pense under the three categories listed above. They must
to apportion deductions that are not definitely related to a apportion the interest expense according to the rules for
separate limit category. those categories by taking into account their distributive
share of partnership gross income or pro rata share of
Interest expense and state income taxes. You
partnership assets. For special rules that may apply, see
must allocate and apportion your interest expense and
Regulations section 1.861-9(e).
state income taxes under the special rules discussed later
Limited partners with partnership interests of less than
under Interest expense and State income taxes.
10% must directly allocate their distributive shares of part-
Class of gross income that includes more than nership interest expense to their distributive shares of
one separate limit category. If the class of gross in- partnership gross income. They must apportion the inter-
come to which a deduction definitely relates includes ei- est expense according to their relative distributive shares
ther: of gross foreign source income in each income category
and of U.S. source income from the partnership. For spe-
• More than one separate limit category, or
cial rules that may apply, see Regulations sections
• At least one separate limit category and U.S. source 1.861-9T(e) and 1.861-9(e)(2) and (3). Also, see the Part-
income, ner's Instructions for Schedule K-3 (Form 1065), for fur-
you must apportion the definitely related deductions within ther information.
that class of gross income. Home mortgage interest. This is your deductible
To apportion, you can use any method that reflects a home mortgage interest, including points from Schedule A
reasonable relationship between the deduction and the in- (Form 1040). Apportion it under a gross income method,
come in each separate limit category. One acceptable taking into account all income (including business, pas-
method for many individuals is based on a comparison of sive activity, and investment income), but excluding in-
the gross income in a class of income to the gross income come that is exempt under the foreign earned income ex-
in a separate limit income category. clusion. The gross income method is based on a
Use the following formula to figure the amount of the comparison of the gross income in a separate limit cate-
definitely related deduction apportioned to the income in gory with total gross income.
the separate limit category. The Instructions for Form 1116 have a worksheet for
apportioning your deductible home mortgage interest ex-
Gross income in separate limit category × Deduction pense.
Total gross income in the class
For this purpose, however, any qualified home (as de-
Do not take exempt income into account when you appor- fined in Pub. 936) that is rented is considered a business
tion the deduction. However, income excluded under the asset for the period in which it is rented. You therefore ap-
foreign earned income or foreign housing exclusion is not portion this interest under the rules for passive activity or
considered exempt. You must, therefore, apportion de- business interest.
ductions to that income.
Example. You are operating a business as a sole pro-
Interest expense. In most cases, you apportion your in- prietorship. Your business generates only U.S. source in-
terest expense on the basis of your assets. However, cer- come. Your investment portfolio consists of several
tain special rules apply. If you have gross foreign source less-than-10% stock investments. You have stocks with
income (including income that is excluded under the for- an adjusted basis of $100,000. Some of your stocks (with
eign earned income exclusion) of $5,000 or less, your in- an adjusted basis of $40,000) generate U.S. source in-
terest expense can be allocated entirely to U.S. source in- come. Your other stocks (with an adjusted basis of
come.

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$60,000) generate foreign passive income. You own your greater than the U.S. source income for federal tax purpo-
main home, which is subject to a mortgage of $120,000. ses. Therefore, the $6,000 is definitely related and alloca-
Interest on this loan is home mortgage interest. You also ble to both U.S. and foreign source income.
have a bank loan in the amount of $40,000. The proceeds Assuming that $15,000 ($90,000 − $75,000) is the for-
from the bank loan were divided equally between your eign source income taxed by the state, $1,000 of state in-
business and your investment portfolio. Your gross in- come tax is apportioned to foreign source income, figured
come from your business is $50,000. Your investment as follows.
portfolio generated $4,000 in U.S. source income and
$6,000 in foreign source passive income. All of your debts $15,000
× $6,000 = $1,000
bear interest at the annual rate of 10%. $90,000
The interest expense for your business is $2,000. It is
apportioned on the basis of the business assets. All of Deductions not definitely related. You must apportion
your business assets generate U.S. source income; there- to your foreign income in each separate limit category a
fore, they are U.S. assets. This $2,000 is interest expense fraction of your other deductions that are not definitely re-
allocable to U.S. source income. lated to a specific class of gross income. If you itemize,
The interest expense for your investments is also these deductions are medical expenses, general sales
$2,000. It is apportioned on the basis of investment as- taxes, and real estate taxes for your home. If you do not
sets. $800 ($40,000/$100,000 × $2,000) of your invest- itemize, this is your standard deduction. You should also
ment interest is apportioned to U.S. source income and apportion any other deductions that are not definitely rela-
$1,200 ($60,000/$100,000 × $2,000) is apportioned to for- ted to a specific class of income, including deductions
eign source passive income. shown on Schedule 1 (Form 1040), Part II, Adjustments to
Your home mortgage interest expense is $12,000. It is Income.
apportioned on the basis of all your gross income. Your The numerator of the fraction is your gross foreign in-
gross income is $60,000, $54,000 of which is U.S. source come in the separate limit category, and the denominator
income and $6,000 of which is foreign source passive in- is your total gross income from all sources. For this pur-
come. Thus, $1,200 ($6,000/$60,000 × $12,000) of the pose, gross income includes income that is excluded un-
home mortgage interest is apportioned to foreign source der the foreign earned income provisions but does not in-
passive income. clude any other exempt income.

State income taxes. State income taxes (and certain Itemized deduction limit. The overall limitation on item-
taxes measured by taxable income) are definitely related ized deductions is suspended for tax years beginning af-
and allocable to the gross income on which the taxes are ter 2017 and before 2026.
imposed. If state income tax is imposed in part on foreign
source income, the part of your state tax imposed on the Qualified Dividends
foreign source income is definitely related and allocable to
foreign source income. Qualified dividends are the amounts you entered on
line 3a of Form 1040, 1040-SR, or 1040-NR. If you have
Foreign income not exempt from state tax. If the any qualified dividends, you may be required to make ad-
state does not specifically exempt foreign income from justments to the amount of those qualified dividends be-
tax, the following rules apply. fore you take them into account on line 1a or line 18 of
• If the total income taxed by the state is greater than Form 1116. See Foreign Qualified Dividends and Capital
the amount of U.S. source income for federal tax pur- Gains (Losses) in the Form 1116 instructions to determine
poses, then the state tax is allocable to both U.S. the adjustments you may be required to make before tak-
source and foreign source income. ing foreign qualified dividends into account on line 1a of
Form 1116. See the instructions for line 18 in the Instruc-
• If the total income taxed by the state is less than or
tions for Form 1116 to determine the adjustments you
equal to the U.S. source income for federal tax purpo-
may be required to make before taking U.S. or foreign
ses, none of the state tax is allocable to foreign source
qualified dividends into account on line 18 of Form 1116.
income.

Foreign income exempt from state tax. If state law Capital Gains and Losses
specifically exempts foreign income from tax, the state
taxes are allocable to the U.S. source income. If you have capital gains (including any capital gain distri-
butions) or capital losses, you may have to make certain
Example. Your total income for federal tax purposes,
adjustments to those gains or losses before taking them
before deducting state tax, is $100,000. Of this amount,
into account on line 1a (gains), line 5 (losses), or line 18
$25,000 is foreign source income and $75,000 is U.S.
(taxable income before subtracting exemptions) of Form
source income. Your total income for state tax purposes is
1116.
$90,000, on which you pay state income tax of $6,000.
The state does not specifically exempt foreign source in- Form 1116, lines 1a and 5. If you have foreign source
come from tax. The total state income of $90,000 is capital gains or losses, you may be required to make cer-
tain adjustments to those foreign source capital gains or
losses before you take them into account on line 1a or

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line 5 of Form 1116. Use the instructions under Foreign adjustments you must make to your foreign source capital
Qualified Dividends and Capital Gains (Losses) in the In- gains or losses. If you have a U.S. capital loss adjustment,
structions for Form 1116 to determine if you are required you must reduce your foreign source capital gains by the
to make adjustments. Also, use the instructions under For- amount of the U.S. capital loss adjustment. To make this
eign Qualified Dividends and Capital Gains (Losses) in adjustment, you must allocate the total amount of the U.S.
the Instructions for Form 1116 to determine if you can use capital loss adjustment among your foreign source capital
those instructions to make adjustments or if you must use gains using the following steps.
the instructions in this publication to make adjustments.
Step 1. You must apportion the U.S. capital loss ad-
If you use the instructions in this publication, see Ad-
justment among your separate categories that have a net
justments to Foreign Source Capital Gains and Losses
capital gain. A separate category has a net capital gain if
below to determine the adjustments you must make.
the amount of foreign source capital gains in the separate
Form 1116, line 18. If you have U.S. or foreign source category exceeds the amount of foreign source capital
capital gains, you may be required to adjust the amount losses in the separate category. You must apportion the
you enter on line 18 of Form 1116. Use the instructions for U.S. capital loss adjustment pro rata based on the amount
Line 18 in the Instructions for Form 1116 to determine of net capital gain in each separate category.
whether you are required to make an adjustment and to
Example 1. Alfie has a $300 foreign source capital
determine the amount of the adjustment.
gain that is passive category income, a $1,000 foreign
source capital gain that is general category income, a
Adjustments to Foreign Source Capital $400 foreign source capital loss that is general category
Gains and Losses income, and a $150 U.S. source capital loss. Alfie figures
the net gains and U.S. capital loss adjustment as follows.
You may have to make the following adjustments to your
foreign source capital gains and losses. Foreign source capital gain = $900
(($1,000 + $300) − $400)
• U.S. capital loss adjustment.
Worldwide capital gain = $750
• Capital gain rate differential adjustment. (($1,000 + $300) − ($400 + $150))
Before you make these adjustments, you must reduce
your net capital gain by the amount of any gain you elec- U.S. capital loss adjustment = $150
($900 − $750)
ted to include in investment income on line 4g of Form
4952. Your net capital gain is the excess of your net
Alfie must then apportion the U.S. capital loss adjustment
long-term capital gain for the year over any net short-term
($150) between the passive category income and the
capital loss for the year. Foreign source gain you elected
general category income based on the amount of net cap-
to include on line 4g of Form 4952 must be entered di-
ital gain in each separate category.
rectly on line 1a of Form 1116 without adjustment.
$50 apportioned to passive category income
U.S. capital loss adjustment. You must adjust the ($150 × $300/$900)
amount of your foreign source capital gains to the extent
that your foreign source capital gain exceeds the amount Alfie reduces the $300 net capital gain that is passive cat-
of your worldwide capital gain (the “U.S. capital loss ad- egory income by $50 and includes the resulting $250 on
justment”). line 1a of the Form 1116 for the passive category income.
Your “foreign source capital gain” is the amount of your
$100 apportioned to general category income
foreign source capital gains in excess of your foreign ($150 × $600/$900)
source capital losses. If your foreign source capital gains
do not exceed your foreign source capital losses, you do Alfie reduces the $600 of net capital gain that is general
not have a foreign source capital gain and you do not category income by $100 and includes the resulting $500
need to make the U.S. capital loss adjustment. See Capi- on line 1a of the Form 1116 for the general category in-
tal gain rate differential adjustment, later, for adjustments come.
you must make to your foreign source capital gains or los- Step 2. If you apportioned any amount of the total U.S.
ses. capital loss adjustment to a separate category with a net
Your “worldwide capital gain” is the amount of your capital gain in more than one rate group, you must further
worldwide (U.S. and foreign) capital gains in excess of apportion the U.S. capital loss adjustment among the rate
your worldwide (U.S. and foreign) capital losses. If your groups in that separate category (separate category rate
worldwide capital losses equal or exceed your worldwide groups) that have a net capital gain.
capital gains, your “worldwide capital gain” is zero. The rate groups are the 28% rate group, the 25% rate
Your U.S. capital loss adjustment is the amount of your group, the 20% rate group, the 15% rate group, the 0%
foreign source capital gain in excess of your worldwide rate group, and the short-term rate group. The 28% rate
capital gain. (If the amount of your foreign source capital group, the 25% rate group, the 20% rate group, the 15%
gain does not exceed the amount of your worldwide capi- rate group, and the 0% rate group are “long-term” rate
tal gain, you do not have a U.S. capital loss adjustment.) groups. Table 4 explains the rate groups.
See Capital gain rate differential adjustment, later, for

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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.

You must apportion the U.S. capital loss adjustment Dennis has net capital gain in more than one rate group
pro rata based on the amount of net capital gain in each that is passive category income. Therefore, the $100 ap-
separate category rate group. Your net capital gain in a portioned to passive category income must be further ap-
separate category rate group is the amount of your foreign portioned between the short-term rate group and the 28%
source capital gains in that separate category in the rate rate group based on the amount of net capital gain in each
group in excess of your foreign source capital losses in rate group.
that separate category in the rate group. If your foreign
Dennis apportions $33.33 to the short-term rate group.
source capital losses exceed your foreign source capital ($100 × $100/$300)
gains, you have a net capital loss in the separate category
rate group. Dennis apportions $66.67 to the 28% rate group.
($100 × $200/$300)

Example 2. Dennis has a $300 U.S. source long-term After the U.S. capital loss adjustment, Dennis has $100
capital loss. Dennis also has foreign source capital gains of foreign source 15% capital loss that is passive category
and losses in the following categories. income, $66.67 of foreign source short-term capital gain
that is passive category income, $133.33 of foreign
Income category 28% rate 15% rate short-term source 28% gain that is passive category income, and
Passive $200 ($100) $100 $200 of foreign source 15% capital gain that is general
category income, as shown in the following table.
General $700
($300)
Income
Dennis figures the U.S. capital loss adjustment as fol- category 28% rate 15% rate Short-term
lows. Passive $200.00 $100.00
−66.67 ($100) –33.33
Dennis’ foreign source capital gain is $600. $133.33 $66.67
(($200 + $700 + $100) − ($100 + $300))
General $700.00
Dennis’ worldwide capital gain is $300. (300.00)
(($200 + $700 + $100) − ($100 + $300 + $300)) −200.00
$200.00
Dennis’ U.S. capital loss adjustment is $300.
($600 − $300) Capital gain rate differential adjustment. After you
have made your U.S. capital loss adjustment, you must
Dennis must apportion the $300 U.S. capital loss ad- make additional adjustments (capital gain rate differential
justment between passive category income and general adjustments) to your foreign source capital gains and los-
category income based on the amount of net capital gain ses.
in each separate category. You must make adjustments to each separate category
Dennis’ net capital gain, passive category income is $200. rate group that has a net capital gain or loss. See Step 2
(($100 + $200) − $100) under U.S. capital loss adjustment, earlier, for instructions
Dennis apportions $100 to passive category income. on how to determine whether you have a net capital gain
($300 × $200/$600) or loss in a separate category rate group.
Dennis' net capital gain, general category income is $400. How to make the adjustment. How you make the
($700 − $300) capital gain rate differential adjustment depends on
Dennis apportions $200 to general category income.
($300 × $400/$600) whether you have a net capital gain or net capital loss in a
separate category rate group.

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Net capital gain in a separate category rate group. Mary does not have a U.S. capital loss adjustment be-
If you have a net capital gain in a separate category rate cause the foreign source capital gain ($450) does not ex-
group, you must do the following. ceed the worldwide capital gain ($500).
Mary’s net long-term capital loss from U.S. sources is
1. First, determine the amount of your net capital gain in
$150 ($200 − $50). The U.S. long-term loss adjustment
each separate category rate group that must be ad-
amount is $150 ($150 − $0). Mary allocates the $150 be-
justed.
tween the 28% rate group and the 15% rate group as fol-
2. Then, make the capital gain rate differential adjust- lows.
ment. See Capital gain rate differential adjustment for Mary allocates $100 ($150 x $300/$450) to the 28%
net capital gains, later. rate group that is passive category income. Therefore,
$200 ($300 − $100) of the $300 28% capital gain must be
How to determine the amount of net capital gain
adjusted before it is included on line 1a. The remaining
that must be adjusted. You must adjust the net capital
$100 of 28% capital gain is included on line 1a without ad-
gain in each separate category long-term rate group that
justment.
remains after the U.S. capital loss adjustment. You must
Mary allocates $50 ($150 x $150/$450) to the 15% rate
adjust the entire amount of that remaining net capital gain
group that is passive category income. Therefore, only
if you do not have a net long-term capital loss from U.S.
$100 ($150 − $50) of the $150 15% capital gain must be
sources or you do not have any short-term capital gains. If
adjusted before it is included on line 1a. The remaining
you have a net long-term capital loss from U.S. sources
$50 of 15% capital gain is included on line 1a without ad-
and you have any short-term capital gains, you only need
justment.
to adjust a portion of the remaining net capital gain in each
separate category long-term rate group. In that case, the Capital gain rate differential adjustment for net
portion you must adjust is limited to the portion of the re- capital gains. Adjust your net capital gain (or the appli-
maining net capital gain in the separate category cable portion of your net capital gain) in each separate
long-term rate group in excess of the U.S. long-term loss category long-term rate group as follows.
adjustment amount (if any) allocated to that separate cat- For each separate category that has a net capital gain
•
egory long-term rate group. You have a net long-term cap- in the 0% rate group, do not include the applicable
ital loss from U.S. sources if your long-term capital losses amount on Form 1116.
from U.S. sources exceed your long-term capital gains
from U.S. sources. • For each separate category that has a net capital gain
The U.S. long-term loss adjustment amount is the ex- in the 15% rate group, multiply the applicable amount
cess of your net long-term capital loss from U.S. sources of the net capital gain by 0.4054.
over the amount by which you reduced your long-term • For each separate category that has a net capital gain
capital gains from foreign sources under U.S. capital loss in the 20% rate group, multiply the applicable amount
adjustment, earlier. If only one separate category of the net capital gain by 0.5405.
long-term rate group has a net capital gain after the U.S.
capital loss adjustment, your U.S. long-term loss adjust- • For each separate category that has a net capital gain
ment amount is allocated to that separate category in the 25% rate group, multiply the applicable amount
long-term rate group. If more than one separate category of the net capital gain by 0.6757.
long-term rate group has a net capital gain after the U.S. • For each separate category that has a net capital gain
capital loss adjustment, you must allocate the U.S. in the 28% rate group, multiply the applicable amount
long-term loss adjustment amount among the separate of the foreign source net capital gain by 0.7568.
category long-term rate groups pro rata based on the
Add each result to any net capital gain in the same
amount of the remaining net capital gain in each separate
long-term separate category rate group that you were not
category long-term rate group.
required to adjust and include the combined amounts on
You must adjust the portion of your net capital gain in a
line 1a of the applicable Form 1116.
separate category long-term rate group in excess of the
No adjustment is required if you have a net capital gain
U.S. long-term loss adjustment amount you allocated to
in a short-term rate group. Include the amount of net capi-
that separate category long-term rate group. See the in-
tal gain in any short-term rate group on line 1a of the appli-
structions, later, under Capital gain rate differential adjust-
cable Form 1116 without adjustment.
ment for net capital gains. The remaining portion of your
net capital gain in the separate category long-term rate Example 4. Beth has $200 of capital gains in the 28%
group must be entered on line 1a of Form 1116 without rate group that are general category income and no other
adjustment. items of capital gain or loss. Beth must adjust the capital
gain before it is included on line 1a as follows.
Example 3. Mary has a $200 15% capital loss from
U.S. sources, a $50 15% capital gain from U.S. sources,
$200 × 0.7568 = $151.36
and a $200 short-term capital gain from U.S. sources.
Mary also has a $300 28% capital gain and a $150 15%
capital gain from foreign sources that are passive cate- Beth includes $151.36 of capital gain on line 1a of Form
gory income. 1116 for the general category income.

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Example 5. The facts are the same as in Example 3, ordering rules to determine the rate group of the capital
earlier. Mary includes the following amounts of passive gain offset by the net capital loss.
category income on line 1a of Form 1116 for passive cate- Determinations under the following ordering rules are
gory income. made after you have taken into account any U.S. capital
loss adjustment. However, determinations under the fol-
Mary includes $251.36 of the 28% capital gain lowing ordering rules do not take into account any capital
($200 × 0.7568) + $100 gain rate differential adjustments that you made to any net
capital gain in a separate category rate group.
Mary includes $90.54 of the 15% capital gain ($100 × 0.4054) +
$50 Step 1. Net capital losses from each separate cate-
gory rate group are netted against net capital gains in the
Example 6. The facts are the same as in Example 2, same rate group in other separate categories.
earlier. After making the U.S. capital loss adjustment, Step 2. U.S. source capital losses are netted against
Dennis has the following. U.S. source capital gains in the same rate group.
Income Step 3. Net capital losses from each separate cate-
category 28% rate 15% rate short-term gory rate group in excess of the amount netted against
Passive $133.33 ($100) $66.67 foreign source net capital gains in Step 1 are netted
against your remaining foreign source net capital gains
General $200
and your U.S. source net capital gains as follows.
Dennis now determines the amount of the remaining net 1. First, against U.S. source net capital gains in the
capital gain in each separate category long-term rate same rate group.
group that must be adjusted.
Dennis' net long-term capital loss from U.S. sources is 2. Next, against net capital gains in other rate groups
$300. The U.S. long-term loss adjustment amount is (without regard to whether such net capital gains are
$33.33 ($300 − $266.67). Dennis must allocate this U.S. or foreign source net capital gains) as follows.
amount between the $133.33 of net capital gain remaining a. A foreign source net capital loss in the short-term
in the 28% rate group that is passive category income and rate group is first netted against any net capital
the $200 of net capital gain remaining in the 15% rate gain in the 28% rate group, then against any net
group that is general category income. capital gain in the 25% rate group, then against
Dennis allocates $13.33 ($33.33 × $133.33 ÷ $333.33) any net capital gain in the 20% rate group, then
of the U.S. long-term loss adjustment to passive category against any net capital gain in the 15% rate group,
income in the 28% rate group. Therefore, Dennis must ad- and finally to offset capital gain net income in the
just $120 ($133.33 − $13.33) of the $133.33 net capital 0% rate group.
gain remaining in the 28% rate group that is passive cate-
gory income. Dennis includes $104.15 (($120 × 0.7568) + b. A foreign source net capital loss in the 28% rate
$13.33) of 28% capital gain and $66.67 of short-term capi- group is netted first against any net capital gain in
tal gain on line 1a of Form 1116 for passive category in- the 25% rate group, then against any net capital
come. gain in the 20% rate group, then against any net
Dennis allocates $20 ($33.33 × $200 ÷ $333.33) to the capital gain in the 15% rate group, and finally to
15% rate group for general category income. Therefore, offset capital gain net income in the 0% rate
Dennis must adjust $180 ($200 − $20) of the $200 net group.
capital gain remaining in the 15% rate group that is gen- c. A foreign source net capital loss in the 20% rate
eral category income. Dennis includes $92.97 (($180 × group is netted first against any net capital gain in
0.4054) + $20) of 15% capital gain on line 1a of Form the 15% rate group, then against any net capital
1116 for general category income. gain in the 0% rate group, then against any net
Net capital loss in a separate category rate group. capital gain in the 28% rate group, and finally to
If you have a net capital loss in a separate category rate offset net capital gain in the 25% rate group.
group, you must do the following. d. A foreign source net capital loss in the 15% rate
1. First, determine the rate group of the capital gain off- group is netted first against any net capital gain in
set by that net capital loss. See How to determine the the 0% rate group, then any net capital gain in the
rate group of the capital gain offset by the net capital 28% rate group, and finally against any net capital
loss next. gain in the 25% rate group.
2. Then, make the capital gain rate differential adjust- The net capital losses in any separate category rate group
ment. See Capital gain rate differential adjustment for are treated as coming pro rata from each separate cate-
net capital loss, later. gory that contains a net capital loss in that rate group to
the extent netted against:
How to determine the rate group of the capital
gain offset by the net capital loss. Use the following • Net capital gains in any other separate category under
Step 1,

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• 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
$16.67 of the $50 is treated as coming from passive category income.
capital loss. After you have determined the rate group of ($50 × $20/$60)
the capital gain offset by the net capital loss, you make the $33.33 of the $50 is treated as coming from general category income.
capital gain rate differential adjustment by doing the fol- ($50 × $40/$60)
lowing.
The remaining $10 of foreign source net capital losses in
• To the extent a net capital loss in a separate category the 15% rate group are treated as offsetting net capital
rate group offsets capital gain in the 0% rate group, gain in the 28% rate group. (See Step 3(2)(c).)
multiply the net capital loss by zero.
$3.33 is treated as coming from passive category income.
• To the extent a net capital loss in a separate category ($10 × $20/$60)
rate group offsets capital gain in the 15% rate group, $6.67 is treated as coming from general category income.
($10 × $40/$60)
multiply that amount of the net capital loss by 0.4054.
Dawn includes $9.28 of the capital loss in the amount en-
• To the extent a net capital loss in a separate category
tered on line 5 of Form 1116 for passive category income.
rate group offsets capital gain in the 20% rate group,
multiply that amount of the net capital loss by 0.5405. This is $6.76
($16.67 × 0.4054)
• To the extent that a net capital loss in a separate cate- plus $2.52
gory rate group offsets capital gain in the 25% rate ($3.33 × 0.7568)
group, multiply that amount of the net capital loss by
Dawn includes $18.56 of capital loss in the amount en-
0.6757.
tered on line 5 of Form 1116 for general category income.
• To the extent that a net capital loss in a separate cate-
This is $13.51
gory rate group offsets capital gain in the 28% rate ($33.33 × 0.4054)
group, multiply that amount of the net capital loss by plus $5.05
0.7568. ($6.67 × 0.7568)
Include the results on line 5 of the applicable Form 1116. Dawn also includes $37.84 ($50 × 0.7568) of capital gain
No adjustment is required to the extent a net capital in the amount entered on line 1a of Form 1116 for passive
loss offsets short-term capital gains. Thus, a net capital category income.
loss is included on line 5 of the applicable Form 1116
without adjustment to the extent the net capital loss off-
Allocation of Foreign and U.S. Losses
sets net capital gain in the short-term rate group.
You must allocate foreign losses for any tax year and U.S.
Example 7. The facts are the same as in Example 2,
losses for any tax year (to the extent such losses do not
earlier. Dennis has a $100 foreign source 15% capital loss
exceed the separate limitation incomes for such year)
that is passive category income.
among incomes on a proportionate basis.
This loss is netted against the $200 foreign source 15%
capital gain that is general category income according to
Step 1. Foreign Losses

Dennis includes $40.54 of the capital loss on line 5 of If you have a foreign loss when figuring your taxable in-
the Form 1116 for general category income. come in a separate limit income category, and you have
($100 × 0.4054) income in one or more of the other separate categories,
you must first reduce the income in these other categories
Example 8. Dawn has a $20 net capital loss in the by the loss before reducing income from U.S. sources.
15% rate group that is passive category income, a $40 net
capital loss in the 15% rate group that is general category Note. The amount of your taxable income (or loss) in a
income, a $50 U.S. source net capital gain in the 15% rate separate category is determined after any adjustments
group, and a $50 net capital gain in the 28% rate group you make to your foreign source qualified dividends or
that is passive category income, as shown in the following your foreign source capital gains (losses). See Qualified
table. Dividends and Adjustments to Foreign Source Capital
Gains and Losses, earlier, under Capital Gains and Los-
Income category 28% rate 15% rate ses.

Foreign Example. You have $10,000 of passive category in-
Passive $50 ($20)
come and incur a loss of $5,000 of general category in-
Foreign come. You must use the $5,000 loss to offset $5,000 of
General ($40) passive category income.
U.S. Source $50

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How to allocate. You must allocate foreign losses income, even if the disposition would otherwise be non-
among the separate limit income categories in the same taxable. See Dispositions, later. The amount you treat as
proportion as each category's income bears to total for- U.S. source income reduces the foreign source income,
eign income. and therefore reduces the foreign tax credit limit.

Example. You have a $2,000 loss that is general cate- You must establish separate accounts for each type of
gory income, $3,000 of passive category income, and foreign loss that you sustain. The balances in these ac-
$2,000 of income re-sourced by treaty. You must allocate counts are the overall foreign loss subject to recapture.
the $2,000 loss to the income in the other separate cate- Reduce these balances at the end of each tax year by the
gories. 60% ($3,000/$5,000) of the $2,000 loss (or loss that you recaptured. You must attach a statement to
$1,200) reduces passive category income and 40% your Form 1116 to report the balances (if any) in your
($2,000/$5,000) (or $800) reduces the income re-sourced overall foreign loss accounts.
by treaty.
Overall foreign loss. You have an overall foreign loss if
Loss more than foreign income. If you have a loss
your gross income from foreign sources for a tax year is
remaining after reducing the income in other separate limit
less than the sum of your expenses, losses, or other de-
categories, use the remaining loss to reduce U.S. source
ductions that you allocated and apportioned to foreign in-
income. For this purpose, the amount of your U.S. source
come under the rules explained earlier under Determining
income is your taxable income from U.S. sources in-
Taxable Income From Sources Outside the United States.
creased by the amount of capital losses from U.S. sour-
But see Losses not considered, later, for exceptions.
ces that reduced foreign source capital gains as part of a
U.S. capital loss adjustment. See U.S. capital loss adjust- Example. You are single and have gross dividend in-
ment, earlier, under Adjustments to Foreign Source Capi- come of $35,000 from U.S. sources. You also have a
tal Gains and Losses. When you use a foreign loss to off- greater-than-10% interest in a foreign partnership in which
set U.S. source income, you must recapture the loss as you materially participate. The partnership has a loss for
explained later under Recapture of Prior Year Overall For- the year, and your distributive share of the loss is $15,000.
eign Loss Accounts. Your share of the partnership's gross income is $120,000,
and your share of its expenses is $135,000. Your only for-
U.S. Losses eign source income is your share of partnership income,
which is foreign branch category income. You are a bona
You should allocate any net loss from sources in the Uni- fide resident of a foreign country and you elect to exclude
ted States among the different categories of foreign in- your foreign earned income. You exclude the maximum
come after allocating all foreign losses as described ear- $112,000. You also have itemized deductions of $14,000
lier, and before any of the adjustments discussed later. that are not definitely related to any item of income.
In figuring your overall foreign loss for foreign branch
The amount of your net loss from sources in the United category income for the year, you must allocate a ratable
States is equal to the excess of (1) your foreign source part of the $14,000 in itemized deductions to the foreign
taxable income in all of your separate categories in the ag- source income. You figure the ratable part of the $14,000
gregate, after taking into account any adjustments under that is for foreign source income, based on gross income,
Qualified Dividends and Adjustments to Foreign Source as follows.
Capital Gains and Losses, over (2) the amount of taxable
income you enter on Form 1116, line 18. $120,000 (Foreign gross income) × $14,000 = $10,839
$155,000 (Total gross income)

Recapture of Prior Year Overall Foreign Therefore, your overall foreign loss for the year is
Loss Accounts $11,839 figured as follows.

If you have only losses in your separate limit categories, Foreign gross income. . . . . . . . . . . . . . . . . . . . . $120,000
or if you have a loss remaining after allocating your foreign Less:
losses to other separate categories, you have an overall Foreign earned income
exclusion. . . . . . . . . . . . . . . . . $112,000
foreign loss. If you use this loss to offset U.S. source in- Allowable definitely
come (resulting in a reduction of your U.S. tax liability), related expenses
you must recapture your loss in each succeeding year in [($8,000/$120,000) ×
$135,000]. . . . . . . . . . . . . . . . . 9,000
which you have taxable income from foreign sources in Ratable part of itemized
the same separate limit category. You must recapture the deductions. . . . . . . . . . . . . . . . 10,839 131,839
overall loss regardless of whether you chose to claim the Overall foreign loss. . . . . . . . . . . . . . . . . . . . . . $ 11,839
foreign tax credit for the loss year.
Losses not considered. You do not consider the fol-
You recapture the loss by treating part of your taxable lowing in figuring an overall foreign loss in a given year.
income from foreign sources in a later year as U.S. source • Net operating loss deduction.
income. In addition, if, in a later year, you sell or otherwise
dispose of property used in your foreign trade or business, • Foreign expropriation loss not compensated by insur-
you may have to recognize gain and treat it as U.S. source ance or other reimbursement.

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• Casualty or theft loss not compensated by insurance branch category income. You also received dividend in-
or other reimbursement. come of $20,000 from U.S. sources. Your itemized deduc-
tions were $14,500, which are not definitely related to any
Recapture provision. If you have an overall foreign loss item of income. You paid income taxes of $4,000 to Coun-
for any tax year and use the loss to offset U.S. source in- try X on your share of the partnership income.
come, part of your foreign source taxable income (in the When figuring your foreign tax credit for 2022, you must
same separate limit category as the loss) for each suc- find the foreign source taxable income that you must treat
ceeding year is treated as U.S. source taxable income. as U.S. source income because of the foreign loss recap-
The part that is treated as U.S. source taxable income is ture provisions.
the smaller of the following. You figure the foreign taxable income that you must re-
1. The total amount of maximum potential recapture in characterize as follows.
all overall foreign loss accounts. The maximum poten-
A. Determination of 2021 Overall Foreign Loss
tial recapture in any account for a category is the
1) Partnership loss from Country X. . . . . . . . . . . . . . . $2,608
lesser of:
2) Add: Part of itemized deductions
a. The current year taxable income from foreign allocable to gross income from
sources in that category (the amount from Form Country X

1116, line 15, less any adjustment for allocation of $125,000 × $14,000 = $12,069
foreign losses and U.S. losses for that category, $145,000
discussed earlier); or
3) Overall foreign loss for 2021. . . . . . . . . . . . . . . . . $14,677
b. The balance in the overall foreign loss account for
that category. B. Amount of Recapture for 2022
1) Balance for foreign branch category
2. 50% (or more, if you choose) of your total taxable in- income foreign loss account. . . . . . . . . . . . . . . . . $14,677
come from foreign sources. 2) Taxable foreign branch category income after
allocation of foreign losses—Foreign branch
If the total foreign income subject to recharacterization is category income. . . . . . . . . . . . . . . . . $12,778
the amount described in (1) above, then for each sepa- Less: Itemized deductions
rate category the recapture amount is the maximum po- allocable to that income
tential recapture amount for that category. If the total for- [($135,000/$155,000)
eign income subject to recharacterization is the amount × $14,500]. . . . . . . . . . . . . . . . . . . . 12,629
described in (2) above, then for each separate category Foreign branch category taxable
income less allocated
the recapture amount is figured by multiplying the total re- foreign losses ($149 − 0). . . . . . . . . . . . . . . . . . . $149
capture amount by the following fraction. 3) Total amount of maximum potential recapture
in all foreign loss accounts (smaller of (1) or
Maximum potential recapture amount for the overall foreign (2)). . . . . . . . . . . . . . . . . . . . . . . . $149
loss account in the separate category 4) Foreign source net income. . . . . . . . . . . $12,778
Total amount of maximum potential recapture in all overall Less: Itemized deductions
allocable to foreign source
foreign loss accounts net income [($135,000/
$155,000) × $14,500]. . . . . . . . . . . . . . 12,629 $149
Example. During 2021 and 2022, you were single and 5) 50% of foreign source taxable income subject to
a 20% general partner in a partnership that derived its in- recharacterization. . . . . . . . . . . . . . . . . . . . . . . $75
come from Country X. You also received dividend income 6) Recapture for 2022 (smaller of (3) or (5)). . . . . . . . . . $75
from U.S. sources during those years.
For 2021, the partnership had a loss and your share The amount of the recapture is shown on Form 1116,
was $20,000, consisting of $125,000 gross income less line 16.
$145,000 expenses. Your net loss from the partnership Recapturing more overall foreign loss than re-
was $2,608, after deducting the foreign earned income quired. If you want to make an election or change a prior
exclusion and definitely related allowable expenses. This election to recapture a greater part of the balance of an
loss is related to foreign branch category income. Your overall foreign loss account than is required (as discussed
U.S. dividend income was $20,000. Your itemized deduc- earlier), you must attach a statement to your Form 1116. If
tions totaled $14,000 and were not definitely related to you change a prior year's election, you should file Form
any item of income. In figuring your taxable income for 1040-X.
2021, you deducted your share of the partnership loss The statement you attach to Form 1116 must show:
from Country X from your U.S. source income.
During 2022, the partnership had net income from • The percentage and amount of your foreign taxable in-
Country X. Your share of the net income was $75,000, come that you are treating as U.S. source income,
consisting of $135,000 gross income less $60,000 expen- and
ses. Your net income from the partnership was $12,778 • The percentage and amount of the balance (both be-
after deducting the foreign earned income exclusion and fore and after the recapture) in the overall foreign loss
the definitely related allowable expenses. This is foreign account that you are recapturing.

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Deduction for foreign taxes. You must recapture the use during the period it was used in a trade or busi-
part (or all, if applicable) of an overall foreign loss in tax ness.
years in which you deduct, rather than credit, your foreign
Disposition defined. A disposition includes the fol-
taxes. You recapture the lesser of:
lowing transactions.
• The balance in the applicable overall foreign loss ac-
count, or • A sale, exchange, distribution, or gift of property.
• The foreign source taxable income of the same sepa- • A transfer upon the foreclosure of a security interest
(but not a mere transfer of title to a creditor or debtor
rate limit category that resulted in the overall foreign
upon creation or termination of a security interest).
loss minus the foreign taxes imposed on that income.
• An involuntary conversion.
Dispositions. If you dispose of appreciated trade or
business property used predominantly outside the United • A contribution to a partnership, trust, or corporation.
States, and that property generates foreign source taxable • A transfer at death.
income of the same separate limit category that resulted
• Any other transfer of property whether or not gain or
in an overall foreign loss, the disposition is subject to the
loss is normally recognized on the transfer.
recapture rules. In most cases, you are considered to rec-
ognize foreign source taxable income in the same sepa- The character of the income (for example, as ordinary in-
rate limit category as the overall foreign loss to the extent come or capital gain) recognized solely because of the
of the lesser of: disposition rules is the same as if you had sold or ex-
changed the property.
• The fair market value of the property that is more than However, a disposition does not include either of the
your adjusted basis in the property, or following.
• The remaining amount of the overall foreign loss not A disposition of property that is not a material factor in
•
recaptured in prior years or in the current year as de- producing income. (This exception does not apply to
scribed earlier under Recapture provision and Recap- the disposition of stock in a CFC to which Internal
turing more overall foreign loss than required. Revenue Code section 904(f)(3)(D) applies.)
This rule applies to a disposition whether or not you ac-
• A transaction in which gross income is not realized.
tually recognized gain on the disposition and irrespective
of the source (U.S. or foreign) of any gain recognized on Basis adjustment. If gain is recognized on a disposi-
the disposition. tion solely because of an overall foreign loss account bal-
In most cases, this rule also applies to a gain on the ance at the time of the disposition, the recipient of the
disposition of stock in a CFC if you owned more than 50% property must increase its basis by the amount of gain
(by vote or value) of the stock right before you disposed of deemed recognized. If the property was transferred by
it. See Internal Revenue Code section 904(f)(3)(D) for gift, its basis in the hands of the donor immediately prior to
more information. the gift is increased by the amount of gain deemed recog-
All of the foreign source taxable income that you are nized.
considered to recognize under these rules is subject to re-
characterization as U.S. source income in most cases. Recapture of Separate Limitation Loss
See Regulations section 1.904(f)-2(d). Accounts
If you actually recognized foreign source gain in the
same separate limit category as the overall foreign loss on If, in a prior tax year, you reduced your foreign taxable in-
a disposition of property described earlier, you must re- come in the separate limit category by a pro rata share of
duce the foreign source taxable income in that separate a loss from another category, you must recharacterize in
limit category by the amount of gain you are required to 2022 all or part of any income you receive in 2022 in that
recharacterize. If you recognized foreign source gain in a loss category. If you have separate limitation loss ac-
different separate limit category than the overall foreign counts in the loss category relating to more than one other
loss on a disposition of property described earlier, you are category and the total balances in those loss accounts ex-
required to reduce your foreign source taxable income in ceed the income you receive in 2022 in the loss category,
that separate limit category for gain that is considered for- then income in the loss category is recharacterized as in-
eign source taxable income in the overall foreign loss cat- come in those other categories in proportion to the balan-
egory and subject to recharacterization. If you did not oth- ces of the separate limitation loss accounts for those other
erwise recognize gain on a disposition of property categories. You recharacterize the income by:
described earlier, you must include in your U.S. source in-
come the foreign source taxable income you are required • Increasing foreign taxable income (adjusted by any of
the other adjustments previously mentioned) for each
to recognize and recharacterize.
of the separate categories (other than the loss cate-
Predominant use outside United States. Property is gory) previously reduced by any separate limitation
used predominantly outside the United States if it was lo- loss, and
cated outside the United States more than 50% of the
• Decreasing foreign taxable income (adjusted by any
time during the 3-year period ending on the date of dispo-
of the other adjustments previously mentioned) for the
sition. If you used the property fewer than 3 years, count

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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 2021, 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 proportion to the balances of the overall domestic loss ac-
had to allocate the $2,000 loss to the income in the other counts for those separate categories.
separate categories. 60% ($3,000 ÷ $5,000) of the $2,000
loss (or $1,200) reduced passive category income and For more information, see the Instructions for Form
40% ($2,000 ÷ $5,000) (or $800) reduced the income 1116.
re-sourced by treaty.
In 2022, you have $4,000 of passive category income, Tax Treaties
$1,000 of income re-sourced by treaty, and $5,000 of gen-
eral category income. Because $1,200 of the general cat- The United States is a party to tax treaties that are de-
egory loss was used to reduce your passive category in- signed, in part, to prevent double taxation of the same in-
come in 2021, $1,200 of the 2022 general category come by the United States and the treaty country. Many
income of $5,000 must be recharacterized as passive cat- treaties do this by allowing you to treat U.S. source in-
egory income. This makes the 2022 total passive category come as foreign source income. Certain treaties have
income $5,200 ($4,000 + $1,200). Similarly, because special rules you must consider when figuring your foreign
$800 of the general category loss was used to reduce tax credit if you are a U.S. citizen residing in the treaty
your income re-sourced by treaty, $800 of the general cat- country. These rules generally limit the amount of U.S.
egory income must be recharacterized as income source income that is treated as foreign source income.
re-sourced by treaty. This makes the 2022 total of income The treaties that provide for this type of restriction include
re-sourced by treaty $1,800 ($1,000 + $800). The total those with Australia, Austria, Bangladesh, Belgium, Bulga-
general category income is $3,000 ($5,000 − $1,200 − ria, Canada, the Czech Republic, Denmark, Finland,
$800). France, Germany, Iceland, Ireland, Israel, Italy, Japan,
If you dispose of appreciated property that gener- Luxembourg, Malta, Mexico, the Netherlands, New Zea-
land, Portugal, the Slovak Republic, Slovenia, South Af-
! ates, or would generate, gain in a separate limita- rica, Spain, Sweden, Switzerland, and the United King-
CAUTION tion loss account, the disposition is subject to re-
capture rules similar to those applicable to overall foreign dom. There is a worksheet at the end of this publication to
loss accounts. See Internal Revenue Code section 904(f) help you figure the additional credit that is allowed by rea-
(5)(F). son of these limited re-sourcing rules. But do not use this
worksheet to figure the additional credit under the treaties
with Australia and New Zealand. In addition, the work-
Recapture of Overall Domestic Loss sheet only applies for tax years beginning on or before
Accounts August 10, 2010, and tax years after the 2017 tax year.
You can get more information by writing to:
If you have an overall domestic loss for any tax year be-
ginning after 2006, you create, or increase the balance in,
an overall domestic loss account and you must recharac- Internal Revenue Service
terize a portion of your U.S. source taxable income as for- International Section
eign source taxable income in succeeding years for pur- Philadelphia, PA 19255-0725
poses of the foreign tax credit.

The part that is treated as foreign source taxable in-
Report required. You may have to report certain infor-
come for the tax year is the smaller of:
mation with your return if you claim a foreign tax credit un-
• The total balance in your overall domestic loss ac- der a treaty provision. For example, if a treaty provision al-
count in each separate category (less amounts recap- lows you to take a foreign tax credit for a specific tax that
tured in earlier years), or is not allowed by the Internal Revenue Code, you must re-
• 50% of your U.S. source taxable income for the tax port this information with your return. To report the neces-
year. sary information, use Form 8833, Treaty-Based Return
Position Disclosure Under Section 6114 or 7701(b). See
Internal Revenue Code section 904(g)(5) allows the instructions for Form 8833, and Regulations section
! for an election to recapture up to 100% of an un- 301.6114-1 for more information.
CAUTION used pre-2018 overall domestic loss from a prior
If you do not report this information, you may have to
year, as opposed to the 50% stated in the previous para- pay a penalty of $1,000.
graph. This election is applicable for any tax year begin-
ning after 2017 and before January 1, 2028.

You must establish and maintain separate overall do-
mestic loss accounts for each separate category in which

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You do not have to file Form 8833 if you are carry forward the unused tax to the next 10 years. The
TIP claiming the additional foreign tax credit that is al- limit on your credit and the qualified foreign taxes paid on
lowed by reason of the limited re-sourcing rules general category income for 2018 through 2023 are as fol-
discussed previously. See Regulations section lows.
301.6114-1(c) for more information.
Your Tax Unused foreign tax (+)
limit paid or excess limit (−)
2018 $600 $800 +200
Carryback and Carryover
2019 $600 $700 +100
If, because of the limit on the credit, you cannot use the 2020 $500 $700 +200
full amount of qualified foreign taxes paid or accrued in
2021 $550 $400 −150
the tax year, you are allowed a 1-year carryback and then
a 10-year carryover of the unused foreign taxes. 2022 $800 $700 −100
This means that you can treat the unused foreign tax of 2023 $500 $550 + 50
a tax year as though the tax were paid or accrued in your
You cannot carry the $200 of unused foreign tax from
first preceding and 10 succeeding tax years up to the
2018 to 2019 or 2020 because you have no excess limit in
amount of any excess limit in those years. A period of less
any of those years. Therefore, you carry the tax forward to
than 12 months for which you make a return is considered
2021, up to the excess limit of $150. The carryover re-
a tax year.
duces your excess limit in that year to zero. The remaining
The unused foreign tax in each category is the amount unused foreign tax of $50 from 2018 can be carried to
by which the qualified taxes paid or accrued are more 2022. At this point, you have fully absorbed the unused
than the limit for that category. The excess limit in each foreign tax from 2018 and can carry it no further. You can
category is the amount by which the limit is more than the also carry forward the unused foreign tax from 2019 and
qualified taxes paid or accrued for that category. 2020.

Figure your carrybacks or carryovers separately for Special rules for carryforwards of pre-2018 unused
each separate limit income category. foreign taxes. Unused foreign taxes in the pre-2018 sep-
The 1-year carryback and 10-year carryover do not ap- arate category for general income carried forward are
ply to unused taxes in the section 951A category. generally allocated to your post-2017 separate category
for general income. Alternatively, you can allocate those
Use Schedule B (Form 1116) to reconcile your prior
foreign taxes to the post-2017 separate category for for-
year foreign tax carryover with your current year foreign
eign branch category income to the extent the unused for-
tax carryover. See Schedule B (Form 1116) and its in-
eign taxes would have been allocated to your post-2017
structions for more information.
separate category for foreign branch category income,
The mechanics of the carryback and carryover are illus- and would have been unused foreign taxes with respect to
trated by the following examples. that separate category, if that separate category had ap-
plied in the year or years the unused foreign taxes arose.
Example 1. All of your foreign income is general cate- A simplified safe harbor is also available for determining
gory income for 2021 and 2022. The limit on your credit the portion of the unused foreign taxes that may be alloca-
and the qualified foreign taxes paid on the income are as ted to the post-2017 separate category for foreign branch
follows. category income. See Regulations section 1.904-2(j)(1)
(iii) for further details.
Your Tax Unused foreign tax (+)
limit paid or excess limit (−) Effect of bankruptcy or insolvency. If your debts are
2021 $200 $100 −100 canceled because of bankruptcy or insolvency, you may
have to reduce your unused foreign tax carryovers to or
2022 $300 $500 +200 from the tax year of the debt cancellation by 33 / cents 1 3
for each $1 of canceled debt that you exclude from your
In 2022, you had unused foreign tax of $200 to carry to gross income. Your bankruptcy estate may have to make
other years. You are considered to have paid this unused this reduction if it has acquired your unused foreign tax
foreign tax first in 2021 (the first preceding tax year) up to carryovers. Also, you may not be allowed to carry back
the excess limit in that year of $100. You can then carry any unused foreign tax to a year before the year in which
forward the remaining $100 of unused tax. the bankruptcy case began. For more information, see
Reduction of Tax Attributes in Pub. 908.
Example 2. All your foreign income is general cate-
gory income for 2018 through 2023. In 2018, all of your Note. No foreign tax carryovers are allowed for foreign
foreign income was general category income, and you taxes paid or accrued on section 951A category income.
had an unused foreign tax of $200. Because you had no Leave line 10 of Form 1116 blank if you complete a Form
foreign income in 2017, you cannot carry back the unused 1116 for section 951A category income, as carrybacks
foreign tax to that year. However, you may be able to

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and carryovers are not allowed for this category of in- Example. In 2022, you paid foreign taxes of $600 on
come. general category income. You have a foreign tax credit
carryover of $200 from the same category from 2021. For
Time Limit on Tax Assessment 2022, your foreign tax credit limit is $700.
If you choose to claim a credit for your foreign taxes in
When you carry back an unused foreign tax, the IRS is 2022, you would be allowed a credit of $700, consisting of
given additional time to assess any tax resulting from the $600 paid in 2022 and $100 of the $200 carried over from
carryback. An assessment can be made up to the end of 1 2021. You will have a credit carryover to 2023 of $100,
year after the expiration of the statutory period for an as- which is your unused 2021 foreign tax credit carryover.
sessment relating to the year in which the carryback origi- If you choose to deduct your foreign taxes in 2022, your
nated. deduction will be limited to $600, which is the amount of
taxes paid in 2022. You are not allowed a deduction for
any part of the carryover from 2021. However, you must
Claim for Refund treat $100 of the credit carryover as used in 2022, be-
cause you have an unused credit limit of $100 ($700 limit
If you have an unused foreign tax that you are carrying minus $600 of foreign taxes paid in 2022). This reduces
back to the first preceding tax year, you should file Form your carryover to later years.
1040-X for that tax year and attach a revised Form 1116. If you claimed the deduction for 2022 and later decided
you wanted to receive a benefit for that $100 part of the
Taxes All Credited or All Deducted 2021 carryover, you could change the choice of a deduc-
tion for 2022. You would have to claim a credit for those
In a given year, you must either claim a credit for all for- taxes by filing an amended return for 2022 within the time
eign taxes that qualify for the credit or claim a deduction allowed.
for all of them. This rule is applied with the carryback and
carryover procedure, as follows. Married Couples
• You cannot claim a credit carryback or carryover from
a year in which you deducted qualified foreign taxes. For a tax year in which you and your spouse file a joint re-
turn, you must figure the unused foreign tax or excess limit
• You cannot deduct unused foreign taxes in any year in each separate limit category on the basis of your com-
to which you carry them, even if you deduct qualified bined income, deductions, taxes, and credits.
foreign taxes actually paid in that year.
For a tax year in which you and your spouse file sepa-
• You cannot claim a credit for unused foreign taxes in a rate returns, you figure the unused foreign tax or excess
year to which you carry them unless you also claim a limit by using only your own separate income, deductions,
credit for foreign taxes actually paid or accrued in that taxes, and credits. However, if you file a joint return for
year. any other year involved in figuring a carryback or carry-
• You cannot carry back or carry over any unused for- over of unused foreign tax to the current tax year, you will
eign taxes to or from a year for which you elect not to need to make an allocation, as explained under Alloca-
be subject to the foreign tax credit limit. See Exemp- tions Between Spouses, later.
tion from foreign tax credit limit under How To Figure
the Credit, earlier. Continuous use of joint return. If you and your spouse
file a joint return for the current tax year, and file joint re-
Unused taxes carried to deduction year. If you carry turns for each of the other tax years involved in figuring
unused foreign taxes to a year in which you chose to de- the carryback or carryover of unused foreign tax to the
duct qualified foreign taxes, you must compute a foreign current tax year, you figure the joint carryback or carryover
tax credit limit for the deduction year as if you had chosen to the current tax year using the joint unused foreign tax
to credit foreign taxes for that year. If the credit computa- and the joint excess limits.
tion results in an excess limit (as defined earlier) for the
deduction year, you must treat the unused foreign taxes Joint and separate returns in different years. If you
carried to the deduction year as absorbed in that year. and your spouse file a joint return for the current tax year,
You cannot actually deduct or claim a credit for the un- but file separate returns for all the other tax years involved
used foreign taxes carried to the deduction year. But this in figuring the carryback or carryover of the unused for-
treatment reduces the amount of unused foreign taxes eign tax to the current tax year, your separate carrybacks
that you can carry to another year. or carryovers will be a joint carryback or carryover to the
Because you cannot deduct or claim a credit for un- current tax year.
used foreign taxes treated as absorbed in a deduction In other cases in which you and your spouse file joint
year, you will get no tax benefit for them unless you file an returns for some years and separate returns for other
amended return to change your choice from deducting the years, you must make the allocation described in Alloca-
taxes to claiming the credit. You have 10 years from the tions Between Spouses next.
regular due date of the return for the deduction year to
make this change. See Making or Changing Your Choice
under Choosing To Take Credit or Deduction, earlier.

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

You and your spouse le
separate returns for the 2020 (Separate returns—Unused foreign tax year)
current tax year (2022), to S S
which you carry an unused
foreign tax from a tax year
for which you and your 2021 (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. 2022 (Separate returns—Excess limit year)

You and your spouse le a
joint return for the current
tax year (2022), to which
2020 (Joint return—Unused foreign tax year) J
you carry an unused foreign
tax from a tax year for
2021 (Separate returns—Excess limit year) S S
which you and your spouse
led a joint return, but
2022 (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
Allocations Between Spouses Method of allocation. For a tax year in which you must
allocate the unused foreign tax or the excess limit for your
You may have to allocate an unused foreign tax or excess separate income categories between you and your
limit for a tax year in which you and your spouse filed a spouse, you must take the following steps.
joint return. This allocation is needed in the following three
situations. 1. Figure a percentage for each separate income cate-
gory by dividing the taxable income of each spouse
1. You and your spouse file separate returns for the cur- from sources outside the United States in that cate-
rent tax year, to which you carry an unused foreign tax gory by the joint taxable income from sources outside
from a tax year for which you and your spouse filed a the United States in that category. Then, apply each
joint return. percentage to its category's joint foreign tax credit
limit to find the part of the limit allocated to each
2. You and your spouse file separate returns for the cur-
spouse.
rent tax year, to which you carry an unused foreign tax
from a tax year for which you and your spouse filed 2. Figure the part of the unused foreign tax, or of the ex-
separate returns, but through a tax year for which you cess limit, for each separate income category alloca-
and your spouse filed a joint return. ble to each spouse. You do this by comparing the al-
located limit (figured in (1)) with the foreign taxes paid
3. You and your spouse file a joint return for the current
or accrued by each spouse on income in that cate-
tax year, to which you carry an unused foreign tax
gory. If the foreign taxes you paid or accrued for that
from a tax year for which you and your spouse filed a
category are more than your part of its limit, you have
joint return, but through a tax year for which you and
an unused foreign tax. If, however, your part of that
your spouse filed separate returns.
limit is more than the foreign taxes you paid or ac-
These three situations are illustrated in Figure A. In each crued, you have an excess limit for that category.
of the situations, 2022 is the current year.
Allocation of the carryback and carryover. The me-
chanics of the carryback and carryover, when allocations

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Table 5. Carryback/Carryover
Tax year                                                           2018      2019     2020           2021                 2022
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 2018. . . . . . . . . . . . . . . . . . . . . . . . . .  —         20W      10W            —                    —
 H's from 2018. . . . . . . . . . . . . . . . . . . . . . . . . .  —         —        50H            —                    —
 H's from 2019. . . . . . . . . . . . . . . . . . . . . . . . . .  —         —        15H            —                    —
     ″ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —         —        10W            —                    —
 W's from 2021. . . . . . . . . . . . . . . . . . . . . . . . . .  —         —        —              —                    10W
 H's from 2021. . . . . . . . . . . . . . . . . . . . . . . . . .  —         —        —              —                    50H
W = Absorbed by W's excess limit
H = Absorbed by H's excess limit

* General category income only
 
between  spouses  are  needed,  are  illustrated  by  the  fol-          Joint Return Filed in a Deduction Year
lowing example.
                                                                         When you file a joint return in a deduction year, and carry 
 Example.     H and W filed joint returns for 2018, 2020,                unused foreign tax through that year from the prior year in 
and 2021, and separate returns for 2019 and 2022. Nei-                   which  you  and  your  spouse  filed  separate  returns,  the 
ther H nor W had any unused foreign tax or excess limit                  amount absorbed in the deduction year is the unused for-
for any year before 2018. For the tax years involved, the                eign tax of each spouse deemed paid or accrued in the 
income, unused foreign tax, excess limits, and carrybacks                deduction year up to the amount of that spouse's excess 
and  carryovers  are  general  category  income  and  are                limit in that year. You cannot reduce either spouse's ex-
shown in Table 5.                                                        cess limit in the deduction year by the other's unused for-
 W's allocated part of the unused foreign tax from 2018                  eign taxes in that year.
($30)  is  partly  absorbed  by  her  separate  excess  limit  of 
$20 for 2019 and then fully absorbed by her allocated part 
of the joint excess limit for 2020 ($20). H's allocated part 
of the unused foreign tax from 2018 ($50) is fully absor-                How To Claim the Credit
bed by his allocated part of the joint excess limit ($65) for 
2020.                                                                    You must file Form 1116 to claim the foreign tax credit un-
 H's  separate  unused  foreign  tax  from  2019  ($25)  is              less you meet one of the following exceptions.

partly absorbed (up to $15) by his remaining excess limit                Exceptions.  If you meet the requirements discussed un-
in 2020, and then fully absorbed by W's remaining part of                der Exemption  from  foreign  tax  credit  limit,  earlier,  and 
the  joint  excess  limit  for  2020  ($10).  Each  spouse's  ex-        choose to be exempt from the foreign tax credit limit, do 
cess limit on the 2020 joint return is reduced by the follow-            not  file  Form  1116.  Instead,  enter  your  foreign  taxes  di-
ing.                                                                     rectly on Schedule 3 (Form 1040), line 1.
1. Each spouse's carryover from earlier years. (W's car-                 If  you  are  a  shareholder  of  a  CFC  and  chose  to  be 
 ryover of $10 from 2018 and H's carryovers of $50                       taxed at corporate rates on the amount you must include 
 from 2018 and $15 from 2019.)                                           in gross income from that corporation, use Form 1118 to 
                                                                         claim the credit. See Controlled foreign corporation (CFC) 
2. The other spouse's carryover. (H's carryover of $10                   shareholder  under You  Must  Have  Paid  or  Accrued  the 
 from 2019 is absorbed by W's remaining excess limit.)                   Tax, earlier.
 W's allocated part of the unused foreign tax of $69 from 
2021 is partly absorbed by her excess limit in 2022 ($10),               Form 1116
and the remaining $59 will be a carryover to general cate-
gory income for 2023 and the following 8 years unless ab-                You must file a Form 1116 with your U.S. income tax re-
sorbed  sooner.  H's  allocated  part  of  the  unused  foreign          turn,  Form  1040,  1040-SR,  or  1040-NR.  You  must  file  a 
tax  of  $104  from  2021  is  partly  absorbed  by  his  excess         separate Form 1116 for each of the following categories of 
limit in 2022 ($50), and the remaining $54 will be a carry-              income for which you claim a foreign tax credit.
over to 2023 and the following 8 years unless absorbed 
                                                                         •   Section 951A category income.
sooner.
                                                                         •   Foreign branch category income.
                                                                         •   Passive category income.
                                                                         •   General category income.

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• Section 901(j) income. possession, complete a separate line for each. If you
receive income passed through from a RIC, aggre-
• Certain income re-sourced by treaty.
gate all foreign taxes paid or accrued on that income
• Lump-sum distributions. on a single line in Part II.
A Form 1116 consists of four parts. 3. Part III—Figuring the Credit. You use this part to figure
1. Part I—Taxable Income or Loss From Sources Out- the foreign tax credit that is allowable. No foreign tax
side the United States (for Category Checked Above). carryovers are allowed for foreign taxes paid or ac-
Enter the gross amounts of your foreign, or U.S. pos- crued on section 951A category income. Leave
session, source income in the separate limit category line 10 of Form 1116 blank if you complete a Form
for which you are completing the form. Do not include 1116 for section 951A category income, as carry-
income you excluded on Form 2555. From these, backs and carryovers are not allowed for this cate-
subtract the deductions that are definitely related to gory of income.
the separate limit income, and a ratable share of the 4. Part IV—Summary of Credits From Separate Parts III.
deductions not definitely related to that income. If, in a You use this part on one Form 1116 (the one with the
separate limit category, you received income from largest amount entered on line 24) to summarize the
more than one foreign country or U.S. possession, foreign tax credits figured on separate Forms 1116.
complete a separate column for each. You do not
need to report income passed through from a mutual
Records To Keep
fund or other regulated investment company (RIC) on
a country-by-country basis. Total all income, in the You should keep the following records in case
applicable category, passed through from the mutual you are later asked to verify the taxes shown on
fund or other RIC and enter the total in a single col- RECORDS your Form 1116, 1040, 1040-SR, or 1040-NR.
umn in Part I. Enter "RIC" on line i of Part I. Total all You do not have to attach these records to your Form
foreign taxes passed through and enter the total on a 1040, 1040-SR, or 1040-NR.
single line in Part II for the applicable category. Be- • A receipt for each foreign tax payment.
cause computations for inclusions under section
951A are reported on separate Form 8992, U.S. • The foreign tax return if you claim a credit for taxes ac-
Shareholder Calculation of Global Intangible crued.
Low-Taxed Income (GILTI), you do not need to report • Any payee statement (such as Form 1099-DIV or
those inclusions on a country-by-country basis. Enter Form 1099-INT) showing foreign taxes reported to
the total inclusion in a single column in Part l and en- you.
ter "951A" on line i. See the instructions for line i in the
Instructions for Form 1116 for information about re-
The receipt or return you keep as proof should either be
porting Section 863(b) gross income and deductions
the original, a duplicate original, or a duly certified or au-
and high-taxed income.
thenticated copy. If the receipt or return is in a foreign lan-
2. Part II—Foreign Taxes Paid or Accrued. This part guage, you should also have a certified translation of it.
shows the foreign taxes you paid or accrued on the in- Revenue Ruling 67-308 in Cumulative Bulletin 1967-2 dis-
come in the separate limit category in foreign cur- cusses in detail the requirements of the certified transla-
rency and U.S. dollars. If you paid (or accrued) for- tion. Issues of the Cumulative Bulletin are available in
eign tax to more than one foreign country or U.S. most IRS offices and you are welcome to read them there.

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Worksheet

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                       
        7.  Other                                                                                                                                                        
        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 column A, Step I, 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 the discussion on 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.
may not be available through Free File. Go to IRS.gov/
FreeFile to see if you qualify for free online federal tax
preparation, e-filing, and direct deposit or payment op-
How To Get Tax Help
tions.
If you have questions about a tax issue; need help prepar- • VITA. The Volunteer Income Tax Assistance (VITA)
ing your tax return; or want to download free publications, program offers free tax help to people with
forms, or instructions, go to IRS.gov to find resources that low-to-moderate incomes, persons with disabilities,
can help you right away. and limited-English-speaking taxpayers who need
help preparing their own tax returns. Go to IRS.gov/
Preparing and filing your tax return. After receiving all VITA, download the free IRS2Go app, or call
your wage and earnings statements (Forms W-2, W-2G, 800-906-9887 for information on free tax return prepa-
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment ration.
compensation statements (by mail or in a digital format) or
other government payment statements (Form 1099-G); • TCE. The Tax Counseling for the Elderly (TCE) pro-
and interest, dividend, and retirement statements from gram offers free tax help for all taxpayers, particularly
banks and investment firms (Forms 1099), you have sev- those who are 60 years of age and older. TCE volun-
eral options to choose from to prepare and file your tax re- teers specialize in answering questions about pen-
turn. You can prepare the tax return yourself, see if you sions and retirement-related issues unique to seniors.
qualify for free tax preparation, or hire a tax professional to Go to IRS.gov/TCE, download the free IRS2Go app,
prepare your return. or call 888-227-7669 for information on free tax return
preparation.
Free options for tax preparation. Go to IRS.gov to see • MilTax. Members of the U.S. Armed Forces and
your options for preparing and filing your return online or qualified veterans may use MilTax, a free tax service
in your local community, if you qualify, which include the offered by the Department of Defense through Military
following. OneSource. For more information, go to
• Free File. This program lets you prepare and file your MilitaryOneSource MilitaryOneSource.mil/Tax ( ).
federal individual income tax return for free using Also, the IRS offers Free Fillable Forms, which can
brand-name tax-preparation-and-filing software or be completed online and then filed electronically re-
Free File fillable forms. However, state tax preparation gardless of income.

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Using online tools to help prepare your return. Go to relief available for individuals and families, small and large
IRS.gov/Tools for the following. businesses, and tax-exempt organizations.

• The Earned Income Tax Credit Assistant IRS.gov/ ( Employers can register to use Business Services On-
EITCAssistant) determines if you’re eligible for the line. The Social Security Administration (SSA) offers on-
earned income credit (EIC). line service at SSA.gov/employer for fast, free, and secure
• The Online EIN Application IRS.gov/EIN ( ) helps you online W-2 filing options to CPAs, accountants, enrolled
get an employer identification number (EIN) at no agents, and individuals who process Form W-2, Wage
cost. and Tax Statement; and Form W-2c, Corrected Wage and
Tax Statement.
• The Tax Withholding Estimator IRS.gov/W4app ( )
makes it easier for you to estimate the federal income IRS social media. Go to IRS.gov/SocialMedia to see the
tax you want your employer to withhold from your pay- various social media tools the IRS uses to share the latest
check. This is tax withholding. See how your withhold- information on tax changes, scam alerts, initiatives, prod-
ing affects your refund, take-home pay, or tax due. ucts, and services. At the IRS, privacy and security are
• The First-Time Homebuyer Credit Account Look-up our highest priority. We use these tools to share public in-
(IRS.gov/HomeBuyer) tool provides information on formation with you. Don’t post your social security number
your repayments and account balance. (SSN) or other confidential information on social media
sites. Always protect your identity when using any social
• The Sales Tax Deduction Calculator IRS.gov/ ( networking site.
SalesTax) figures the amount you can claim if you The following IRS YouTube channels provide short, in-
itemize deductions on Schedule A (Form 1040). formative videos on various tax-related topics in English,
Getting answers to your tax questions. On Spanish, and ASL.
IRS.gov, you can get up-to-date information on Youtube.com/irsvideos.
•
current events and changes in tax law.
• Youtube.com/irsvideosmultilingua.
• IRS.gov/Help: A variety of tools to help you get an-
swers to some of the most common tax questions. • Youtube.com/irsvideosASL.

• IRS.gov/ITA: The Interactive Tax Assistant, a tool that Watching IRS videos. The IRS Video portal
will ask you questions, and based on your input, pro- (IRSVideos.gov) contains video and audio presentations
vide answers on a number of tax law topics. for individuals, small businesses, and tax professionals.
• IRS.gov/Forms: Find forms, instructions, and publica-
Online tax information in other languages. You can
tions. You will find details on the most recent tax
find information on IRS.gov/MyLanguage if English isn’t
changes and interactive links to help you find answers
your native language.
to your questions.
• You may also be able to access tax law information in Free Over-the-Phone Interpreter (OPI) Service. The
your electronic filing software. IRS is committed to serving our multilingual customers by
offering OPI services. The OPI Service is a federally fun-
ded program and is available at Taxpayer Assistance
Need someone to prepare your tax return? There are Centers (TACs), other IRS offices, and every VITA/TCE
various types of tax return preparers, including enrolled return site. The OPI Service is accessible in more than
agents, certified public accountants (CPAs), accountants, 350 languages.
and many others who don’t have professional credentials.
If you choose to have someone prepare your tax return, Accessibility Helpline available for taxpayers with
choose that preparer wisely. A paid tax preparer is: disabilities. Taxpayers who need information about ac-
• Primarily responsible for the overall substantive accu- cessibility services can call 833-690-0598. The Accessi-
racy of your return, bility Helpline can answer questions related to current and
future accessibility products and services available in al-
• Required to sign the return, and ternative media formats (for example, braille, large print,
• Required to include their preparer tax identification audio, etc.). The Accessibility Helpline does not have ac-
number (PTIN). cess to your IRS account. For help with tax law, refunds,
or account-related issues, go to IRS.gov/LetUsHelp.
Although the tax preparer always signs the return,
you’re ultimately responsible for providing all the informa- Note. Form 9000, Alternative Media Preference, or
tion required for the preparer to accurately prepare your Form 9000(SP) allows you to elect to receive certain types
return. Anyone paid to prepare tax returns for others of written correspondence in the following formats.
should have a thorough understanding of tax matters. For
• Standard Print.
more information on how to chose a tax preparer, go to
Tips for Choosing a Tax Preparer on IRS.gov. • Large Print.
Coronavirus. Go to IRS.gov/Coronavirus for links to in- • Braille.
formation on the impact of the coronavirus, as well as tax • Audio (MP3).

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• Plain Text File (TXT). If you prefer, you can order your transcript by calling
• Braille Ready File (BRF). 800-908-9946.

Disasters. Go to Disaster Assistance and Emergency Reporting and resolving your tax-related identity
Relief for Individuals and Businesses to review the availa- theft issues.
ble disaster tax relief. • Tax-related identity theft happens when someone
steals your personal information to commit tax fraud.
Getting tax forms and publications. Go to IRS.gov/ Your taxes can be affected if your SSN is used to file a
Forms to view, download, or print all of the forms, instruc- fraudulent return or to claim a refund or credit.
tions, and publications you may need. Or, you can go to
IRS.gov/OrderForms to place an order. • The IRS doesn’t initiate contact with taxpayers by
email, text messages (including shortened links), tele-
Getting tax publications and instructions in eBook phone calls, or social media channels to request or
format. You can also download and view popular tax verify personal or financial information. This includes
publications and instructions (including the Instructions for requests for personal identification numbers (PINs),
Form 1040) on mobile devices as eBooks at IRS.gov/ passwords, or similar information for credit cards,
eBooks. banks, or other financial accounts.
Note. IRS eBooks have been tested using Apple's • Go to IRS.gov/IdentityTheft, the IRS Identity Theft
Central webpage, for information on identity theft and
iBooks for iPad. Our eBooks haven’t been tested on other
data security protection for taxpayers, tax professio-
dedicated eBook readers, and eBook functionality may
nals, and businesses. If your SSN has been lost or
not operate 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.
Note. The IRS can’t issue refunds before mid-Febru-
• View your address on file or manage your communi- ary for returns that claimed the EIC or the additional child
cation preferences. tax credit (ACTC). This applies to the entire refund, not
just the portion associated with these credits.
Tax Pro Account. This tool lets your tax professional
submit an authorization request to access your individual Making a tax payment. Go to IRS.gov/Payments for in-
taxpayer IRS online account. For more information, go to formation on how to make a payment using any of the fol-
IRS.gov/TaxProAccount. lowing options.
Using direct deposit. The fastest way to receive a tax • IRS Direct Pay: Pay your individual tax bill or estima-
refund is to file electronically and choose direct deposit ted tax payment directly from your checking or sav-
which securely and electronically transfers your refund di- ings account at no cost to you.
rectly into your financial account. Direct deposit also • Debit or Credit Card: Choose an approved payment
avoids the possibility that your check could be lost, stolen, processor to pay online or by phone.
destroyed, or returned undeliverable to the IRS. Eight in
10 taxpayers use direct deposit to receive their refunds. If • Electronic Funds Withdrawal: Schedule a payment
you don’t have a bank account, go to IRS.gov/ when filing your federal taxes using tax return prepara-
DirectDeposit for more information on where to find a tion software or through a tax professional.
bank or credit union that can open an account online. • Electronic Federal Tax Payment System: Best option
for businesses. Enrollment is required.
Getting a transcript of your return. The quickest way
to get a copy of your tax transcript is to go to IRS.gov/ • Check or Money Order: Mail your payment to the ad-
Transcripts. Click on either “Get Transcript Online” or “Get dress listed on the notice or instructions.
Transcript by Mail” to order a free copy of your transcript.

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• Cash: You may be able to pay your taxes with cash at on the IRS2Go app, under the Stay Connected tab,
a participating retail store. choose the Contact Us option and click on “Local Offices.”
• Same-Day Wire: You may be able to do same-day
wire from your financial institution. Contact your finan- The Taxpayer Advocate Service (TAS)
cial institution for availability, cost, and time frames. Is Here To Help You
Note. The IRS uses the latest encryption technology to What Is TAS?
ensure that the electronic payments you make online, by
phone, or from a mobile device using the IRS2Go app are TAS is an independent organization within the IRS that
safe and secure. Paying electronically is quick, easy, and helps taxpayers and protects taxpayer rights. Their job is
faster than mailing in a check or money order. to ensure that every taxpayer is treated fairly and that you
know and understand your rights under the Taxpayer Bill
What if I can’t pay now? Go to IRS.gov/Payments for of Rights.
more information about your options.
• Apply for an online payment agreement IRS.gov/ ( How Can You Learn About Your Taxpayer
OPA) to meet your tax obligation in monthly install- Rights?
ments if you can’t pay your taxes in full today. Once
you complete the online process, you will receive im- The Taxpayer Bill of Rights describes 10 basic rights that
mediate notification of whether your agreement has all taxpayers have when dealing with the IRS. Go to
been approved. TaxpayerAdvocate.IRS.gov to help you understand what
• Use the Offer in Compromise Pre-Qualifier to see if these rights mean to you and how they apply. These are
you can settle your tax debt for less than the full your rights. Know them. Use them.
amount you owe. For more information on the Offer in
Compromise program, go to IRS.gov/OIC. What Can TAS Do for You?

Filing an amended return. Go to IRS.gov/Form1040X TAS can help you resolve problems that you can’t resolve
for information and updates. with the IRS. And their service is free. If you qualify for
their assistance, you will be assigned to one advocate
Checking the status of an amended return. Go to who will work with you throughout the process and will do
IRS.gov/WMAR to track the status of Form 1040-X amen- everything possible to resolve your issue. TAS can help
ded returns. you if:
Note. It can take up to 3 weeks from the date you filed • Your problem is causing financial difficulty for you,
your amended return for it to show up in our system, and your family, or your business;
processing it can take up to 16 weeks.
• You face (or your business is facing) an immediate
Understanding an IRS notice or letter you’ve re- threat of adverse action; or
ceived. Go to IRS.gov/Notices to find additional informa- • You’ve tried repeatedly to contact the IRS but no one
tion about responding to an IRS notice or letter. 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 not immediately receive written communications in TAS has offices in every state, the District of Columbia,
the requested language. The IRS’s commitment to LEP and Puerto Rico. Your local advocate’s number is in your
taxpayers is part of a multi-year timeline that is scheduled local directory and at TaxpayerAdvocate.IRS.gov/
to begin providing translations in 2023. You will continue Contact-Us. You can also call them at 877-777-4778.
to receive communications, including notices and letters
in English until they are translated to your preferred lan- How Else Does TAS Help Taxpayers?
guage.
TAS works to resolve large-scale problems that affect
Contacting your local IRS office. Keep in mind, many many taxpayers. If you know of one of these broad issues,
questions can be answered on IRS.gov without visiting an report it to them at IRS.gov/SAMS.
IRS TAC. Go to IRS.gov/LetUsHelp for the topics people
ask about most. If you still need help, IRS TACs provide TAS for Tax Professionals
tax help when a tax issue can’t be handled online or by
phone. All TACs now provide service by appointment, so TAS can provide a variety of information for tax professio-
you’ll know in advance that you can get the service you nals, including tax law updates and guidance, TAS pro-
need without long wait times. Before you visit, go to grams, and ways to let TAS know about systemic prob-
IRS.gov/TACLocator to find the nearest TAC and to check lems you’ve seen in your practice.
hours, available services, and appointment options. Or,

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Low Income Taxpayer Clinics (LITCs)                         a  small  fee  for  eligible  taxpayers.  To  find  an  LITC  near 
                                                            you,  go  to TaxpayerAdvocate.IRS.gov/about-us/Low-
LITCs are independent from the IRS. LITCs represent in-     Income-Taxpayer-Clinics-LITC or see IRS Pub. 4134, Low 
dividuals whose income is below a certain level and need    Income Taxpayer Clinic List.
to resolve tax problems with the IRS, such as audits, ap-
peals, and tax collection disputes. In addition, LITCs can 
provide information about taxpayer rights and responsibili-
ties in different languages for individuals who speak Eng-
lish as a second language. Services are offered for free or 

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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    21
Accrual method of accounting     5   Exchange rates   5                   Income re-sourced by treaty, 
Allocation:                          Excluded income:                      separate limit     20
 Carryback/carryover between           Foreign earned 12                  Income tax bond     5
  spouses     39                       Taxes on   12                      Interest 12
 Foreign losses  32                  Exemption from foreign tax credit    Interest expense, apportioning                   26
 Foreign taxes 20                      limit 18                           International boycott  16
 U.S. losses  33                     Export financing interest 20         Itemized deduction    13
Alternative minimum tax  2           Extraterritorial income   13
Amended return   38                                                       J
American Samoa, resident of      13  F                                    Joint return:
Assistance (See Tax help)            Financial services income   20        Carryback and carryover   38
                                     Foreign corporation—U.S.              Credit based on foreign tax of both 
B                                      shareholders, filing                spouses      9
Bankruptcy, effect of 37               requirements   16                   Filed in a deduction year 40
Beneficiary 10                       Foreign country  9
Bond, income tax  5                  Foreign currency and exchange        L
Boycotting countries  16               rates 5                            Limit on credit 18
                                     Foreign income, translating    5     Losses, foreign     32
C                                    Foreign losses:                       Allocation of 32
Capital gains and losses 27            Allocation of 32                    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)                    20
                                     Foreign oil and gas extraction 
 Joint return 38
                                       income, taxes on  16
 Joint return–deduction year 40                                           M
                                     Foreign partnerships—U.S. 
 Taxes all credited or deducted  38    partners, filing requirement   16  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   38
 Changing your choice  4               Allocation to income categories 20  Joint return 9
 Choice applied to all qualified       For which you cannot take a        Mineral income, foreign,   16
  foreign taxes  3                     credit   12                        Mutual fund distributions  10 19, 
Claim for refund 38                    Imposed on foreign refund    8     Mutual fund shareholder    10
Classes of gross income  25            Qualifying for credit 9
Compensation for labor or              Redetermination  6                 N
 personal services   21                                                   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  40
Covered asset acquisition 15                                              Overall foreign loss  33
                                       5471  16
Credit:
                                       5713  16
 How to claim  40                                                         P
                                       7204  1 5, 
 How to figure 18
                                       8833  36                           Partner  9 19 21, , 
 Limit on 18
                                       8865  16                           Passive category income    19
Credit for taxes paid or accrued 5
                                       8873  13                           Penalties 8 12, 
D                                    Functional currency     5             Failure to file Form 5471, 8865                 17
                                                                           Failure to file Form 5713 16
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    20                                                            information    36
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       24

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Possession exclusion  13          Separate limit income  18             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     20 Taxes related to a foreign tax credit 
  taxes in connection with  15      Lump-sum distribution   20          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 27            Soak-up taxes  12                    Translating foreign currency                      5
                                  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   24         Unused foreign tax credits, 
Refund, foreign tax 10            State income taxes  27                carryback or carryover  3 37, 
Reporting requirements            Subsidy  10
  (international boycott) 16                                           W
Resident aliens 9                 T                                    Wages 13
                                  Tax help 43                          When refunds can be claimed                         8
S                                 Tax treaties 36                      When tax can be assessed                          38
S corporation shareholder   9 21, Taxable income from sources          Who can take the credit 8
Sanctioned countries 13             outside the U.S., determination    Why choose the credit 4
Schedule B (Form 1116) 37           of 25
Schedule C (Form 1116) 7          Taxes:
Section 901(j) income 20            Excluded income   12
Section 901(j) sanctioned           In lieu of income taxes 12
  income 13                         On dividends 15

Publication 514 (2022)                                                                           Page 49

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